Newsweek International Edition

Learning From the Student

If Japan wants to stave off a banking crisis, it should look at the path taken by its former star pupil, South Korea

Oct. 14 issue - Ever wonder what makes Japanese financial markets succumb to near-death spasms every six months like clockwork? Why, each March and September, stock prices in Tokyo tumble, bankers sweat the latent losses hidden on their balance sheets, and analysts?sure that a crisis is nigh-issue dire pleas for reform?

Here is a brief summary of Japan's economic problems :

Japan Inc.痴 long losing streak has shrunk the economy to its 1995 size and sent stocks plummeting to levels not seen since the mid-1980s. Property markets are in free fall. Bank lending declines by 2 percent each year, with most new credit going to so-called zombie companies幼onstruction and retail failures kept alive with zero-interest loans.


The Korean and Japanese versions of capitalism now bear increasingly little resemblance to one another. Since its own bubble economy burst in the late 1980s, Tokyo has refused to change. The government has tried to bail out the economy with massive public works, banks have refused to cut off old clients, corporations have kept on deadwood in senior management. Now banks are plagued by growing portfolios of bad loans to industries sinking under the weight of overcapacity and weak profits.
Read the whole article to know what Japan is going to do, and more importantly, why Korean economy is the second fastest growing in the world (after China), while Japan's is doomed. The 1997's Asian crisis has allowed S. Korea to heal its financial system by nationalising 6 major banks and letting some of the largest chaebol go bankrupt, and growth has now taken over. Korean society's relationship to money has greatly evolved (money circulates more freely than ever), while Japan hasn't made any significant change since problems appeared in the late 80's.

Talking of Takenaka's reforms to come, Newsweek says :

One fear is that he will tighten the definition of what it means to be a deadbeat. Japan now allows debtors who can at least pay interest to dodge classification as 渡onperforming,� while Korea and the United States requires debtors to pay both the interest and the principal. By the stricter measure, dozens of big domestic companies are in danger of going under, and Japan could face the biggest industrial shakeout the world has ever seen. Japanese bankers also now live in fear of getting canned in favor of foreign professionals, as has happened in Korea. 展hen we visit Korean banks we typically meet at least one foreign manager, and they池e usually in charge of credit assessment,� says Takamasa Yamaoka of Standard & Poor痴 in Tokyo. 典hat would be impossible in Japan today.�
But with resistance among high officials, especially inside the LDP, reforms might not come as soon as expected (or needed). The 4 major Japanese banks don't want infusion of capital either.


I have previously voiced my concern for big Japanese banks going burst (I mentioned Mizuho, the world's largest commercial bank). Here is another article in the same issue about it :

Interview: No Bank Is Too Big to Fail