The bureaucrats inside Japan's Finance Ministry have been putting out fires all summer, thanks to a string of recent financial collapses. Yet now there is reason to believe the shakiest pillar of the world financial system may not collapse after all. After years of dickering, the ministry finally has the outlines of a plan to use public money to manage future bank failures, consolidate weaker players, and even create a Resolution Trust-style vehicle to sell off assets of failed institutions. Rock-bottom interest rates, a stronger dollar and weaker yen, and a new $135 billion economic stimulus package are helping, too.
Great stuff, but if Japanese banks, burdened with some $800 billion in post-bubble debt, are ever going to win back their global competitiveness, plenty more must come. Japan is dramatically overbanked, what with 21 major commercial banks and 129 regionals banging heads. What is necessary is a carefully orchestrated consolidation. Among the bigger banks, this might mean four or five trillion-dollar monoliths to return Japan back into the global banking sweepstakes and dominate its push into Asia. The trade-off is putting up with the kind of massive layoffs--anathema in Japan--that have accompanied the wave of consolidations sweeping money-center banks in the U.S.
Plenty is at stake, not only for Japan but also for the global financial system. Tokyo banks are already swallowing a "Japan premium" to borrow dollars in the global money market. And their fragility has prompted U.S. regulators to limit federally backed American lenders' exposure in Japan. A financial meltdown in Tokyo would have scary implications for everything from U.S. Treasury bonds to global interest rates. The Finance Ministry has finally awoken from its slumber and confronted Japan's bad debt mess. Now it needs the kind of vision to return these behemoths to long-range health for the good of the world economy.