Japan's real economy will have bottomed when credit again starts becoming available for business expansion. The financial markets could bottom and turn up before this happens, anticipating the future. Japan's Nikkei has rallied many times during its 12 year downward march on hope and expectations that would start happening.
There is tremendous wreckage inside even the strongest Japanese financial institutions. They are all, or almost all, holding on by their fingernails. Everyone is afraid to look too closely at what is off the balance sheets, but there. Or what the mark to market values of portfolios really is. What the collateral is really worth, etc.
The Japanese gov't had tried to fix the problem almost exclusively by letting banks profit from the enormous spread between the BoJ discount rate (now 0.5%) and U.S. treasuries. This is a page from Greenspan's book. (He lowered the discount rate to 3% and let banks still charge a prime of 6% during the dark days of 1990, I think it was.) But the page they won't take from our books is getting the horrifying badly loans with inadequate marked to market collateral off the weak institution's books and into a governmental agency, funded with taxpayer credit, and ultimately taxpayer money. (Our RFC.) And then in an orderly way over several years, selling those assets (here mostly real estate) to make them performing again at a market clearing, but orderly price.
The Japanese haven't done that in part because of political stalemate. But its not so easy a problem as many noise making Wall St. pundits in this country like to pretend. The bad loans that we KNOW about are vastly greater in extent than what the RFC was faced with. They include not only loans based on real estate at a time when the grounds of the Imperial Palace in Tokyo were said to be valued (by implication from nearby sales) more highly than all of California. Japanese banks also have lots and lots of that developing Asian economy debt that isn't performing. And isn't getting better tomorrow.
So the Japanese public, who have socked away a good part of the world's net savings and are keeping it in very low paying government, and private bank accounts (as well as under the mattress), aren't so excited about being taped to make up the shortfall. Through taxes that are already on the very high side by world standards.
So its a very tough situation. Some intentional Japanese inflation may be part of the answer, as Krugman recently speculated. But that runs against the Japanese grain in a major, major way. And in the end it does mean forcing the aging Mom and Pop savers to bail out the banks even more than they already are with the non-interest they are getting. Mom and Pop aren't marching right up to the block for the slaughter. They are telling their legislators to say no.
Japan's very tough financial problems have proven that they are not going to be solved by the passage of time alone. The banks couldn't reliquify during the bull expansion of the 90's, while Japanese exports not only to the U.S., but also to all of Asia, were booming. I don't see them getting the equity bases necessary to resume new lending to their domestic economy without really extensive government action. Such as printing money in pretty extreme amounts and handing it over to the banks (and accordingly somewhat hurting everybody else, as well as forcing them to go out and buy, buy, buy.) That hasn't happened yet.
Doug |
