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

"People prefer the certainty that there's a half chance of success than knowing nothing at all," Ikeda said. "In other words, people ask for a huge discount for uncertainty so it is important to fix losses and reduce uncertainty."

Japan waited until 1997, several years into its crisis, before it let a few financial institutions go under and in the following years the government spent $120 billion to replenish ailing banks' capital.

And it was only in 2003 that a push by reform-minded former Prime Minister Junichiro Koizumi to accelerate bank write-offs put an end to more than a decade of banking malaise.

The initial softly-softly approach failed to stem the rot.

On the contrary, uncertainty about the true scale of the banking crisis hit confidence and as property prices kept falling bad loans snowballed leading to nearly $1 trillion in write-offs.

That is about the same size as the International Monetary Fund's estimate of worldwide losses from the latest credit market losses of $1 trillion.

Aware of the risk of keeping financial markets guessing about the magnitude of today's crisis, the Group of Seven financial chiefs have called for risk disclosure and fair value estimates for complex and illiquid instruments.

They also asked for enhanced guidance on fair value accounting, within 100 days from their meeting on April 11.

But Japanese officials warn that drawing a line under the current crisis may prove trickier than assessing bad debts held by Japanese banks.  Continued...