Japan's credit lessons: act fast, expose all losses

By Hideyuki Sano - Analysis

TOKYO (Reuters) - U.S. banks and policymakers have tackled the unfolding credit crisis with much more vigor than Japan did during its banking blow-out in the 1990s.

Yet they still risk repeating Japan's biggest folly: covering up losses in a futile attempt to soothe investors' frayed nerves.

Just like today's crisis started with the U.S. mortgage market meltdown, Japan's banking crisis erupted when a real estate bubble burst, hitting loans made against property collaterals.

But as bad debts piled up Tokyo did not force banks to write them off and let unprofitable banks survive out of fear that a major bank failure would cause panic.

That delayed necessary capital injections to banks, including public aid.

"Japan's biggest mistake was its attempt to cover up losses," said Nobuo Ikeda, a professor of economics at Jobu University, who as a journalist covered the crisis in the early 1990s.

In contrast, today major banks have been quick to replenish their capital, often with help of Asian and Middle Eastern sovereign wealth funds. The Federal Reserve has slashed rates drastically and helped orchestrate the rescue of Bear Stearns (BSC.N: Quote, Profile, Research), while U.S. politicians are working on a fiscal stimulus package.

"I think the U.S. authorities' crisis control has been very good," said Seiya Nakajima, chief economist at Itochu Corp.  Continued...