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Slow ambulance for Japan's banking
'emergency'
By Gary LaMoshi
A
paralyzing pain grips your chest. Fortunately, a friend
is with you and calls a doctor. After hearing the
symptoms, the doctor confirms you're having a heart
attack.
"It's a very serious situation," the
doctor says. "I'll send an ambulance at the end of the
month."
The doctor's attitude matches Japan's
sense of urgency about its economic crisis. The crisis
has festered since 1990.
What's a few more years
and a few billions more in evaporated wealth?
On
Monday, Prime Minister Junichiro Koizumi announced the
first cabinet shuffle of his 18 month old
administration. The biggest change added the Financial
Services brief to Economic Minister Heizo Takenaka's
portfolio. Ousted Financial Services Minister Hakuo
Yanagisawa opposed drastic action to clean up bad loans
crippling the banking sector.
Banks' dud loans
are officially estimated at 52 trillion yen (US$423
billion) - other calculations reach three times that
amount. Bad loans are the biggest cloud overhanging not
just the banking sector, but the deflating economy,
consumer and business confidence, and the stock market,
which registered a fresh 19-year bottom on Wednesday.
Emergency speed
Koizumi himself
declared the economic situation an "emergency" Monday
and demanded action. "I appointed Takenaka to show the
government's commitment to speed up the disposal of bad
loans," he said.
The Prime Minister repeated his
deadline for cleaning up banking and ending deflation:
the end of 2004. Yes, 2004, but don't panic. He means
the end of Japan's 2004 business year, March 2005 on the
calendar.
Now dubbed Japan's economic czar,
Takenaka sprang into action Tuesday, declaring he would
form a task force to make recommendations for repairing
the financial system. That team is due to report at the
end of October. Apparently, in his role as Economic
Minister, this stuff about the financial system never
crossed Takenaka's mind or that of his ministry. It's
unclear whether a package of measures to combat
deflation, promised for mid-October, has been delayed in
anticipation of the czar's new master plan.
What's most troubling about this flurry of
activity on the economic crisis is that it seems to have
been stimulated by pressures other than the banks'
precarious situation, the ongoing bloodbath in the stock
market, near-record unemployment, falling prices and
negligible growth. The key motivator for action seems to
have been political and international face.
Two
weeks ago, the Bank of Japan (BOJ) issued its own
innovative plan to address the banking crisis. BOJ
proposed buying leading banks' stock market portfolios,
a suggestion that was poorly explained and widely
misunderstood.
Buying out the banks
Taking volatile stockholdings off the banks'
balance sheets and replacing it with cash or government
bonds would help banks in three significant ways. It
would raise their capital ratios under Bank of
International Settlements guidelines, since shares in
their banking customers count only half as much as cash
under the rules. It would make Japan's banks less
reluctant to foreclose on loans to customers whose stock
they now hold. And, with their healthier capital ratios,
banks would have added balance sheet strength to write
off more bad loans.
There are problems that
would accompany purchasing banks' stockholdings, most
notably, how to pay for the shares and what to do with
them. Even before the BOJ announcement, fund managers in
Japan proposed winding the shares into investment
vehicles for pension funds or the Japanese public -
banks' shareholdings roughly approximate benchmark stock
market indexes - or more daring venture funds that would
try to revive ailing companies whose shares it holds.
It's unknown whether investors would buy such funds.
There would be immediate negative side effects
as well, if the BOJ plan succeeded. As banks sold shares
in customers, customers would likely reciprocate by
dumping bank shares, depressing the stock market
further. Bolder bank loan writeoffs would accelerate
bankruptcies and raise unemployment. Advocates of
ridding banks of their stock portfolios contend short
term sting would be balanced by the long term benefits
of unwinding Japan Inc's web of crossholdings and
driving out excess capacity. But the BOJ plan would be
neither painless nor risk free.
Nor would it be
unprecedented. The government earlier this year began
its own initiative to reduce bank shareholdings,
establishing a Share Buying Organization with funds to
purchase up to 10 percent of the banks' stock
portfolios. So the Koizumi administration's failure to
embrace the BOJ plan may not have been based strictly on
its merits.
It's the politics, stupid!
The political leadership was undoubtedly annoyed
that BOJ announced its plan independently and without
winning advance endorsement from the government. There
were conflicting statements about the extent of BOJ
consultations with the administration and the level of
support the plan received from it. The BOJ announcement
also stole thunder from Koizumi's triumphant visit to
North Korea. Crowding the prime minister's
groundbreaking engagement of Pyongyang, the BOJ put an
old, unpleasant issue in the headlines.
In a
short time the banking bind might have faded into the
background again, if not for the G7 economic summit last
weekend in Washington. The government's confused
response to the BOJ plan and further conflicting
statements from Japanese delegates at the summit led US
Treasury Secretary Paul O'Neill to state, "I did not
come away with an understanding of how these particular
interventions are going to contribute to an increase in
the gross domestic product."
With his government
humiliated at home and on the world stage, Koizumi was
pushed into action. He reportedly closeted himself on
Sunday night to consider changing his economic team.
With the appointment of Tanekana, Koizumi's government
has retaken the initiative on the bad loans issue. Let's
see what it does with it.
For the past 14 years,
Japan's politicians and bureaucrats have shown little
stomach for meaningful steps to tackle the economic
crisis. Indosuez W I Carr chief economist Michael Taylor
published a paper earlier this year comparing the
government's poor response to the 1920s Showa depression
with its failures during the 1990s, in part to debunk
"the still-potent Japanese myth of governmental and
bureaucratic competence."
For all the talk of
structural reform and recovery, after a year and a half
Koizumi and his team have delivered no more than their
predecessors to root out the causes and cure the
economic mess stifling Japan that hurts all of Asia and
the world. Maybe the appointment of Takenaka marks a
turning point from casual response to action befitting
the emergency all agree exists; we've seen numerous
apparent turning points in this relentless downturn. But
the origins of this latest initiative and its first
steps indicate business as usual.
See you and
your heart attack at the end of the month.
(©2002 Asia Times Online Co, Ltd. All rights
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