In These New Times

David Piling

FT

26th October, 2008

Western banks may still not have produced reliable accounts of their balance sheets, suggesting more write-downs and capital injections could be necessary, according to Heizo Takenaka, the former Japanese economy minister often credited with ending the country’s 10-year banking crisis.

Mr Takenaka, who from 2001 forced banks aggressively to write down bad loans and to repair balance sheets by raising capital, said “more intellectual effort” was needed by western institutions to flush out the full extent of toxic assets. These were more complicated and harder to identify than in Japan’s more straightforward banking crisis, he said.

“The balance sheets of international institutions are not so reliable at this moment,” Mr Takenaka said in an interview with the Financial Times. “The Japanese experience shows capital injection is important, but not enough,” he said, adding Japan’s banking crisis continued for several years after state funds were injected, first in 1998, then 1999 and in 2003.

Officials involved in Japan’s banking clean-up have pointed out that, in a recession, banks’ problems can spiral downwards as previously good loans turn sour. One thought another round of capital injection would be needed. Mr Takenaka did not rule it out: “If, as a result of asset assessment, more capital is needed . . . government should inject more.”

Mr Takenaka’s bank clean-up was helped when Japan’s economy started to pick up from 2002, thanks to strong global demand, especially from China. That improved the fortunes of struggling companies, turning them from non-performing borrowers to ones able to service their debts.

Mr Takenaka was worried that, with a “simultaneous recession” in the US and Europe, there would be no “anchor” of external demand to “rescue the situation”. Some countries would need to resort to fiscal stimulus to ward off a recessionary spiral.

He said Asia could play a role in providing global demand. China and India, in particular, would still grow at about 9 and 7 per cent respectively. Asian economies would be “not so seriously damaged”.

Japan’s prospects might be damaged by what he called an “over-valued” yen, but he warned against foreign exchange intervention as only a short-term fix. “Considering the very messy situation with the US economy, a strong yen will continue for a little bit.”

Japan and China, he said, should use foreign exchange reserves of nearly $3,000bn (€2,380bn, £1,923bn) to support the US and Europe. Japan Post Bank, the vast savings institution he helped privatise, was well positioned to invest in assets there.