The size of bad debts held by Japanese banks, which observers put at over 77 trillion yen (pounds 335bn), mean that the failure of some banks is certain and necessary. However, Japan may not go far enough in permitting bank failures to satisfy Washington. According to Arthur Stockwin, Nissan Professor of Modern Japanese Studies at Oxford University, this can be explained by the political culture: "The whole way the system works, at least in the past, has been geared to not letting people be hurt too much when things go wrong. The American solution is not to the taste of most people in Japan. It has its advocates, but I think it is going to take a bigger crisis than has occurred so far for there to be a really drastic solution."
Professor Stockwin argues that the political culture may also cause conflict over the role of foreign companies in the economic crisis: "The very interesting question is how far foreign banks and financial houses will in fact be allowed to operate freely and take over Japanese firms. There'll be enormous outside pressure to let it happen, but I think there'll be enormous resistance as well."
But to understand the issue of banking reform, and why the Japanese government has not made concerted efforts to tackle it, the situation must be viewed in the context of Japan's recent history.
Rikki Kersten of Sydney University says: "Japan's economic success has been attributed to a particular relationship between politicians, banks and big business. What you really do when you talk about banking reform is mess with the formula that delivered the economic miracle. If you're going to mess with the banks, what you're doing is meddling with the basis of power in Japanese politics. You mess with the banks, so does that mean you're no longer going to have easy finance for export-oriented industry?
"Does it mean that if you're in construction, you can no longer bank on stimulus packages or political favours? Because if that's the case then the foundations of Japanese politics will completely change. This is going to strike fear into the hearts of politicians, businesses and banks."
Fear is not conducive to action. And the result is the paralysis we have seen.
In the short term there will be little progress. Despite an announcement by prime minister Ryutaro Hashimoto that he will keep working for a solution to the banking crisis, politicians will be distracted by the run-up to the upper house elections on 12 July. Some commentators hope that if the result gives the ruling Liberal Democratic Party (LDP) a majority in the upper house, stronger government will emerge. Yet even then there would still be problems. The LDP is a conservative party with a poor track record in reform; it is sensitive to vested interests and the stifling effect of Japan's bureaucracy.
But most important, any economic recovery requires public confidence to encourage consumer spending. "The problem is that somehow we need to convince the consumer and the businessman that the government is going to take all steps necessary to keep the economy afloat, and that means sustained fiscal stimulus and fixing the financial system," says Jeff Bahrenburg, an international equities strategist at Merrill Lynch.
Like the rest of the world, the Japanese have lost confidence in their government. And if voters cannot get effective political leadership that will tackle reform, what hope should the international financial community have?