(China Daily)
Updated: 2007-11-27 07:16

Ten years ago this month, Japan was beginning to face its worst postwar financial crisis starting with mid-tier brokerage Sanyo Securities Co filing for bankruptcy protection.

That led to the first default in the short-term credit market under which financial institutions lend and borrow day-to-day funds. This development paralyzed the market. Hokkaido Takushoku Bank and Yamaichi Securities Co soon went under.

There was more to come, however. In October 1998, the Long-Term Credit Bank of Japan collapsed, closely followed in December by Nippon Credit Bank. The government injected massive amounts in public funds to rescue the big banks.

While this meant the immediate crisis was over, nonperforming loans continued to act as a serious drag on the domestic economy. It is only during the past two years or so that the effects of financial recovery have been felt.

The late 1980s asset-inflated economy and the financial crisis that developed after 1997 marked a turning point in postwar finance and economics.

At one point there were 20 major banks. They have since been consolidated into six financial groups, including three mega-banks. There also used to be four big securities firms, but now only Nomura Holdings remains as one which does not have any foreign financial support or backing from a bank.

Despite the recovery, the finance industry is still in trouble. That is evident from their interim financial reports for the first half of fiscal 2007. Domestically, the industry chalked up heavy losses in consumer finance which allowed them to expand their business in personal loans.

In markets overseas, they incurred losses due to the US subprime loan crisis. As a result, profits for the six financial groups are half what they were in the comparable period a year earlier.

The impact of subprime loans was considerably less than that faced by financial institutions in the West. But that is mainly because Japanese institutions had taken a back seat in international competitiveness. Thus, this was a lucky mistake. They must not rest easy.

The relationship between the industrial arena and the financial industry has also changed dramatically. Under the postwar "main bank" system which has collapsed, a big bank totally managed the finances of a company. Nothing has been set up to replace the system, however.

Japan is currently witnessing its longest period of sustained economic postwar growth. It is now in its sixth year. Yet, the financial industry cannot be credited as having contributed to it.

The corporate sector, which drives the economy, still sticks to raising funds on its own through exports and paying for capacity investment, rather than relying on bank loans. As a result, a worker's pay is squeezed, personal consumption is lethargic, and the economy remains stagnant.

The finance industry still gripes that demand for funds remains low. But that is because it has not found ways to discover new and promising industries and help them grow.

In provincial areas, local financial organizations are obsessed with improving their own earnings, rather than taking time to support and nurture local companies. That is one reason for the stagnant state of local economies.

Ten years after this country was rocked by financial crisis, no new financial framework is in place to lead the Japanese economy into the future. What can financial institutions do to support industry and make people's lives better? New ideas should be shaped now.

The Asahi Shimbun

(China Daily 11/27/2007 page11)