Japan pledge on ailing banks to mollify G7

Reviewed By Hitoshi URABE

Article:
"Japan pledge on ailing banks to mollify G7"
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1031119743870&p=1012571727169
(by David Ibison in Tokyo) Financial Times

Comments:

The top agenda item for Japan's delegation at this year's IMF/World Bank meeting was how Mr. Shiokawa, finance minister, and Mr. Hayami, the governor of Bank of Japan, would be attended to by the policy makers of other member countries. To no surprise, explanations on Japan's policies toward cleaning up the banking sector with more than $400 billion in problem loans were received with skepticism.

The frustration was amplified after Mr. Shiokawa argued with his own ministry about whether Japan might be ready to use public money in bailing out the banks. Mr. Shiokawa said on Friday that he told Mr. O'Neill, U.S. treasury secretary that it was possible. But the Ministry of Finance issued a correction shortly afterward, denying that the minister had talked about a publicly funded rescue. Then, hours later, Mr. Shiokawa angrily insisted that he had meant what he said. It was resolved finally to be understood that the finance minister did talk about it, but not during the official conference but as a comment while "walking in the corridor with Mr. O'Neill."

The article introduced above explained the situation fairly correctly, including certain assumptions related to the reshuffling of the cabinet on Monday, September 30.

It had been reported and well known for quite a while that there were disputes between Mr. Yanagisawa, Minister for Financial Services, and Dr. Takenaka, Minister of State for Economic and Fiscal Policy, over the method of reviving Japan's banking sector. Mr. Yanagisawa maintained that individual banks were strong enough to withhold the burden of depressed stock prices and even if the government needs to step in, indirect measures such as purchasing of problem assets in limited quantity from the banks should suffice. Dr. Takenaka, on the other hand, argued that in order to bring back the system into a healthy state, direct capital injection to the individual banks would be necessary.

As it turned out, the comments by Mr. Shiokawa in Washington D.C. was a forecast of what to come. Mr. Koizumi, in reshuffling his cabinet, sacked Mr. Yanagisawa and assigned the task of supervising the financial services industry to Dr. Takenaka. This could be considered a very clear indication of which policy direction Mr. Koizumi chose to cope with the issue. While it could make managers at certain banks uneasy for it is a step in the direction of banks being state-owned, the measure should be welcomed generally, as direct infusion of capital into individual banks should expedite the process of cleaning up the mess. It has been said, however, that it would be necessary to pass a new legislation before this sort of capital injection by public money into individual banks could be carried out, and so it would still be at least a few months until such a measure is executed. In any case, Dr. Takenaka needs to act swiftly. The problem has been dwelled on for too long.