By Steven Clemons
Executive Vice President, New America Foundation
First Appeared: Daily Yomiuri - January 23, 2002
There are episodes in history that deservingly draw our attention--some very
small in scale, but major in impact. In U.S. history, one such moment at the
start of the Revolutionary War has come to be known as "the shot heard
round the world."
Another such momentous event recently appeared in Japan, which wrecked by a
decadelong economic malaise and the potential threat of a financial implosion,
saw the Nikkei Stock Average rise on a day that it should have plummeted.
After the tragic Sept. 11 terrorist attack on the United States, Tokyo's
stock index rose, baffling those who noticed and were not otherwise glued to
the visual images of airplanes crashing into skyscrapers.
Why did the Nikkei move up? What could explain the breath of life in an
otherwise flat and dreadfully stale Japanese economy?
Prime Minister Junichiro Koizumi and his colleagues of the Liberal
Democratic Party should have called a Diet hearing to investigate. Or perhaps
the prime minister's economic policy czar, Heizo Takenaka, should have
attempted some explanation as to why Japan's stock index seemed to power past
the shock of the day's earlier traumatic events.
What triggered this shiver of hope was the bankruptcy of Japan's
third-largest retailer, Mycal Corp. Rather than prolonging by sleight of hand
its insolvency, Mycal forced a real and transparent reconciliation of its
deteriorating assets and accumulating debts.
In contrast to the life support that the government and several lead banks
continue to apply to Daiei Inc., Mycal's action earned the applause and support
of markets. This is the shot that should ring loudly through the halls of
Nagatacho and Kasumigaseki, and frankly, throughout Japan.
However, Koizumi, despite his slick veneer as a reformer and rhetoric that
he would protect "no sacred cows," has thus far utterly failed to
make market forces his friend in changing the course of the nation's economy.
Many who interact closely with the prime minister report that though he has
one of the keenest political minds in contemporary Japanese history, he is not
very "numerate." He does not follow numbers and does not really
understand the dynamics of an economy.
As but one example, misunderstanding his advisers, Koizumi originally told
the nation he had a three-year plan for disposing of the country's
nonperforming loan (NPL) problems.
But he later revised this to seven years after being corrected by his NPL
disposer-in-chief Hakuo Yanagisawa, state minister in charge of financial
policy.
Nonetheless, the positive shock generated by Mycal's bankruptcy was not lost
on all of the prime minister's close advisers--particularly Hideichi Okada, a
personal aide drawn from the senior ranks of the Economy, Trade and Industry
Ministry.
Okada gave Koizumi access to a couple of clever economic realists from both
the Diet and the private accounting sector who convinced the prime minister
that economic confidence could be significantly strengthened if the lessons of
Mycal's bankruptcy were applied to Japan's major borrowers. Koizumi was on
their side for at least two days before changing course again.
Focusing on the worst NPL cases would require the government to abandon the
command economy tactics advocated by Yanagisawa. His current approach is to
generate a total figure of nonperfoming loans, divide that number by seven (for
seven years), and then write one-seventh of the nation's bad debt off each
year.
In the meantime, to better calibrate and understand the full scale of the
problem in the domestic financial sector, Yanagisawa is playing the role of a
good bureaucratic chief--asking for an expansion of his budget, a broadening of
his powers and a massive expansion of his inspection team.
At best, however, Yanagisawa's plan is disingenuous and a distraction from
real problem-solving as it fails to account for the ongoing accumulation and
compounding of bad loans beyond current levels.
His plan also rests on the notion of informally dispersing bad debt target
levels--to the domestic financial sector--allowing them only to write off a
certain limit of NPLs each year.
In other words, Yanagisawa has constructed a framework in which the
government will essentially be directing banks to write off some loans, but
then to misclassify other parts of its portfolio until the next year's bad-debt
targets are dispersed and approved.
Very few seem to be noting that Yanagisawa seems to be putting the
government in the position of being a party to the ongoing fraudulent
management of loan portfolios.
The beauty of the Mycal bankruptcy and the so-called 30 Worst NPLs Plan is
that the government and private sector can acknowledge that the resolution of
the nation's debt problems will take years to resolve, but that this strategy
will clear the worst cases off the books first.
Markets rise and fall based not on current conditions, but on future
projections. If the nation steps forward to work out the most bleak parts of
its bad-debt portfolio, markets may believe that this bodes well for sound
economic decisions in the future.
Yanagisawa's annual allotments of bad-debt write-offs also could be
overwhelmed by other unforeseen, unmanaged bankruptcies, compelling even more
strident government guidance to the banks that are dishonest about the true
state of their loan portfolios.
Just as markets can spiral down, triggering further cascading spirals
downward, they also can spiral upward. If the nation worked harder to get
market forces on the side of reform, stopped trying to convince the world that
the nonperforming loans will disappear by some unrealistic date, and worked to
resolve the worst cases first, confidence might return on the basis of a
brighter future down the road.
Such a boost would stir new investment, drive consumption and potentially
kick-start the economy, thus bestowing on those at the helm of state the
deserved accolades as "reformers."
Copyright: 2002 Daily Yomiuri