Editorial comment: Seoul lessons
Published: February 7 2002 19:52 | Last Updated: February 7 2002 19:55





Politicians have hinted that another sizeable Japanese bank bail-out is imminent. A Y15,000bn (E129bn) fund is already set aside to deal with a financial crisis; few would challenge the notion that the banks are technically insolvent; and Thursday's 8.2 per cent surge in banking sector shares reflected financial market confidence that an injection of public capital would be forthcoming.

The question for policymakers should be: what has changed since the Y9,000bn injection of public funds in 1999? The answer is, unfortunately, that the situation has got worse.

Bad loans continue to grow at an alarming rate as the economy's debt/deflation spiral intensifies. And the banks (cheered on by government) remain far too willing to prop up failed companies such as Daiei, the country's largest supermarket chain.

To judge by past experience, the worst conceivable policy response from the government - throwing the banks a further cash lifeline as a substitute for reform - also seems the most likely. The political attraction is clear: it would help defuse an inevitable ticking-off from President George W. Bush when he visits Japan in just over a week. It would also smooth April's removal of the blanket guarantee on bank deposits.

Such expediency would do great damage. It would remove pressure on banks to restructure from within and would make a mockery of the government's 1999 assurance that there would be"no more" capital injections into the banking system.

The solution to Japan's banking and economic woes has been clear for many years. A radical change in direction is needed to boost sagging demand and create expectations of inflation, alongside structural reforms to stop the misallocation of capital towards bad investments.

For the banks, this would imply honesty about the bad loan problem, followed by a nationalisation programme to clean up banks' balance sheets. Then the government could float their healthy parts on the stock market - while insisting, as it should, that the Bank of Japan fulfil its statutory duty to maintain stable prices and eradicate deflation.

This programme is entirely feasible - indeed, it has been done. South Korea's restructuring of its financial system since the 1997 Asian crisis is beginning to show results, with declines in bad loans and a relatively successful economic performance.

Seoul's record on financial reform is far from perfect but it puts that of Japan to shame. Tokyo's politicians might not like it but they would be wise to cast their eyes to their Korean neighbour for inspiration.




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