Will Japan challenge the high tide or get washed away in the flood?


There is a tide in the affairs of men, which taken at the flood, leads on to fortune.

Flood is a good way to put it when talking of Japan’s sea of economic troubles. In this respect, it is good to see the Koizumi government putting on a show of some long-awaited action on the economic front. At the helm of the new-look Koizumi approach stands Heizo Takenaka, now economics cum financial affairs minister.

Mr. Takenaka is in the process of instituting a series of new measures to tackle the issue of banks’ nonperforming loans. Given the circumstances, the quickly-quickly approach that appears to have replaced the previous softly-softly method in dealing with the problem is a welcome change.

Indeed, we must take the current when it serves, or lose our ventures.

How we take the current though, is another matter. Some of the proposed changes sound frankly too autocratic for the economist’s peace of mind.

There have been media reports of numerical targets regarding profitability being imposed on the larger banks. There is also talk of a compulsive injection of public funds into banks to “pre-empt” a financial crisis. Mr. Takenaka has suggested that the government and the Bank of Japan coordinate their strategies to arrive at a comprehensively workable solution to the deflationary pressure.

Apparently the first thing that the new team working on the nonperforming loans issue wants to do is conduct a thoroughgoing reappraisal of the loan portfolio in the banking sector. That is fine.

Yet, if after all that stringent scrutiny the end result is to put public funds into all banks indiscriminately, what would have been the point of the exercise but to perpetuate the convoy system, where none gets left behind but none is rewarded for individual resourcefulness?

The numerical target approach, if indeed it is adopted, sounds like ignoring the invisible hand of the market and resorting to the visible hand of command economics.

For the government and the Bank of Japan to work together to take the current and lead us on to better things sounds encouraging, as such. Yet history tends to show that nothing good comes of these two institutions being too much in each other’s pockets.

Furthermore, it would be unfortunate, to put it nicely, should horse trading between the government and the BOJ end up with the latter adopting inflation targeting, as Mr. Takenaka has been keen to suggest on many an occasion.

Inflation targeting poses that classic problem of the string not working both ways. You can use the inflation targeting string to pull inflation down. But using the same string to push inflation up is entirely a different story.

Meanwhile the government has decided to postpone the full introduction of the 10 million yen cap on bank deposit guarantees. The new policy is that unlimited guarantees will continue to apply on current accounts for a further two years. This is strange.

If on the one hand you are going to provide public funding to the banks to recapitalize, none will ever face the danger of bankruptcy anyway. So why bother to postpone the deposit insurance capping?

Nobody is going to be allowed to fail, and no depositors will be placed at risk. And the government will pass judgment on banks according to numerical criteria of its own choosing. All of this is beginning to look like interventionist economics at its most high-handed.

Rather than taking the tide at its flood, policy looks poised to go the way of the sorcerer’s apprentice. Once you begin something you do not know how to finish, anything can happen. Drowning in the flood is one of them.