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Japanese finds its models back in fashion

Friday, 5 August 2011

When foreigners visit Japan, one of their most common gripes is the difficulty of obtaining cash from bank machines or paying for purchases with credit cards. Such basic obstacles to their red-blooded desire to spend freely and to spend often have been seen as emblematic of an anachronistic financial system that has simply failed to keep pace with modern times.
Now laggard Japan does not look quite so stupid. Whether by luck or design, its financial institutions have been relatively unscathed by the financial crisis that has felled some of the biggest names on Wall Street. While its adventurous foreign brethren were off on a lucrative, but ultimately disastrous, spending spree, most Japanese banks continued to make the bulk of their money from old-fashioned lending.
Now the tables have turned. This week, Nomura has picked up Lehman assets at seemingly bargain-basement prices.Mitsubishi UFJ will pay some $8bn (€5.5bn, £4.3bn) for a sizeable chunk of Morgan Stanley, one of the few US investment banks left standing.
Yet the quick reversal of fortunes has led to remarkably little carping. “They’ve been admirably restrained considering they spent 10 years with the Americans telling them how to run things,” says Richard Jerram, economistat Macquarie Securities. “There must be a deep temptation to say: ‘You really mustn’t manipulate the market by banning short selling. You really must let this problem work out rather than having a low-transparency rescue plan,” he says, referring to continued prodding of Japan to adopt a more robust form of free-market capitalism.
Part of the restraint is due to the fact that, in attempting to resolve the crisis, the US is practising more or less what it preached to Japan in the 1990s. Then, US officials told Tokyo, often in no uncertain terms, that Japanese banks must recognise bad debts more quickly and that the government should replenish missing capital with public funds.
“The serious complaint about Japan was how long it took them,” says Mr Jerram. “The good thing you can say about America is that they are barely a year into this and they are throwing absolutely everything at it.”
Teizo Taya, a board member of the Bank of Japan when that institution was being criticised for its supposedly unimaginative policy in tackling deflation, is not carping either. “They won’t listen anyway,” he says.
But he does argue that, by aggressively lowering interest rates after the collapse of the tech bubble and after the emergence of the subprime crisis, the US response may have been just as flawed as Japan’s more conservative tack.
Ben Bernanke, the Federal Reserve chairman, once famously urged the Bank of Japan to buy ketchup – in other words, any asset going – to stop deflation. But many Japanese officials privately argue that pushing interest rates too low was the cause of the bubble that has now exploded so spectacularly. They also point to the BoJ’s once unfashionable assertion – now being reassessed worldwide – that central banks should not limit themselves to targeting consumer inflation but should work out how to prick asset bubbles as well.
One senior BoJ official, speaking on condition of anonymity, said on Friday: “I’m not saying it’s possible to detect a bubble and to stop it from bursting. But there are some things you can do.” More, for example, could have been done to take the heat out of the housing market, he said.
Mr Taya says of US monetary policy: “The lesson they thought they had learnt may not be correct. In one sense, their policy was quite successful. They avoided an economic downturn from 2001. But they forgot about the side-effects of easy policy.”
Japan, says Mr Taya, has benefited from the natural caution of its institutions. “Japanese are different from US investment banks. US banks just bought assets with money that they had borrowed. That business model has now collapsed.”
But neither does he attribute the relatively healthy position of Japanese banks to wisdom. “Japanese institutions were lagging behind. I don’t think there is any positive aspect to this. Until 2005 they were busy writing down bad debt. Then there was a pause period. There was simply no time for Japanese institutions to follow suit.”
A senior Japanese finance official puts it more succinctly. “I think this was more luck than prudence.”

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