Treasury Secretary Robert Rubin recently sent a letter to the Japanese finance minister asking that Japan's financial system be stabilized as quickly as possible. The Japanese government has been in deep denial. In America, regulators closed or merged lending institutions fairly quickly once they recognized the magnitude of the problem. In Japan, by contrast, the government has not been willing to bail out large depositors or lenders. But oddly, the government has been forthcoming with the indirect subsidies that have allowed the problem to fester.
Regulators require pension funds to hold half their assets in bank deposits or government bonds.
And households have few alternatives to keeping their savings in banks. Saxonhouse points out that roughly 60 percent of liquid household assets are in banks in Japan, compared with about 25 percent in America. The interest rate that banks will need to pay to keep deposits is bound to rise sharply, most likely forcing the government to acknowledge that the banking sector is flat broke. Saxonhouse predicts a happy ending. Once the banks' problem formally becomes the depositors' problem, he predicts, the government will step in to protect against a run on the banks and a Depression-style implosion of the money supply.