Within a day of the installation of a new prime minister and Cabinet, Japan’s parliament convened an emergency session on the nation’s banking crisis. What counts is what happens next. Can the ruling Liberal Democratic Party finally, belatedly, push through new laws to overhaul a system saddled with bad loans that the Japanese estimate at $620 billion but others put as high as $1 trillion, a devastating weight on the world’s second-largest economy?
Prime Minister Keizo Obuchi’s smart first move was to tap as his finance minister Kiichi Miyazawa, an able elder statesman respected within and outside Japan. What Obuchi lacks in economic expertise and experience, Miyazawa has in spades, having served as head of Japan’s finance, trade and foreign ministries and as prime minister from 1991 to 1993. His appointment will help instill confidence in Japan’s beleaguered economy both at home and abroad.
Miyazawa will be the point man for bank reforms and other economic moves. Working in his favor is an unusual convergence of pressures that could promote change in consensus-driven Japan. The most telling is the stunning rebuke that voters delivered to the Liberal Democrats in the upper house earlier this month over their failure to properly manage the economy. Also, the United States and other nations have been pressing Tokyo to take measures to reinvigorate the recession-mired economy. Ministers in Tokyo had fiddled, at one point even raising taxes when clearly the goal should have been to stimulate spending.
The rest of Asia cannot recover from this now year-old economic crisis without recovery in Japan. But the plight of Japanese banks, stuck with the billions in bad debt foolishly accumulated during the so-called bubble economy of the 1980s, is worsening. Companies are going bankrupt and unemployment is rising.
What Japan needs is a tough program to clean up the banks, similar to the job done by the Resolution Trust Corp. in the United States a decade ago in the savings and loan debacle. Depositors were protected while insolvent or weak S&Ls; were taken over by the government. Tokyo could use that kind of decisive action in the plan before the parliament, a plan that in its current form appears far too easy on the banks, which are known to use accounting gimmicks that hide weaknesses.
Miyazawa helped to craft the plan; now he can strengthen it. Until Tokyo gets a handle on its bank problem, the credit crunch will worsen, and with it rides the fate of the ruling party.