The reshuffled Cabinet of Prime Minister Junichiro Koizumi has a powerful economic portfolio that may well be described as “deputy prime minister for economic affairs.” As state minister in charge of economic and fiscal policy as well as financial affairs, Mr. Heizo Takenaka is now the de facto economic czar of the Koizumi administration. That is the most salient feature of Monday’s Cabinet reshuffle.
Mr. Takenaka, a former economics professor, joined the Koizumi Cabinet as economics minister in April last year. Now he also serves as financial services minister, taking over from Mr. Hakuo Yanagisawa who had called for a more measured approach to banking reform. Mr. Takenaka’s double appointment is evidence that he has the full backing of the prime minister, who wants to push bad-loan disposal more aggressively in a coordinated effort with the Bank of Japan.
Mr. Takenaka’s expanded position also shows that the bad-loan problem is reaching a point where drastic action is needed. With stock and bond prices falling, the government faces mounting pressure at home and abroad to work out a “crash program” for banking and industrial revival — a program that can accelerate debt disposal and corporate restructuring in an integrated manner.
In a press conference held after the reshuffle, Mr. Takenaka said he will “change what needs to be changed and come up with a comprehensive policy package.” He favors a direct infusion of public funds into undercapitalized banks — a step that had been opposed by Mr. Yanagisawa. Mr. Takenaka’s argument is that economic stagnation is largely the result of debt-ridden banks restricting lending to business and industry, and that a fund infusion is needed to bolster bank capital and accelerate debt cleanup.
Injecting public money directly into banks before they collapse rather than after will be more effective than buying bad loans above market value through the government-managed Resolution and Collection Corp. — a plan reportedly being considered within the government and the ruling parties. The latter method, which is an indirect way of pouring taxpayer money into banks, represents a halfway measure that will have little impact on management reform.
The direct method, by contrast, requires rigorous changes on the part of individual banks. A pre-emptive capital infusion also requires careful preparations — as well as bold decisions — on the part of the government. The lesson of a similar bailout carried out for top banks several years ago is that halfhearted assistance without tough conditions attached is more likely to slow banking reform.
The Financial Services Agency, which regularly inspects banks, had ruled out a direct bailout, saying that major banks meet international capital requirements and that debt write-offs are making steady progress. Since a bailout decision means a policy reversal, the agency owes banks as well as taxpayers a clear explanation of why direct funding is necessary.
A direct bailout entails, as it should, government intervention in bank management. For banks to receive public assistance before they become insolvent amounts to an admission of failure. Therefore, the government will need to resolutely pursue their managerial responsibility and ensure that additional reforms are put in place. Benign intervention of the sort practiced in the past will reduce incentives for self-reform.
Bad loans represent debts owed by deadbeat borrowers. Speeding up the resolution of this problem requires writing off more bad loans to depressed industries such as real estate, distribution and construction. It is also essential that these write-offs are made in ways that encourage structural reform in these sectors. The Koizumi administration, however, so far has been less than positive about promoting such reform.
Restructuring is likely to drive more debt-heavy businesses into bankruptcy, particularly in a period of persistent price declines. That makes it more important than ever to deal correctly with deflation. Policymakers, including Mr. Takenaka, need to stay clear of inflationary fiscal and monetary measures. Deflation, it should be noted, stems in large part from structural factors, such as high domestic prices relative to overseas prices.
It is important, therefore, that a bank bailout be accompanied not only by stepped-up restructuring in debt-strapped sectors but also by banks’ own efforts to reduce costs, such as cutting relatively high wages. These and other painful adjustments should form an integral part of an effective debt-disposal program. Without such adjustments, the Japanese economy will be unable to change itself. Mr. Takenaka must lead such a national undertaking.
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