The interlocking vested interests among the bureaucrats, the LDP, and Corporate Japan work against the kind of cathartic reforms the country needs to overhaul its financial system and rid the economy of excess debt, labor, and capacity. In that sense, the latest set of policies rolled out on Oct. 30 are probably a variation on a very old political ritual in which dramatic change is promised -- but never delivered.
For the record, here's what Tokyo officialdom has come up with this time. The Bank of Japan will push up its bank-reserve targets by as much as $40 billion and increase its monthly government bond purchases by 20%, to $9.6 billion a month. Meanwhile, top bank regulator Heizo Takenaka pledges to use tougher classification rules on suspect loans and to study the use of deferred tax credits to bolster the capital bases of major banks.
TORN TENETS. There's more: A new organization will help companies restructure, while the government will use a mix of tax cuts and fresh spending to help the broader economy cope with working out the banks' troubles. It's a step forward, but Prime Minister Junichiro Koizumi and Takenaka will be under enormous pressure to move glacially on reforming Japan's banking system.
Why? Forget for the moment the debates about how big Japan's nonperforming debt load is, the true quality of the banks' capital bases, and whether big corporate deadbeats should be led to the guillotine or given a big wet kiss and a multibillion debt forgiveness scheme. The real reason the bankers, the conservative elements of the LDP, and the ministries are dragging their feet is that true bank reform entails tearing down many of the tenets of Japan's post-war political economy.
If that sounds overwrought, bear with me for a moment. Japan has never been a capitalist economy in a truly American or British sense. Capital sometimes gets allocated for reasons that have nothing to do with credit risk. Factories get built with little regard to return on investment. Government-directed construction projects that ravage the environment go through regardless of whether they're needed or serve any greater public good.
BAD DEBT CLUB. Fixing the banks -- really fixing them -- means crushing what Akio Mikuni and R. Taggart Murphy, in their fascinating new book Japan's Policy Trap, call the "socialization of credit risk." In Japan, big and politically connected companies in key industries have always been given a "Get out of jail" card by the government and financial authorities whenever they get into trouble.
Sure, the last decade has seen that rule broken. Big banks like the Long Term Credit Bank of Japan, Yamaichi Securities, and the national retailer Sogo no longer exist. But they're still the exception, not the rule. Each bank probably has kept alive 20 to 30 major borrowers that probably wouldn't last 10 minutes if their core profitability were in any way linked to Japanese lending prices.
The current debate is really about whether Japan's political economy can truly embrace concepts like profit motive, risk, and, yes, business failure. Will credit be allocated based on a sound business plan as opposed to a political chit or how much land you're sitting on?
SYSTEM SHOCK. As Mikuni and Murphy point out convincingly, such thinking would subvert the entire power structure of Japan. Bureaucrats who can't rig economic outcomes with a call to a loan officer no longer are viewed as useful to the corporate world. That means no sinecure jobs and fat pensions for ex-bureaucrats running some industry group or serving as a corporate adviser, while spending a lot of time on the links. The same holds true for the powerbrokers in the LDP.
For a while there, Takenaka really looked like he was going to get serious and force the banks to call in their loans on companies beyond repair. He wasn't just a meddlesome economics professor trying to impose some tough love on the banks. To those who really control what happens in Japan, Takenaka is loathed and seen as almost a bomb-throwing Bolshevik. His ideas are a threat to the system.
So what will it take to bring the whole thing down? Mikuni and Murphy have bad news and good news. Bad news first: It will probably take a full-blown, multiyear recession to finally force the banks to sever their ties with unworthy borrowers, awaken passive Japanese voters to hold their leaders accountable, and set the stage for a powerful recovery. Here's the good news: The bad news is going to happen whether the LDP likes it or not. Bremner, Tokyo bureau chief for BusinessWeek, offers his views every week in Eye on Japan, only for BusinessWeek Online