One of the jarring things about the early edition of the Wall Street Journal is how dated it can seem, just hours after it's landed on your stoop. The headline across today's "International" section shouted: "Japan Agrees to Banking-Reform Compromise," but by the time I read the article that compromise had collapsed in the wake of an angry disagreement over what, exactly, the compromise had been.
Any meaningful reform of Japan's banking system is going to require some kind of government bailout along the lines of the Resolution Trust Corporation that the U.S. used to liquidate insolvent savings and loans. So it's hard to believe that the ruling LDP and Japan's opposition parties could be genuinely confused about just what they had agreed to. After all, the question: "Can we use this $98-billion public fund to recapitalize the Long-Term Credit Bank?" sounds like a question you can answer only with "Yes" or "No." But I suppose it's possible that a Clintonesque parsing of the words would give one party a very different definition of the word "use" than that assumed by the other. Perhaps "use" means "borrow against." Perhaps it means "pretend to use for public-relations purposes." For that matter, perhaps it means "do not touch." I guess you'd need to know the context in order to decide.
The continued lack of urgency on the part of the Japanese government remains breathtaking. The Nikkei has now slumped to historic lows, at one-third of its peak in the late 1980s. Lending has for all intents and purposes ceased, in as convincing an example as you're likely to find of shutting the barn door after the horses have fled. And while Japan needs more than banking reform to jump-start its economy, in the absence of banking reform the effects of a radical inflationary policy will be muted. Unless the Japanese government plans to print yen and hand them out to people on street-corners, any increase in the money supply would have to go through the banks. And as long as the banks are concerned about the $500 billion (or $675 billion or $1 trillion) in bad loans that they're carrying, the banks are likely to remain tight-fisted.
It's obviously a mistake to say that banking reform is enough. And those Western analysts who have argued that it is, or who have suggested that if Japan just let a few banks fail everyone would snap to, make two mistakes. In the first place, a step in the syllogism is missing. Banking reform will help liquidate bad loans, and permit prices to find truer levels. But in the short run, that's actually going to increase, not decrease the pain and fear in the Japanese economy. In the second place, the idea that all Japan needs to do is stop cushioning market mistakes is itself closing the barn door after the horses have fled. It may be true that Japan would have been better off if there wasn't such a cozy relationship between the banking system and the Ministry of Finance. That doesn't mean it's true that "grin and bear it" is the best advice for Japan right now.
It's possible, of course, that by the time you read this Japan will in fact have reached a real compromise, and the first genuine steps toward banking reform will have been taken. Nonetheless, the sharp rally in the U.S. stock market this afternoon, with the Dow rebounding from 170 points down to finish nearly 40 points up, was surprising in light of the continued chaos in Japan. It was also continuing evidence that the market believes it has discounted the trouble in Asia more than adequately. Unfortunately, that belief rests upon remarkably shaky foundations. We're one currency devaluation away from another dramatic market tumble, and Japan's failure to take its place in the global economy--which is essentially what the events of the past week have meant--has only increased the odds of continued global market volatility.