Japan turns failures into a success story

To turn two banking failures in one day into a boost for confidence in the Japanese financial system is no mean feat. But the Japanese authorities appeared yesterday to have pulled off just that. The markets, impatiently waiting for signs that the Ministry of Finance in Tokyo is ready to tackle squarely the banking system's horrendous bad debt problems, gave a speedy thumbs-up to the robust action taken at Hyogo, a large regional bank, and Kizu, the country's second-biggest credit co-operative. This official action contained three important messages.

The first is that depositors' money is protected. The second is that the crisis is of such magnitude that only radical action, involving the use of public money, can prevent widespread damage to the interests of ordinary savers. This may seem a statement of the blindingly obvious, but not for the Japanese government, which has been trying to build a consensus around how to deal with the debt crisis. The third message is that the Japanese government is sufficiently confident to bring the bad debt situation fully into the open, having swept it firmly under the carpet for so long.

Japan is a country where conspiracy theories are almost as thick on the ground as cherry trees. Much of it is justified. Certainly, there appears to have been an element of the stage-managed in the collapse of Hyogo Bank. Beginning with the crash of the Cosmo credit union in late July, the authorities seem to have pursued a shock-therapy approach, letting crises erupt the better to forge support for rescue arrangements and control market sentiment.

The partial closure of Kizu was forced by a run on deposits, but the timing was fortuitous, in that it amplified the government's message. There will inevitably be further failures in the coming months. But yesterday's actions give greater hope that the Japanese bad debt crisis is at last being actively managed.