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Japan's banking crisis: Follow the
leader
By Richard Hanson
Previously:
It's macho time in bad loan land
Capital
crimes
TOKYO - By some reckoning, it was the
event of the new political season - billed simply as "A
Gathering of 1,000 People to Support Koizumi's Reforms".
By the official tally, there were in fact 1,280
people squeezed into rows of plain banquet seats in the
posh main ballroom of central Tokyo's New Otani Hotel on
Thursday. You could tell that most of the participants
were from Big (and not so big) Business. "About 1,000 of
them arrived in black cars with drivers," observed one
organizer of the affair. Such transport implies
presidents and other exalted persons.
But the
main qualification to be there was a shared interest in
seeing to it that Japan's often embattled prince of
structural reform, Prime Minister Junichiro Koizumi, 60,
was not alone in his and the country's time of need. You
could tell it was a no-nonsense affair. No drinks, not
even snacks, were served. What was dished up was a
litany of what ails Japan - a recession-pocked decade of
poor economic growth and deflating values - and a few
healthy helpings of Koizumi's recipe for economic
recovery.
And it was no accident that the affair
was scheduled for the eve of the convening on Friday of
an extraordinary session (the 155th) of the Diet
(parliament). In the stormy session that ended in July,
Koizumi's much-ballyhooed reform agenda was torn to
shreds, or watered down, by hardcore opponents in his
own party, the ruling Liberal Democratic Party (LDP).
They opposed Koizumi's reforms for such vested
interests as the public works for road construction and
moves to privatize the nation's huge postal system. Both
are cash cows for the core factions of the LDP,
especially the one led by former prime minister Ryutaro
Hashimoto, the party's largest group.
The debate
last spring turned vitriolic. At one point, Koizumi said
in public that if his LDP opponents tried to "destroy"
his postal reform bills he would "destroy" the LDP. That
sort of talk was not conducive to progress on a
consensus on anything except that Japan indeed has edged
out all other contenders for the distinction of biggest
sick puppy in the advanced industrial world.
Japan's government bonds have been rated by
non-Japanese rating agencies at just a hair above
investment grade. That is when the organizers of the
Support Koizumi Movement quietly stepped in. It took a
consensus among Japan's three most powerful business
organizations - the Japan Business Federation (Nippon
Keidanren), the Japan Association of Corporate
Executives (Keizai Doyukai) and the Japan Chamber of
Commerce and Industry to form a task force of their own
to save the prime minister.
The work began in
July, when the leaders of the three organizations
visited the prime minister with their plans drawn up
through August. Koizumi himself produced a dramatic
twist when he surprised the world at the end of August
with a plan to become the first sitting prime minister
to travel to North Korea to negotiate for normal
relations between the two neighboring countries.
One result was a welcome boost in support
reflected in popular polls - a jump to more than 60
percent in most samples from the 40 percent range
reached earlier in the year. In late September, Koizumi
further consolidated his grip on government by
reshuffling his cabinet - the first time in the 17
months since he took office.
He wasted no time
in tightening his grip on the LDP. The top three party
officials were kept on with the tacit understanding that
they will support his reform. The prime minister then
dropped from the cabinet a key economic minister and
placed the onus for steering the government's economic
policy in hands of Heizo Takenaka, an academic
(non-politician) who is responsible for the Financial
Services Agency (FSA) as well as organs that direct
economic and fiscal policy.
What Koizumi has
succeeded in doing is concentrating the decision-making
functions in one place. Takenaka has formed a special
task force to draw up policies to deal with the two
issues designated as top priority.
The first is
deflation, which has reduced the value of most assets
and goods almost unabated for over a decade. The other
is the still rising number and size of non-performing
loans made by banks to companies that cannot pay them
back. This threatens wholesale failures in the corporate
sector and wholesale failures in the banking industry,
which was not helped by a large infusion of governmental
money in the late 1990s.
That, for bad or good,
is where things stick.
What will be clear is
that there is no simple solution to the problems that
face Japan without inflicting a still
difficult-to-calculate amount of pain on one sector or
another. There is barely any agreement on whether the
main culprits being fingered - deflation and bad loans -
are part of the same problem or need to be treated
separately or some mix of many solutions that have so
far eluded consensus. Eliminating bad loans likely will
have little to do with whether prices will continue to
fall. Inducing measures that stimulate price rises are
no solution to banks and companies that are insolvent
and need to be disposed of in some manner.
Even
within the inner sanctums of the central Bank of Japan,
there is no strong conviction that deflation is bad,
whereas there is a consensus that failing banks and
falling financial markets are very bad for the prospects
of economic recovery. What the Bank of Japan has
proposed in its most innovative mode is offloading
listed stocks owned by a select number of big banks.
That will help pump some money into the banks, which
don't make enough money to cover huge writeoffs of bad
loans. Pumping more money into the economy is another
option, but there is already a lot of it sloshing
around.
So there would seem to be no ready
answers to the question raised implicitly at the
gathering of 1,000 supporters of Koizumi.
Where
does the buck, as the US dollar is affectionately
called, stop? At the risk of being obvious, the
organizers of the 1,000 event have their own answer. It
is leadership, which is at times the most elusive of
human qualities. The crowd perhaps realized that this is
what they were witnessing, or at least wishing for.
As Koizumi left the podium and descended from
the long stage with a jaunty stride, the assembled
supporters rose and awarded him with rare gesture these
days - a standing ovation.
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