On May 17, the finance ministers of the world's major powers gathered in Deauville, France as part of efforts to set the stage for the annual Group of Eight summit in Evian. A statement adopted at the meeting urged Japan to pursue structural reforms in its financial and corporate sectors and overcome its deflationary woes.
Just a day before the meeting, however, Resona Holdings Inc., a group that has Resona Bank and other firms under its umbrella, decided to ask the Financial Services Agency for an injection of public funds. Despite efforts to beef up its capital, the Resona group reported it had developed a capital shortfall that was pulling its capital-to-asset ratio below the 4 percent minimum for maintaining domestic operations, making it difficult to do business without government support.
The next day, the government decided to inject about 2 trillion yen in public funds to Resona, believing the group's troubles, if left unattended, could explode into a financial crisis. Upon the government's request, the Bank of Japan also promptly agreed to chip in with the necessary funds. It will be the third time taxpayer money has been pumped into the banking system, and the first since a set of new legal provisions was adopted to provide a safety net for financial crises. We should closely watch how the management responsibility of Resona's executives and its shareholders will be scrutinized during the bailout process, and whether the scheme will lead to a revival in the financial sector.