Japan: U.S.! Learn from us!

FT.com: The US should inject public funds into its financial system, which is undergoing a worse crisis than that experienced by Japan during its non-performing loan crisis, according to Japan’s financial services minister. “It is essential [for the US] to understand that given Japan’s lesson, public fund injection [into the financial sector] is unavoidable,” Yoshimi Watanabe told the Financial Times.

Although “it is very difficult for Japan to convey such a message to a foreign government ...Japan could, for example, convey – through the G7 [meeting of finance ministers] or central bank governors’ meeting – Japan’s lesson and that we are prepared to take co-ordinated action if necessary” to help resolve the situation, Mr Watanabe said.

US and European central banks are to consider the possibility of using public funds to purchase mortgage-backed securities as a potential remedy for the crisis.

The remarks are the first public expression of concern by a Japanese cabinet minister that the impact of the current financial market turmoil could be much more serious than Japan’s experience during its “lost decade” of abnormally slow economic growth in the 1990s.

Mr Watanabe warned unless swift and appropriate action was taken by world leaders, the financial market turmoil could lead to a severe dollar crisis. He said the world’s huge excess liquidity has started flowing out of the US. If that flow were to be extended, it could lead to unprecedented problems.

“One thing is to fix the hole in the bathtub,” he said. “[But] we must recognise that the current crisis is not as straightforward as past dollar crises.”

He had no comment on whether Japan might cut interest rates in a co-ordinated response. Any decision would be made by the Bank of Japan, responsible for monetary policy but headed currently by an acting governor.

The minister said that while the US credit turmoil was structurally similar to Japan’s at the time of its bad debt crisis, there was an important difference in that risk in Japan was contained in the banking sector. In the US, it had been dispersed widely into other areas of the financial industry. So “it is not clear how big the hole [in the US] is because the fire has spread to products other than securitised products”.

MyTake: True. The US should follow Japan's foot steps by injecting public funds into its financial system during this crisis. (period) However, unlike Japan, the US has acted fast in admitting to the problem by embarking aggressive loose monetary policy. Japan's problems in the 1990s are due to asset bubble and the many interlocking business relationships among the rich corporate group. The Japanese authorities were woefully slow in stepping in to resolve the non performing loans until the collapse of the property and stock markets. Further, the Japanese nature of "do not disturb the peace" mentality and pride in the society also plays a part for the reason why corporates failed and did not come clean in disclosing their defaulted loans. Many believe, "the lost decade"'s loans are still siting in many Japanese banks until today. BOJ still maintains a zero interest rate policy. During the early 1990s, the Nikkei stock average fell 63% from its peak in December 1989 of 38,916 and land prices fell between 3% and 6% for eight successive years. Did the Dow Jones or S&P500 dropped that much to date?

P/S Today, land prices are a quarter of what they were at the height of the bubble, a long way from the days when land in Tokyo's plush Ginza district fetched more than $1.5m a square metre.