World Finance Officials Press Japan to Act Fast
International finance officials meeting here Saturday ratcheted up the pressure on Japan to fix its floundering financial sector fast, with U.S. Deputy Treasury Secretary Lawrence Summers warning that Japan’s window of opportunity for reform won’t last.
“We are very serious about structural reform, particularly financial reforms, in this country,” said Eisuke Sakakibara, Japan’s vice finance minister for international affairs, adding that he believed the officials from 17 nations who attended Saturday’s meeting were persuaded of Japan’s “seriousness” to act “as soon as possible.”
But Sakakibara, who is known here as “Mr. Yen” for his influence on the currency markets, offered no new details about how Japan intended to realize the promised reforms. Nor would he speculate on whether the bearish investors, who drove the yen to an eight-year low last week until the United States intervened, would be appeased by the Japanese pledges.
“You have to ask the market,” Sakakibara said. “I can’t control the market.”
Participants in the five-hour meeting released a statement saying they “welcomed recent announcements by Japan of its determination to restructure its financial system as a matter of highest urgency.”
In recent days, Prime Minister Ryutaro Hashimoto and other Japanese officials have promised to take swift action to liquidate their mountain of bad bank loans, estimated by the government to be about $563 billion but suspected by some private analysts to be about $1 trillion. Markets are waiting impatiently for the details of when and how Japan will dispose of these loans.
The ruling Liberal Democratic Party wanted to put off that politically sensitive announcement until after July 12 parliamentary elections, but party Secretary-General Koichi Kato reportedly promised Summers on Friday that Japan will make a decision before then on whether to create a “bridge bank” that would take over the assets and liabilities of failing banks.
There were unconfirmed reports that the bank reform plan will be taken up by the LDP as early as Tuesday.
Japanese authorities also have promised to accelerate the implementation of a $117-billion fiscal stimulus package and to reform income tax structures for corporations and individuals.
“It is of vital importance to Japan, to the recovery of Asia . . . and to the entire world economy that Japan restore its banking system to health, achieve domestic demand-led growth, open and deregulate its markets,” the participants’ statement said.
Summers added: “We in the international community will be looking to see how Japan takes advantage of this window of opportunity.”
The world “wants to encourage Japan to carry through in a decisive and meaningful way,” he said.
The hastily called meeting brought together deputy finance ministers and central bank officials from the Group of 7 industrialized nations and 10 other Asian nations with a deep interest in seeing the regional economic crisis resolved, including China, Indonesia, South Korea, Thailand, Malaysia and the Philippines.
Officials from the International Monetary Fund, the World Bank and the Asian Development Bank also attended.
The powwow was to be held in Hong Kong, but Japan invited the delegates to Tokyo instead after last week’s yen emergency.
Summers, who has been in emergency meetings with Japanese officials since Thursday, insisted that the U.S. has not prescribed specific solutions to Japan’s banking problems. But he noted that “common elements globally” for bank bailout schemes include transparency, getting bad assets off bank balance sheets, and “appropriately targeted” capital infusions.
He rejected the argument--put forth by some Japanese finance officials--that cleaning up the bad-loan crisis will necessarily lead to higher unemployment.
Summers declined to speculate on how long the window of opportunity will remain for Japanese authorities to come up with a credible and specific reform plan before investors start dumping the yen again.
Japan is believed to have spent billions trying to prop up its stock and currency markets since last fall, but its past interventions, conducted without U.S. support, succeeded for only a few days or a week.
Summers did say he was “very much encouraged by the sense of seriousness of purpose” of his Japanese counterparts.
Sakakibara dismissed questions about whether Japan had agreed to a specific quid pro quo in return for the United States’ decision to join Japan in intervening in currency markets to prop up the yen, implying that such cooperation between allies and friends was natural.
Pressed by reporters, he added: “If you’re asking if there are some secret agreements between the U.S. and Japan, there aren’t any.”
The first test case of how Japan intends to deal with problem banks is likely to be the Long Term Credit Bank of Japan, whose shares plummeted and were suspended from trading Friday after Moody’s Investors Service downgraded its debt rating from Ba1 to B1 and said the rating could be further lowered.
The bank’s management has insisted that it is not in operational trouble, but Japanese media report that the government has concluded that the bank will not be able to recover and is mulling various restructuring options.