Jitters About Japan

Japan has become the big new worry in the economic refashioning of Asia. Jitters about Tokyo’s handling of its messy banking problems and billions in bad loans needs to be put to rest promptly to restore confidence. The government made an extraordinary appeal last week to the public and to financial markets for calm, but what’s really needed to assuage fears is for Tokyo to address the banking problems head-on.

Market forces demand that Japan stop coddling its debt-laden financial institutions, which the present government hitherto has been reluctant to do for political reasons. Tokyo took a welcome step in that direction this month when it allowed the unthinkable: the demise of the 100-year-old Yamaichi Securities investment firm and two banks. But the government so far has stopped well short of enunciating a policy for an orderly restructuring of banks. Japanese Prime Minister Ryutaro Hashimoto said last week that he had no intention of rescuing individual banks but would safeguard the overall stability of the system. Too vague. Nervous Japanese depositors starting pulling money out of banks and worrying about other financial institutions. The Tokyo stock market gyrated with uncertainty.

Now Japanese banks, saddled with bad loans made during boom times, are having to pay premium interest rates to borrow short-term on international markets. Five banks are under review by Moody’s Investor Service for possible downgrading in their credit ratings. The Bank of Japan is having to pour money into the financial system to assure funds for depositors and creditors of ailing or failed institutions.

Unlike other financially troubled Asian nations, Japan, the world’s largest creditor, has the funds to deal with its problems. The markets are looking to Tokyo for a plan--similar to the U.S. savings and loan bailout--in which public funds are used to protect Japanese depositors and healthy banks while weeding out insolvent institutions. The government is supposed to unveil a fiscal stimulus package next month, but if it offers the usual hesitant, watered-down approach it will not help much. Neither will waiting until next year’s scheduled launching of Hashimoto’s “Big Bang” array of financial reforms intended to gradually allow banks, insurance companies and securities firms to compete more freely with each other.

Japan has been the economic model for other Asian countries. It can be again. The banking crisis provides an opportunity for Tokyo to take the lead in Asia’s sorely needed make-over.