October 17 2008 Financial Times
Banks need time and luck as well as funds By Gillian Tett
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More specifically, when Japan did finally bite the bullet and earmark Y25,000bn ($246bn) to provide capital for banks in 1999 -- after years of hand-wringing and procrastination by its politicians -- this helped end the banking panic. However, this turnabout in the bank's fortunes did not suddenly deliver a broad-based economic recovery.
The economic picture remained grim for several more years. Indeed, it was not until Japan enjoyed an extraordinary dose of luck, in the form of a dramatic export boom fuelled by the sudden growth of China, that many of the "old economy" parts of its economy -- such as construction -- started to look vibrant again.
These days policymakers in Tokyo suspect there were at least two reasons for this delay, both relevant today. First, when a crisis of this magnitude hits a financial system, it takes time for consumers, companies and banks alike to recover their nerve. After all, once trust is shattered it always takes time to restore -- and today, a decade later, Japanese consumers and banks have still not shed some of their psychological scars.
Thus, it is ridiculous to expect -- as some British politicians have implied in recent days -- that banks will now ramp up their loans to the real economy as a result of the bail-outs. What they are more likely to do, at least in the near term, is to focus on activity with institutions and individuals deemed ultra-safe (and thus probably least in need of loans).
We are thus entering a period of credit rationing, which will inevitably hurt many leveraged operators.
But the second problem is the "feedback" effect. In the years after the Y25,000bn bail-out package was announced in Japan, the real economy continued to produce new corporate and consumer defaults -- hence more bad loans. That made it hard for banks to convince investors (or themselves) a true bottom had been reached, or even that the capital injections had been big enough to tackle the rot.
Unsurprisingly, confidence in banks, regulators and borrowers remained low, further sapping the economy.
Of course, the good news from Japan is that the downward spiral did ease as this decade wore on. That should offer a useful reality check right now. After all, when markets are panic stricken, it is often hard to believe that normality can ever return. Yet it is worth remembering that in Tokyo the real turning point was in about 2002, just when many investors were despairing of ever seeing an end to the bad loan hole.
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