[talk] "The Crisis in Japan's Governance:the Deflation-fighting Program"

Discussion of Financial Problems
Moderator Yasushi Kudo: Representative of Genron NPO
Anonymous bureaucrats A, B, C

At the end of February, the Japanese government introduced its anti-deflationary measures. The measures incorporated increased special inspection of banks by the Financial Services Agency. Nevertheless, we wonder whether Prime Minister Koizumi is aware of the crisis in the Japanese economy and what his goals are in implementing these measures.
Stock Prices of Japanese banks have been falling 20-30 percent since the previous injection of funds. The result of the increased special inspection of banks will be made public after mid-April. If we regard the banks' capital as "core" capital excluding deferred tax assets and previously injected public funds, many banks should have already experienced a shortage in capital. If this is the case, any measures, including the injection of public funds, should be taken before a new crisis emerges.

However, bureaucrats of the Financial Services Agency flatly opposed such a view. Instead, they argued that the special inspection by the agency is in compliance with international standards and is therefore appropriate. Furthermore, since the examinations were carried out by audit corporations and the Bank of Japan, the state of Japanese banks have not been problematic.

They are cautious about the injection of public funds. The Financial Services Agency is seriously concerned about the risk of placing the banks under the control of the government through the injection of public funds. They emphasized that it is necessary to have a strict legal condition for the injection of public funds such as a serious threat to the financial stability of the country and/or the region. Accordingly, they proposed that the Bank of Japan take responsibility for the risk of "failure due to a funding crunch" expected to take place after the start of the removal of the full deposit protection. They also proposed that the Bank of Japan provide short-term liquidity through a special loan by the Bank, requiring legal conditions rather than the injection of public funds. The goal of the financial administration is to stabilize the financial system by rational rules.

However, this alone is unable to get the Japanese economy out of its current deflation. The most important point will be to create a governance system by which the Financial Services Agency, the Ministry of Finance and the Bank of Japan can put together each other's idea and by which they can strongly drive the policies of Japan.