Japan: A Way out of Financial Gridlock?

Two years ago, Masaru Hayami, the maverick governor of the Bank of Japan, took out his frustration over the nation's slow-paced financial reform by raising interest rates in the prostrate economy. Hayami believed the negative interest rates that his bank had fostered were allowing Japan's banks to carry billions in bad debt that should have long ago been written off. Because of the banks, the cost of money was free. While Hayami's move may have had a noble intent--and even though it shocked the economic world--it had no real effect. Hayami later backed down on his small rate hike. Money is still free in Japan.

Now, Hayami has taken his fight to a new level. On Sept. 18, he announced that the central bank would buy stock held by some big Tokyo banks, sending a tremor across the financial world. The question asked was: "Are things really that bad?" Now, in private missives and public statements to the press, the central bank said it was buying stock to shock the Tokyo government into action. The primary target is banking regulator Hakuo Yanagisawa, whose Financial Services Agency thinks the bad-debt problem is less grave than Hayami does. Hayami thinks Yanagisawa, once viewed as a tough cop, has gone soft on the banks. Yanagisawa is said to be under pressure to resign.

If this were about one official, Hayami would be right. But it's unlikely that any other bank regulator replacing Yanagisawa will have the nerve to be tougher. And the rest of Japan's governing elite remain too paralyzed to do anything. Yet the signs of disaster are all there.

Bond buyers are balking at taking Japan's government securities, rating agencies are writing down Japan's debt, banks are dumping blue-chip stocks to raise funds to carry bad debtors, and no one is lending to restart the economy. When a once-great nation is locked in this kind of gridlock, even a Pyrrhic effort deserves some praise. Hayami remains a voice in the wilderness. Japan continues to decline. Is anyone listening?

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