How the U.S. Experience Can Be Useful to Japan

I have been traveling to Japan for many years to discuss the banking situation with its bankers and government officials and, despite what you read in some newspapers, Japan has already done many beneficial things to deal with its banking problems caused by nonperforming loans.

Among these, it has recapitalized its major banks and recapitalized the long-term credit banks through short-term nationalization. In addition, it has created a new independent bank regulatory agency and it has adopted international accounting standards.

What has not been accomplished, to the degree necessary to revitalize the banking system and the economy is the removal of bad debts from the banks and the disposal of these problem loans to the private sector. To help Japan in its ongoing mission to revitalize its banking system and economy, I recently offered some guidance based upon the U.S. experience.

First, follow the advice given by the Greek healer, Hypocrites who admonished physicians: “First, Do No Harm.” This is appropriate advice for those who would attempt to cure a banking system as well.

The purpose of each action in dealing with the banks’ bad loans is to aid the overall economy as well as to deal with the particular banking debt problem. Accordingly, each nonperforming loan must be evaluated to determine how it should be dealt with to achieve the best economic result for the bank, the government, and the economy.

The bad debts are really just evidence of a more pervasive problemu00e2u20ac”lack of sufficient capital. In general, Japan’s enterprises are undercapitalized and depend too heavily on debt financing. In dealing with the disposal of the debt, some situations will require the recapitalization of the debtor’s business using capital from private sources and/or government credit. Enterprises, to the extent they are viable because they have a sound business, should be properly capitalized. It would be “doing harm” to liquidate them.

However, the U.S. could not save every company and neither will Japan. Many bad loans will require liquidation, closing the enterprise, and selling assets to the private sector. But it should be remembered that liquidation sales are always the last resort.

My second lesson deals with the government’s role in the cleanup process. Unlike the previous experience in the U.S., in Japan, the great bulk of the bad debts are in the major banks, which are still owned by the private sector. Thus, disposal of these institutions’ bad debts will have to be done by the banks under guidelines from the government under present conditions.

The Japanese government must put a mechanism in place to take the bad loans out of the banks by purchasing them at fair market value. Once the bad loans are in the government’s hand, the good banks are in a position of strength to finance the private sector and enhance economic growth.

My third, and possibly most important, lesson is this: Start immediately. Delay increases the cost. There is never a good time to begin the painful process of bad debt disposal, especially if the economy is in recession. But the time to begin is now even if all the details of the plans have not been resolved.

Once the business community observes that the problem is being dealt with effectively it will respond with increased optimism. This change from pessimism to optimism was very clear in the U.S. experience.

To recapitalize Japan’s economy, buyers must be attracted from all over the world. Japan should make available information about assets on a worldwide basis. New technologies are available to assist with this. Recently in the U.S., the FDIC has had some real success in using an Internet auction in disposing of assets. The RTC used every type of sales technique known to the private sector in disposing of bad debt and underlying assets.

My fourth lesson, learned the hard way, is that the private sector will prove the best people to get the job done. While I have stressed that the government should own the bad loans, the job of government employees is largely one of setting the rules and organizing the private sector to carry out their disposal.

A fifth and final lesson: One government leader has to be charged with the responsibility for getting the bad debt disposal job done. The potential of bureaucratic infighting and turf struggles is unlimited. Only by centralizing the job in one place and with one person can the government hope to accomplish the job in a timely fashion. The public must also be able to see that the best talent in the country is making the decisions on which companies will be recapitalized and that these tough decisions are made in a fair and professional manner.

The world economy needs a strong Japan and I hope the U.S. experience can help it achieve a successful cure to the problem of bad debts in the banking system. We stand ready to help Japan with this problem in any way we can.