Ambassador Baker says bank reforms could herald rosy future for Japan
Howard H. BakerC Jr.
Special to The Yomiuri Shimbun
This article was originally published Aug. 6, 2003 in The Daily Yomiuri on Page 8 and is reproduced here by permission.
Commentators and analysts are quick to draw up a list of the challenges confronting Japan: nonperforming loans, persistent deflation, government debt, and regulatory barriers to efficient resource allocation. However, focusing on the negative obscures Japan's underlying economic strengths and the reform progress already achieved. I'd like briefly to review those strengths, and to focus on recent progress in one area critical to Japan's economic future: bank reform. Japan's high living standards and status as the world's largest creditor nation reflect several key factors.
The first is human capital in the form of a well-educated and industrious workforce. The Nobel prizes awarded to Japanese researchers in chemistry and physics last year demonstrate that Japan can remain a science and technology power for years to come. The international success of anime and Japanese pop music shows that Japan can also successfully export its popular culture and lifestyle.
The second key factor is Japan's industrial capital, comprised of a large number of world-class firms across the spectrum of consumer and industrial products and services.
A third factor is Japan's financial capital as the world's largest creditor nation, with over 175 trillion yen in net foreign assets. Fourth is the fact that Japan is a well-governed democracy, whose institutions are under the rule of law and ultimately subject to the will of the people. This helps explain the progress Japan has achieved in deregulation and other economic reforms in recent years.
Japan's human capital, industrial capital, financial capital, and democratic governance are more than sufficient to enable Japan to address its current problems and achieve a brilliant economic future. But an essential step toward that brilliant future is the restoration of an efficient and well-functioning financial system. That is why Japan's recent progress in bank reform is so heartening. Many skeptics derided the measures introduced in October in the government of Prime Minister Junichiro Koizumi's Financial Revival Program as insufficient.
However, Resona Bank's recognition that it was undercapitalized, its decision to request public capital, and the government's decisive action showed that the program's reforms have teeth. Resona also demonstrated once again that the Japanese financial authorities could address a major bank's weakness quickly and efficiently, while maintaining stability in the financial system.
Another positive element is that the government, in recapitalizing Resona, imposed stricter conditions than in the past. Senior managers were changed and shareholders will suffer dilution of their equity stakes. Enforcing the principles of management and shareholder responsibility will improve operational incentives at Resona and at other banks.
The government also appears to have provided a sufficient amount of capital for Resona to address its problems once and for all. The 2 trillion yen in new funds will raise Resona's capital adequacy ratio to more than 12 percent, far above the 4 percent minimum for domestic banks. That extra capital should allow Resona to undertake a thorough reassessment of its loans and other assets so that the bank is not burdened by the mistakes of the past and can resume sound risk-based lending practices.
Well-structured capital injections, with conditions that prevent the need for public money in the future, make sense. The government's action on Resona increases my confidence that Japan can look beyond the narrow special interest to the overall public interest. It is also a sign that Japan is starting to harness the enormous resources at its disposal to forge a brighter future.