Japan’s economy shrank at an annual rate of 3.4 percent in the second half of 2001, the fourth recession in a decade. Unemployment should exceed 6 percent this year. Everyone agrees the Japanese banking sector is both a cause and a victim of this macroeconomic malaise. The banks are hamstrung by poor-quality assets and a lack of capital, and are therefore unable to perform their critical role as intermediaries between savers and businesses seeking capital.
Analysts have examined how the Japanese government, intervening through the Resolution Collection Corporation (RCC) might attempt to break the fiscal gridlock. They conclude that the RCC would have little to gain and much to lose by resolving the banking crisis.
The capture of the RCC by bureaucrats and politicians with a stake in preserving the status quo constitutes a disaster for Japan as a whole.
Source: Gavin Buckley, A Banking Crisis: Reformers do not Reform. Blame is Difficult. Milken Institute Review, Third Quarter 2002.
For text http://www.milkeninstitute.org/poe.cfm?point=pub03
For more on Japan http://www.ncpa.org/iss/int
FMF Policy Bulletin \7 November 2002
