With economics minister Heizo Takenaka taking on responsibility for the Financial Services Agency, a new sense of purpose is evident in Japan
For Heizo Takenaka, the moment of truth and its consequences approaches. Any day now, we can expect a preliminary report from Japan's new economics overseer on his promised plans to resolve the crisis among the nation's major banks.
Takenaka's new policy could be another disappointment, we have to allow for that. Tokyo has delivered too little, too late so often it sometimes seems to have taken its place among kabuki and geisha bars as a great Japanese tradition.
I'm an optimist this time. Prime Minister Junichiro Koizumi indicated clearly the time for action is near when he addressed a room full of Americans at the Council on Foreign Relations in New York recently. He then went home to name a new cabinet, in which Takenaka, his economics minister, took on the added responsibility of heading the Financial Services Agency. A new sense of purpose has been evident in Tokyo ever since.
Takenaka now has a Financial Sector Emergency Response Project Team working out the details. But enough has been said already to suggest Tokyo is about to make public its first credible plan to bring Japan out of its long-running banking crisis. My expectations are these:
• A new calculation of the non-performing loans at Japan's major banks. This is certain to total several times more than the ¥52 trillion ($418bn) officially acknowledged to date. A realistic reckoning will finally put the loan problem in perspective and bring Japan closer in line with international norms in the matter of accounting.
• An injection of government funds into troubled banks. We've heard no figures on this yet, nor any news as to how the amount will be determined, but direct recapitalisation has taken shape as the central feature of Takenaka's policy.
• I haven't heard anyone in Koizumi's government wax enthusiastic about the prospect of nationalising crippled banks, but I haven't heard anyone deny it as a possibility either. Temporary nationalisation, when necessary, is perfectly plausible at this point.
• New social and corporate welfare measures are coming. In a recent policy speech, Koizumi promised an enhanced safety net to assist those who lose jobs as reforms send companies into bankruptcy. At the same time, Takenaka backed a newly announced government contribution to a bailout fund for Daiei Inc, the long-troubled retailer. This is not the last we'll see of this type of corporate rescue, as Takenaka made clear.
• Over at the Bank of Japan, details of the stock-purchasing plan announced last month are falling into place. The central bank intends to buy ¥2 trillion worth of shares from more than 10 banks over the next year, and possibly extend the plan into 2004. No, it's not a lot of money, but we need to see this as part of a larger package, not in isolation.
• The bank also seems willing to extend unsecured emergency loans to troubled banks. The operative term here is 'emergency', and any such facility is likely to function as a supplement to government injections of funds. It also looks like a bridge-building exercise between the bank and Takenaka's bureaucracy.
• Inflation targeting may turn out to be another bridge builder to the Takenaka crowd. It would mark a drastic shift in policy and reduce the central bank's room for manoeuvre, but the Bank of Japan would finally be fighting the current war, the war against deflation, and not the last one.
What will Takenaka's policy not include? Glad you asked, because this is important too. There will be no declaration of a crisis, which would panic the public and provoke resistance among the banks. Although such a declaration is statutorily required before the government steps in, Takenaka, a former professor who holds no elected office, seems determined to end-run it.
In the same fuzzy-around-the-edges fashion, it doesn't look as if there will be much in the way of new legislation to empower the government. Serious horse trading between the bureaucrats and the bankers is a clear preference at this point over hard-edged, Western-style law and regulation.
Nor will there be a starring role for the Resolution and Collection Agency, Japan's warehouse of bad loans, roughly akin to the Resolution Trust launched to solve the savings and loan crisis in the US a decade ago. By opting instead for direct capital injections, Takenaka seems determined to negotiate structural reform at the banks, although we don't yet know what his demands will be.
I see a couple of things in this; seriousness, for one thing. As long as Takenaka and his colleagues stood to the side and called for radical policies with no reference to their damaging consequences, you could assume he hadn't truly left the halls of academe and stepped up to the plate.
Takenaka's Financial Services Agency is now developing a policy intended to prompt reform while mitigating the pain ' corporate bankruptcies, increased unemployment ' it is certain to entail. This is a sign of strength and commitment, not weakness.
Just as salutary is the degree of policy coordination emerging between the Bank of Japan and bureaucrats at the Ministry of Finance and the FSA. The softening stance of Masaru Hayami, the central bank governor and a longtime critic of the Financial Services Agency slipping and sliding under Hakuo Yanagisawa, Takenaka's predecessor, has been startling of late.
Hayami is like a mirror in this respect. The extent of his willingness to compromise with other branches of the government seems to reflect the new Koizumi government's desire and ability to move forward.
I hope I'm right about Hayami, and that Hayami is right about the prime minister and his right-hand man. We'll know soon enough.
Bloomberg newsroom, New York
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