[interview] A Proposal for Public Fund Investment Schemes on the Swedish Model

Yuri Okina: A senior fellow of the Research Department of the Japan Research Institute Limited.

Okina graduated from Keio University's Economics Department in 1982 and finished her Masters in Business Administration in 1984. She joined the Bank of Japan in the same year and became a deputy chief researcher of the Research Department of the Japan Research Institute Limited in 1992. She has been incumbent since 2000. She worked concurrently as a visiting professor for the graduate school of Keio University from September of 2001 to March of 2002. She is an author of The Information Disclosure, The Japan's Financial System and The Financial Futurology etc.

The investment of public funds in Japan's financial institutions in 1999 protected depositors and temporarily stabilized the financial markets. However, this step postponed the resolution of its problems as a large number of banks still exist and they have still not implemented the necessary innovative changes in their operations. There are several intertwined reasons why the profitability of Japanese banks does not improve. In particular, there is a delay in structural transformation of the whole industry in Japan, the financial structure has an excessive number of banks, and the continuance of asset deflation.

In order to disentangle these difficulties, it is crucial that we accelerate the structural transformation of Japan's industry, improve bank profitability by creating innovative business models, and speed-up the disposal of non-performing loans. By practicing such measures, Japan's financial institutions will be reorganized and screened, and the excessive number of banks will be reduced.

As to the injection of public funds, exciting laws must be observed. However, those institutions that will receive public funds must be chosen carefully on the basis of their ability to survive and turn profits.

More specifically, taxpayers' money should be injected only in those banks whose financial soundness is reasonably assured without closing out their overseas operations in case of banks with positive shareholders' equity. As for those that are not sound, their operations should be limited domestically and the public funds should not be injected in them.

The lessons of 1999 tell us that when injecting public funds, it must be implemented on the premise that the bank can generate a sufficient return compared to risks associated, which means that banks must reform to earn large profits. The public funds should be injected as “capital” which can be utilized to absorb losses from disposal of non-performing loans. Moreover, clarification of management responsibility is another essential condition, where management responsible for bad financial results should resign. Shareholders should also take responsibility, and the bank management has to be reformed fundamentally.