The comments in the Financial Times by Yoshimi Watanabe, Japan’s financial services minister, are extraordinary. He ventured to give the US advice on its credit crunch based on Japan’s experience during its post-bubble-years banking crisis. And it’s not pretty.
Why are these remarks so unusual? Consider:
Most countries don’t give other countries advice on how to run their financial services sector. That alone is pretty unheard of (however, the IMF dictated the terms of rescue programs in the Asian crisis of 1997, but those were third world countries suffering capital flight. Of course, their situation, with excessive borrowings, wobbly banks, and unsustainable current account deficits, bears no resemblance to ours)
The Japanese are particularly loath to stick their noses in other countries’ affairs (that gives others license to comment on their practices). Note that even the often-belligerent Chinese sound off in response to US pressure, not in a vacuum
This statement came from the head of Japan’s top financial regulator. If the powers that be had wanted to soft-pedal the message, they would have used a lower-ranking bureaucrat or a retired official
The Japanese comment is effectively a statement that significant actors in the US financial sector are bankrupt and will need to be recapitalized. Again, that is a shocking diagnosis to make in a public forum. Wantanabe says that the US banking system will need to get new equity from the government. The delay in recapitalizing Japanese banks (it was hard to win over the public) is considered within Japan the biggest reason for the length of their economic crisis
The Japanese are as nicely as they possibly can telling the US that we are in a terrible mess and we need to get on top of it ASAP. This is a blunt warning. I am sure the significance of the Japanese attempt at tough love will be lost.
If it was difficult to achieve consensus to reconstitute the banking system in Japan, imagine how long it will take here.
From the Financial Times:
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”.
Clive Crook of the Financial Times comes to a similar conclusion in “Campaign silence over Wall St woes“:
A lesson from Japan in the 1990s is that efforts to deny and disguise the financial damage only worsen the problem. The US political environment makes repeating that error all too likely. The present administration is serving out its notice; the presidential candidates are busy grubbing for votes. A bill to subsidise mortgage writedowns and widen the scope of government guarantees, thus slowing the rate of foreclosures and cutting interest payments for distressed borrowers, is before Congress. Its focus, naturally, is to address voters’ immediate concerns. A measure like that might be part of the answer – but only if it does not prevent house prices finding their new equilibrium. The temptation is to postpone the day of reckoning; that would do more harm than good.
If house prices have to fall another 20 per cent, it is better that this happens quickly. As the losses strike the financial system, there might be a huge cost to taxpayers – not, one hopes, in protecting banks’ shareholders (perish the thought) but in providing new capital to the system. It is awful to contemplate but the alternative – ask Japan – is worse. And these are not in fact “uncharted waters”. The US has been here before, with the Resolution Trust Corporation established in the 1990s to deal with the collapse of the savings and loan industry.
In an election year, no one wants to face that prospect. For the time being, it is easier to keep talking about Nafta.
13 comments
Comments are closed.
Yes, this is extraordinary for Japan. So the question is why and why now?
It sounds like Japan is very fearful that the crisis in the USA will hurt Japan’s slow recovery, perhaps even sending the country back into recession. The weakened dollar and a USA recession are certain to affect Japan’s exports negatively.
I’m also reminded of all the times I have pointed out over the last few years that what happened to Japan could well happen to the USA (80% drop in RE prices, years of no to little growth, etc.). The standard pat reply was almost always that Japan was different. Yes, they are. They at least had personal savings. The USA is a debtor nation with little personal savings. This will make our turn at the wheel that much worse.
Correct, and they also have the advantage of being a more cohesive society, willing to share pain. We are going to have huge struggles over who gets hit worst.
While Japan’s bubble on paper was bigger on paper, residential real estate did not trade anywhere near as often as in the US (Japanese are not as mobile and seldom go from starter homes to bigger homes) and in 1990, they didn’t have our home equity extraction techniques. But corporate real estate was leveraged to the gills at crazy, fictitious levels (land almost never was sold in central Tokyo partly due to confiscatory taxes, partly due to the fact that for a company to sell land was an admission it was going bankrupt. Selling land was like selling your children. Imagine what a Manhattan or London office building would go for if only one sold a year). And equity prices were nutty and margined.
But while our nominal asset inflation isn’t as bad, we have all sorts of leverage on leverage the Japanese did not have: leverage in some CDO structures, hedge funds, hedge fund of fund that sometimes add more gearing, plus all kinds of derivatives that enable investors to take what amount to levered bets….so the amount of debt and synthetics relative to the sustainable value of the underlying assets may be more similar to Japan at the peak than anyone here wants to admit.
Have to agree that it always looked to me that a US crisis could be much worse for those involved than that in Japan. As a nation the Japanese are huge creditors and their collective nature meant that the pain was spread relatively equitably, there was no mass foreclosures and unemployment only rose to levels that appear normal in many Western nations. The analogy I always use is that if a Japanese company needs to save 10% in labour costs, then everyone will take a 10% wage cut in the US 15% (workers get less than bosses) will be fired.
Pure self interest. Sester does a great summary of recent TIC data and in short concludes that capital allocation to US is diminishing. Also an article on Bloomberg today that Asian Central Banks are considering investing more money in local bonds as US becomes less attractive. (http://www.bloomberg.com/apps/news?pid=20601009&sid=amDf25VX.ORc&refer=bond)
Should not be surprising that US gov’t credit lines via the exporters actually have something to say about protecting the system that insurers their growth and stability. Question is one of interest alignment? Watching the upcoming auctions will be an interesting tell. There is another article on Bloomberg talking about the migration of Chinese from the countryside to the cities. Plus the Chinese bankers are talking about employment remaining the highest priority.
S,
Great minds work alike. Was about to post up a short comment on the Setser piece. Had not seen the Bloomberg story, will have a look and see how to work that in. Thanks.
opco strategist out with a call that equities are the next bubble. The blind bulls are setting up the trade with all the “valuation” arguments and Barrons appears to bolster the case with a dow 18,000 call (admittedly have not read the rationale). HArd to belive as the most quotewd and trasparent of markets without some new “opaque revolution promising something infinite” reinflates. stock (tech), housing, china, emerging markets..repeat…
This situation scares the crap out of me.
For “why” I think the US is a rather important customer.
The US should inject public funds into its financial system,…
Absolutely not. But if it comes to pass then it should be an equity investment so the taxpayers can have their share of future profits.
Didn’t Japanese minister say “You don’t need a stinkin chairman of central bank!”?
I think Pikachu is a good candidate for Fed chairman.
http://timesonline.typepad.com/urban_dirt/2008/03/i-am-spartacus.html
There is little doubt that the US economy is facing rougher sledding than did Japan, if for no other reason than Japan managed to avoid the worst due to it`s high rate of personal savings and low rate of personal indebtedness. Perhaps, however, just to put things in perspective, he should have added that the Japanese MOF “solved” its own asset deflation problems by sitting on its hands for 15 years after the collapse of the bubble economy, and that the MOF now advocates adoption of supply side economics in an econpmy characterized by oversupply and under consumption, while the govt cosiders raising the sales tax. . .
Real estate values in Japan are on average half of what they were 15 yrs ago, and the stock market is at 30% of its former peak value. The only thing the MOF knows anything about is the destruction of wealth and deflation – they were responsible for allowing the bubble to occur, and for doing nothing when it burst. This from a country that can barely manage to appoint a director for its own MOF. Free advice is worth what you pay for it. Pikachu? Better call Mito Komon.
Anon of 10:28 PM,
I know something about Japanese banks during the bubble years, and their lending practices were appalling. They has NO concept of cash flow lending. It was all collateral based. And they would lend 100% against urban land (in Japan, the land was what made real estate valuable, not the buildings).
And their asset liability management was at least a decade behind the US.
But having said that, I am skeptical that Japan is in quite as bad shape as the Japanese claim. Remember, they have a booming export sector. But they choose to focus attention on their terrible domestic economy (where the companies have succeeded in having negative wage growth) so that no one busts their chops about their huge trade surpluses and weak yen.
I think the social/political aspect of recapitalization is not given enough importance by many economists.
The fact of the matter is that the U.S. government is about to ask its citizens to fork over several trillion dollars or more over the next few years to save the financial system. In comparison, Medicare is a $400 billion a year program. Defense spending is ~$600 billion a year. The Iraq War so far has been less than a trillion. Universal health care, depending on which form you advocate, is projected to cost the U.S. govt. $2-300 bil/ year. These are the largest and in many ways most fundamental services that the government provides.
Now think of the bitter social and political battles that have been fought over these programs, which IMHO have much greater resonance with the average American than the financial system. The financial system is asking for a commitment equal to or greater than what the public has been willing to pay for health care or national defense, to say nothing about Social Security, education, scientific research, etc.
Furthermore, Yves and others have commented on Japan’s social cohesiveness vs American indivdualism, but the other part to consider is that after their stunning rise during the 80s, the Japanese business world was held in high esteem by their countrymen for their success in elevating Japan in the eyes of the world, and in trickling down those benefits to the general public in the form of rising standards of living.
In contrast, Wall St., and indeed, much of corporate America is widely loathed by the American public as people see their standard of living and economic health deteriorate while companies continue to rake in record profits.
So in the end, I think economists need to realize that they are asking Americans to support an industry that they hate with a level of financial commitment akin to what we dedicate to the health of our parents and the security of our country. No matter how logically correct that argument may be, convincing the public on an emotional level to place the financial system on a higher footing than our other priorities is likely to be an unattainable goal. After all, what would you rather spend a trillion dollars on: Wall St. or universal health care?
And, let’s not forget that Japan was not fighting two losing wars on the other side of the globe, and Japan was enjoying a vibrant export-driven economy.