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Monday, June 2, 2003
Consequences of eternal stability may mummify Japan's economy
By NORIKO HAMA
Stability is a good thing. But you can always have too much of a good thing. Too much stability turns into rigidity. Rigidity begets stagnation. Stagnation leads to decline. Decline leads to death. Such is the dynamics of economic activity.
It was in the name of financial stability that the Japanese government decided to inject public funds into the Resona banking group. The fear was that Resona's failure to meet the 4 percent capital adequacy ratio and the imminent threat of its collapse would send the whole financial system in Japan into turmoil.
The desire to keep the financial system out of harm's way is a laudable one. Yet this does not mean that policymakers can persistently sacrifice efficiency on the altar of stability and expect to get away with it. Stability is not always the hallmark of soundness. Things can actually be very badly wrong, even when they outwardly appear to be the epitome of stability.
Indeed, too much stability on the surface tends to be a sign there is rot spreading within, which somebody is trying very hard to cover up and conceal. However, excellence in economic policy management is not measured by how well you can cover up the rot and maintain the semblance of stability, but in how well you prevent the rot from spreading and damaging the health and efficiency of the economy as a whole.
In the Resona case, policy seems to have gone completely in the direction of deception. One cannot help thinking that too much effort has been put into trying to make Resona look like an isolated incident -- on saying the isolated incident has been duly dealt with, and that therefore there is nothing wrong anymore with the banking system. As China has shown, contagious diseases can't be contained by pretending only a few people have it, have been isolated, and all is well.
The way in which the Resona case has been handled is not what one would expect from a reform-minded government. What happened to the statement that there is no such thing as being too big to fail? Where is the transparency and rule-based approach upon which a systematic solution to the whole banking problem must by definition stand? Will the same criteria that found Resona wanting in financial viability be applied to other banking groups?
That would seem to be the logical approach, but where is the assurance that this will happen?
And in the event that it does happen, what will be the consequences?
Will the government dare to actually back the erstwhile sentiment of "no one's too big to fail," or will it execute yet more bailouts and nationalizations in the name of stability? When does a bank failure constitute a genuine threat to the financial system, and when does it not? By what reasoning were Resona's problems, which have been an open secret for some time, deemed worthy (or dangerous) enough to warrant yet another policy-organized rescue operation?
The whole sequence of events begs more questions than it provides solutions. Indeed, it has solved nothing. Not one thing has changed. Stability has been made to look as though it has been kept intact. But the rot is still there.
Sometimes it helps to rock the boat. A few of the feeble-footed may fall off, but once thrown into the water, it is just possible that some of them will discover that they can actually swim. Alas, the policy of not rocking the boat come what may continues to be the government's preoccupation. Much more of this stability -- and rigor mortis -- may be what ultimately awaits the Japanese economy.
Noriko Hama is an economist and a professor at Doshisha University School of Management.