Japan makes a start at prodding economy Bank reform: Measures designed to restore credit to Asia's industry, ward off world recession.

October 16, 1998

THE POLITICAL DEAL to let Japan rescue and regulate distressed banks is good news for the world. It is designed to put credit back into Japan's domestic economy and its massive investments in industrial Asia.

Prime Minister Keizo Obuchi said final passage of the measures will send "a clear and strong message to the world that a global depression will absolutely not begin in Japan."

Only time and cooperation from Japan's civil service and big banks will tell if this optimism is justified. Financial markets do not, as yet, share it.

At the political heart of the plan, the support of two opposition parties ensured that the ruling Liberal Democratic Party's measure could not be blocked. The lower house of Parliament adopted the measure Tuesday. Approval by the upper house -- expected as early as today -- is still needed.

The economic heart of the plan is a government-supervised, publicly funded rescue of troubled banks, with nationalization, deposit protection and "bridge banks" to protect good loans of failed institutions. An agency modeled on the U.S. Resolution Trust Corp., which disposed of assets of failed savings and loans in this country a decade ago, would do similar work on a larger scale.

The lower house also approved spending as much as $500 billion to recapitalize the banking system. It is more than three times what the U.S. Treasury committed to the savings and loan rescue.

What is made possible by the legislation still needs to be accomplished. Japan's powerful civil service long resisted such a plan.

Big banks able to survive may not apply for funds they need to restore credit operations, for fear of the required public disclosure. That is not their tradition. Persuading them to join is the next big political challenge.

Bad debts from insolvent companies are soaring, and as banks call in debt, creditworthy companies cannot find loans. Recapitalizing banks is key to ending Japan's recession.

A smaller but equally positive signal to the world was the agreement in Washington between the White House and congressional leaders in budget negotiations to make $18 billion from the U.S. Treasury available to the International Monetary Fund. This is a strong signal from Congress that the larger country lecturing Japan on responsibilities is finally attending to its own.

Signs abound of Asia's slowdown reaching U.S. shores. One is empty containers on the piers of Baltimore, reported in The Sun's business section last Sunday. While cheap goods from Asia flood in, exports to Asia have ebbed. If Japan's bank recapitalization succeeds, Asian manufacturers may resume buying U.S.-made equipment.

Another was the announcement by Merrill Lynch & Co. that it will cut 3,400 jobs, about 5 percent of its work force worldwide. The investment giant reported a $164 million loss for the third quarter compared with earnings of $502 million for the same period a year ago.

Earlier, analysts forecast that Bankers Trust Corp. of New York, incurring losses from bad Russian loans, may be forced to do something similar, likely spreading the pain to its Baltimore subsidiary, BT Alex. Brown Inc.

What the world needed was a boost of confidence somewhere. Japan, which from political paralysis had long delayed providing it, may finally have come through.

Pub Date: 10/16/98

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