NCPA - National Center for Policy Analysis

Japan's Banking Mess

October 29, 2002

Japan's economy shrank at an annual rate of 3.4 percent in the second half of 2001, the fourth recession in a decade. Unemployment should exceed 6 percent this year. Everyone agrees the Japanese banking sector is both a cause and a victim of this macroeconomic malaise. The banks are hamstrung by poor-quality assets and a lack of capital, and are therefore unable to perform their critical role as intermediaries between savers and businesses seeking capital.

Analysts have examined how the Japanese government, intervening through the Resolution Collection Corporation (RCC) might attempt to break the fiscal gridlock. They conclude that the RCC would have little to gain and much to lose by resolving the banking crisis.

  • Thanks to its history, staffing and mandate, the Resolution and Collection Corporation is run like a private bank rather than a public-sector asset disposal organization.
  • Asset disposal would mean that the institution is temporary in nature: when the assets are depleted, the RCC would close up shop as the Resolution Trust Corporation did in the United States in 1995.
  • However, neither the RCC's owner -- the Japanese government -- nor its staff members wish that to happen.
  • For its staff the job of collecting income from assets (rather than disposing of them) means job security -- and for the government, keeping assets on the RCC books and slowly writing them down with collections, dividend and interest income means not having to recognize losses and use taxpayer money.

The capture of the RCC by bureaucrats and politicians with a stake in preserving the status quo constitutes a disaster for Japan as a whole.

Source: Gavin Buckley, "A Banking Crisis: Reformers do not Reform. Blame is Difficult." Milken Institute Review, Third Quarter 2002.


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