Prime Minister Junichiro Koizumi’s controversial reappointment Monday of Heizo Takenaka as financial services minister means banks will still be under pressure to clean up their bad loans.
That is good news for Takenaka’s supporters, including the U.S. government, and bad news for bankers and critics of reform such as the Liberal Democratic Party’s old guard.
Whether tough action will follow Takenaka’s tough talk is another story.
“Takenaka’s position is stronger now, and it means he can be more aggressive (in bank reforms),” said Brett Hemsley, financial institutions analyst at Fitch Ratings Ltd., a ratings firm based in New York and London.
An academic with little political clout, the 52-year-old Takenaka has been Koizumi’s right-hand man since he was made economics minister in 2001 and then also put in charge of bank policy in September 2002.
His tough talk on banks has won strong praise from abroad and even stronger condemnation at home. In the last year, his prime critics have taken every opportunity to attack his ability as an economist, pointing to his about-face on bailing out ailing banks.
In bursts of nationalistic jingoism, they have even portrayed him as an unwitting agent for foreign investment banks eager to find bargains in a Japanese economy shattered by his radical policies.
Takenaka’s so-called bank reforms are only bringing pain with little prospect of gain, said Noboru Kitade, president of Sakamoto Hokuriku Securities Co., based in Kanazawa, Ishikawa Prefecture.
“The regional economies are bleeding,” Kitade said. “Lending is tighter, and smaller companies have nowhere to go for funds.”
On the other hand, he has strong support from the proreform camp.
“One of Takenaka’s few sources of strength is the stamp of approval he can get from U.S. officials,” said a Cabinet Office official who asked not to be named.
For all the praise, however, Takenaka has yet to take concrete action that would cement his place as a reformer.
Some economists point to his failure to win the go-ahead from within the Financial Services Agency and the Diet for preventive bailouts of ailing banks with the use of public funds.
They further point to his role in extending the unlimited state guarantee on ordinary deposits at banks for two years from April. The move cushions weak banks from depositor flight, dulling market principles but appeasing his critics.
The banks have shed bad loans, with the total reported to the FSA at 35.3 trillion yen in fiscal 2002, a year-on-year drop of 18.3 percent. But many analysts say some banks are still window-dressing their books.
Meanwhile, stricter auditing rules forced the nation’s fifth-largest bank, Resona Holdings Inc., to seek a 1.96 trillion yen bailout in May and bring in new management. But the move was criticized as overly lenient to shareholders, whose share prices rose after the bailout.
Still, Takenaka’s track record may not be the point.
“Takenaka may not have achieved that much, but he has changed the atmosphere at the Financial Services Agency into one of pressure that is scaring banks to clean up their books,” said Fitch’s Hemsley. “The longer he’s allowed to stay, the more chances he will have to put his aggressive statements into action.”
Some economists excuse Takenaka, saying that a limp economy and share price falls to 20-year lows this year have hampered his ability to follow through on tough talk.
“This is not a perfect world, unexpected things happen,” said Satoshi Matsubara, an economics professor at Toyo University. “All things considered, (Koizumi and Takenaka) have done more for the economy than any of their predecessors.”
The reform camp now hopes Takenaka will force banks to sell their shareholdings more quickly so they can become less vulnerable to stock falls, and also force them to set aside more reserves against problem loans. Problem loans have been seen as a dead weight on the economy, preventing banks from lending to new ventures.
Cynics say it makes little difference over the long term who is financial services minister. Whoever is in charge of banking policy, they say, will show strong support for major banks, while support for smaller loss-churning and inefficient institutions is already dwindling.
Shinichi Tamura, an analyst at UBS Securities Japan Ltd., summed up Takenaka’s policy: “The message is, we won’t let banks go under, we will give you more money when you need to forgive large debtors, but you must conduct business our way.”
He is worried regulators will eventually stifle any innovation on the part of small regional banks, while state- affiliated institutions take the lion’s share of profits from riskier moves, such as lending to small companies.
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