JEI's Spin on the News

Public Money For Japanese Banks Meets Mixed Reaction

Wednesday, October 21, 1998

If you are in individual or a family in Japan, getting welfare is a major task. Government employees actively discourage jobless workers from applying for unemployment insurance. If you are a bank, it is different. Tokyo is now in the process of begging banks to accept a multitrillion yen handout. At least one major financial institution, the Industrial Bank of Japan, Ltd., has said it would take the money, more or less as a public service, but most others are publicly noncommittal.

What is going on? Why are the banks looking this gift horse in the mouth? In part, banks are responding to the same social forces that attaches a stigma to private welfare, but there are other reasons as well. Like banks in Scandinavia in the early 1990s or American banks in the 1930s, both of which were on the receiving end of government largess, the Japanese banks worry that acceptance of the money implies that they cannot survive on their own. Moreover, in another parallel to Scandinavia and America, they are concerned that the public funds would come with so many strings attached as to render the assistance counterproductive. In the case of Japanese banks, one particularly onerous requirement might be that they tell the truth about their financial condition.

One lesson of the earlier experiences is that public reluctance to take money correlates little with private need. In the Great Depression, banks accepted public funds only after the head of the Reconstruction Finance Corp. publicly described the banks as largely bankrupt. Some private analysts have come to the same assessment concerning Japanese banks.

The historical background as well as the Japanese debate regarding the issue of public money for private banks has been discussed at length in JEI Reports this year. The most extended discussion is in "Japan's Banks And The Bad Loan Problem: The Nightmare Continues", JEI Report No. 25A, July 3, 1998, especially pp. 11-13.

"JEI's Spin on the News" are the opinions of one of more members of JEI's staff and do not necessarily represent the views of the organization.

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