[Moderator's Note: The following post disputes the argument, made in some
quarters, that Japan's financial crisis is rather staged, a kabuki drama. List
members with an interest in this issue are encouraged to comment.]

This ain't no kabuki. And - you ain't seen nothing yet, friends. It is real, and
it is serious. It looks pretty calm because the real crisis has not been reached
yet. And if and when it hits, it won't be nearly as manageable as what we have
seen. In the best case scenario, it will take five years at least to clean up
the mess, at the end of which I expect to find no banks for long-term credit
left, and the total number of banks to be cut in half through mergers. In the
worst case scenario, the life insurers go bust which will immediately affect the
city banks, and no one can tell what would happen to the country and to the
world if there were a run on a Japanese city bank.

In order to avoid the worst case scenario, the politicians keep telling us that
"we are over the mountain", and (after Hyogo Bank went) "this is it". Note that
this "keeping the citizenry ignorant" tactic for once is sound policy: the aim
is to avoid a panic while you are working on the patient. Every government would
do the same in this situation. But what seems to be "little action" is in fact
high-speed and dangerous driving. The big accident can happen any day now.

The Nikkei, at the time of the Hyogo Bank reorganization, had tucked away in a
box on page 5 a quote of Alicia Ogawa from Salomon Brothers, Asia, who estimate
the *additional* bad loans that have arisen because of the failures of the 20
non-banks related to Hyogo Bank, to be about 1.8 trillion Yen. "Bad loans" (that
won't be repaid) are difficult to estimate. Officially, there are some 40
trillion of them. In reality, it is probably closer to 100 trillion Yen. In
March 1995, only five (!) out of 11 city banks had more assets than bad loans.
Forget the trust banks; according to this ratio, by and large they are history.
The only question is: who will pay for this? The answer is, of course: the tax
payer.

What we have been observing until now might well be the quiet before the storm.
The four credit unions (shinyo kumiai) that went bust so far are all peanuts.
They are regulated by their prefectural governments, not by MOF. Theoretically,
the cities of Osaka and Tokyo, as the regulators in charge, would have to pay
for ALL of the amount, but unfortunately they are close to illiquid themselves.
Because the city of Tokyo decided against financing, deposit insurance had to be
called in.

Now, with the reorganization of Hyogo Bank, the deposit insurance scheme is
empty - zero. So the next bank that goes is de facto not deposit insured. Of
course, MOF tells us that they will have new money in the deposit insurance
system in 1996, but that is another four months!

So why is everybody not running to her or his bank to get the Yen out? Part
ofthe answer is that the big city banks still look o.k. More importantly,
however, the public miraculously still seems to believe in MOF. And Takemura,
the MOF minister, is very good at it, too. I saw him speak at an insurance
company event on Friday, and he cited the "three big finance pluses": the
exchange rate is over 100, the Nikkei index over 18,000, and the discount rate
below1%. (The audience applauds). Therefore, he continues, we are now able to
settle all these loans. The Nikkei, Mainichi, and Asahi note it on page 1 the
following day. Why people believe MOF after it has become crystal-clear that MOF
cannot steer the stock market any longer, is a puzzle to me.

Turning from public lies to mere facts, the lowering of the discount rate is the
most telling evidence that the financial authorities are all in sweat. The
reason is that all the depressed small banks get funds out of the discount
window (central bank loans, of which the discount rate is the price), while the
large bank get uncollateralized loans cheaper on the money market. Lowering the
discount rate, however, means that the Bank of Japan has used its last weapon -
unless it wants to give money away for free (0%) which might also happen in the
near future. One possible reason why the discount rate was lowered on Friday is
a market rumor that one or two life insurance companies are too close to the
edge to be saved. That would turn a large number of loans that were considered
"safe" until now into bad loans - and the small banks would suffer most.

The kabuki stage may turn into a financial battlefield tomorrow.

Ulrike Schaede
Assistant Professor
Graduate School of International Relations and Pacific Studies University of
California, San Diego