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Sunday, November 10, 2002

Who's in charge in Japan?

As I have already indicated (see blog post immediately below) there is considerable doubt and consusion about where exactly Japan is headed right now, and about what will be the real impact of Takenaka's reform programme. Morgan Stanley's Robert Alan Feldman seem to be in no doubt:

The media were wrong. A week ago, when the initial reports on the new plan for financial system clean-up were announced, the press universally dismissed the new plan as a humiliating retreat from the hardline position that Minister Takenaka had taken. Indeed, one reporter asked me if there was anything to write but an epitaph. Nothing could be further from the truth than these reports.

It is true that immediate enforcement of US standards for deferred tax treatment (DTAs -- see appendix table 1) was not in the package. However, the package did include a review of the standards (which was not even on the agenda under the previous minister), and a clear tilt toward tightening (see appendix table 2). Moreover, virtually every other component of the initial wish list IS included in the final plan, along with some enhancements. Many of these provisions are extremely strict. In addition, the final plan includes some provisions that will enhance the sustainability of the financial reform plan.

The most epoch-making part of the plan was the new concept of "special support financial institutions" (SSFIs). The plan specifies these as institutions in distress, capital shortage, or similar situations, and says that the government and BoJ will apply "special support" immediately. Such support will trigger various actions, including FSA resident inspectors and prompt removal of "danger of bankruptcy" or worse loans to the RCC or to revival funds. Once transferred, the plan calls for prompt disposal, e.g., by RCC to accelerated collection and sales of loans purchased, with prompt sale of those loans that cannot be collected quickly, creation of a market in distressed loans, and greater use of securitization and asset-backed securities market. Of course, the FSA will have to determine whether institutions fall into the SSFI category, and this cannot be done logically until after the next round of special inspections is complete -- barring unforeseen major bankruptcies. However, the SSFI concept is a powerful one.

Now that the bashing is over, there is considerable evidence that Minister Takenaka in fact has won some very important victories. Of course, much lift is still to be done, and investor skepticism will not fade easily. However, I believe that Minister Takenaka has made a very powerful start, and that momentum is with him.
Source: Morgan Stanley Global Economic Forum

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