The Unraveling Of Corporate Japan

The nine-month, 35% slide in the Nikkei that has vaporized $800 billion in market capitalization raises the possibility of another financial crisis among Tokyo money center banks. A vicious cycle is underway, as banks dump their shareholdings to raise cash and get ready for tougher accounting rules in April. Yet the faster they sell, the lower the Nikkei sinks. Bank balance sheets are getting shredded along the way.

It is a dilemma that cries out for a quick and canny response. Unfortunately, all the ruling Liberal Democratic Party of Prime Minister Yoshiro Mori can come up with is a clutch of market-rigging proposals that will only compound the problem. Some use taxpayer money to prop up the market. Others give the banks a one-off cash infusion and transfer their stock holdings over to government control, a quasi-nationalization of Corporate Japan. Still others suggest cutting the banks slack on the new accounting rules.

Some clear thinking is in order. First, the unwinding of the cross-share networks is a positive thing. Cross-sharing ties up huge amounts merely to cement business relations. Banks need that capital to clean up their balance sheets, restructure, and look for new lending opportunities. Telling the banks to halt these sales, as some in the LDP have, is wrong-headed.

Reform should focus on shoring up the banking sector, not the stock market. But any new money going to the banks should come with serious preconditions. Banks in trouble need to deliver real layoffs and branch closings. And they should hook up with domestic and foreign banks when it makes sense. It's time to be tough in Japan.

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