Lessons From Tokyo
2008年10月22日16:08Heizo Takenaka
The subprime problem in the United States has triggered global financial market instability. A similar crisis of confidence hit Japan in the 1990s, after the collapse of the late 1980s bubble. That crisis occurred because the Japanese government hesitated to inject public funds into banks, and instead reacted solely with mistaken demand-side expansion policies. When government action finally came, it was misdirected and too late. It took nine years from the collapse of our bubble until our first public funds injections into banks.
Once a crisis of confidence starts, there is only one thing to do: Both the government and the central bank must take all possible actions to quell the crisis. Crisis demands activism. Japan's bitter experience of fighting the crisis of confidence has lessons for the rest of the world. Let me point to two concrete lessons.
First, public fund injections alone did not solve the problem. Rather, sequencing was important. Above all, there must be precise and strict asset appraisal of financial institutions' health. Only then should the necessary capital be injected -- and quickly so.
Lack of trust in banks' balance sheets was the most important source of concern for our financial markets. Unfortunately, at the end of the 1990s, Japan injected public funds while bad assets were still being concealed. As a result, the financial crisis continued, even after the injections. The solution came only in 2002, after introduction of our 'Financial Revitalization Program' under Prime Minister Junichiro Koizumi. Under this program, strict bank inspections were carried out, and then necessary capital injections were made. As a result, the government injected capital into Resona Bank in 2003, and then the situation began to improve.
The second lesson is that activism can go too far. Activism is essential in a crisis, but there are some steps to avoid. When excessive protection is given to some institutions, the impact on others can worsen the crisis of confidence.
In this context, the global trend toward reversing mark-to-market accounting -- something which is also being discussed in Japan at present -- is troubling. To prevent the financial condition of institutions from appearing to worsen, the idea is to temporarily reverse some accounting rules. This is a mistake. Reversing mark-to-market rules increases investor worries about balance sheets. Confusion stemming from uncertainty over the true state of balance sheets would only worsen.
It is easy to understand why some view reversal of mark-to-market accounting as an activist policy. But when activism is used for financial stabilization, the right sequence is first to enforce precise and accurate asset assessments and then to show flexibility in financial oversight standards, such as capital ratios and stock exchange listing standards. Changing the accounting rules is counterproductive.
Dealing with accounting issues is particularly hard when a crisis hits during election season. This combination pushes politics toward indiscriminate activism. In 2003, when an election coincided with a financial crisis here in Japan, many politicians and industry groups called for suspension of mark-to-market accounting as a way to stop banks from falling into capital shortages. In the end, the Japanese government, under the leadership of then-Prime Minister Koizumi, rejected this view. Had we done this, investors would have been even more confused, and would have lost even more confidence in banks' financial statements. Had we reversed mark-to-market accounting at that time, bad loan disposal and economic recovery would have taken even longer.
When facing a crisis of confidence, flexibility and boldness are crucial. That said, urgency is no excuse to be reckless. Distorting accounting standards is a classic example of indiscriminate activism. This issue will test the restraint and wisdom of political leaders everywhere.
(Editor's Note: Mr. Takenaka is director of the Global Security Research Institute at Keio University and was formerly Minister of Economics, Minister of Financial Reform and Minister of Internal Affairs and Communications under Prime Minister Junichiro Koizumi.)
