Cablegate: Tokyo Stock Exchange President Discusses Japan's

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DE RUEHKO #3151/01 3180827
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FM AMEMBASSY TOKYO
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RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/TREASURY DEPT WASHDC
RUEHBS/USEU BRUSSELS
RUEHIN/AIT TAIPEI 7192

UNCLAS SECTION 01 OF 02 TOKYO 003151

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON PGOV JA
SUBJECT: TOKYO STOCK EXCHANGE PRESIDENT DISCUSSES JAPAN'S
EXPERIENCE IN FINANCIAL SECTOR RESTRUCTURING WITH A/S
SULLIVAN

TOKYO 00003151 001.2 OF 002

1. (SBU) Summary: Japan's experience resolving its 1990-2002
financial crisis demonstrates direct re-capitalization of
banks is the most effective way to revive a weakened
financial sector, Tokyo Stock Exchange (TSE) President
Atsushi Saito told visiting EEB Assistant Secretary Sullivan
November 5. Saito commended recent efforts by the U.S.
Treasury to use USD 250 billion from the Emergency Economic
Stabilization Act of 2008 to inject capital directly into
bank balance sheets. End summary.

2. (SBU) Saito noted he headed the Industrial Revitalization
Corporation of Japan (IRCJ) from 2001-2006, when the
quasi-public entity was responsibile for restructuring
Japan's bankrupt industrial firms and stabilizing their
weakened lenders. Although IRCJ had a government allocation
of 10 trillion yen (approximately $100 billion at current
exchange rates) and explicit government guarantee of its
debt, it was able to finance its five-year operations
entirely with capital raised in short-term money markets,
Saito said. The corporation never drew on its government
allocation and eventually passed approximately 7 billion yen
back to the national treasury. Private sector financing was
made easier by Japan's historically low interest rates at
that time.

3. (SBU) The IRCJ's biggest challenge was insisting on honest
accounting and appropriate valuation of assets, Saito told
the visiting Assistant Secretary. Many bankers at that time,
Saito continued, were encouraging borrowers to hold assets on
their books at face value and kept lending to insolvent
borrowers. Bankers feared if assets were marked to markeQ
the banks would be subject to shareholder lawsuits and public
criticisQHoweQ, this continued denial of reality only
prolonged the crisis and put the banks' own balance sheets at
risk.

4. (SBU) The IRCJ insisted insolvent corporations "face
reality in analyzing their balance sheets", Saito explained.
Where market valuations were possible, IRCJ marked assets to
market. Where independent valuation was unavailable, IRCJ
made a best faith estimate of the asset's value based on
underlying cash flow. At the same time, IRCJ insisted
shareholders and corporate executive take personal and
financial responsibility for their past business decisions.
In almost all cases write-downs wiped out shareholder equity
while IRCJ managers forced the bankrupt companies' executives
to give up salaries, bonuses, and pensions. In one case, a
former hotel company president was asked to become the
company's bus driver. While that example was dramatic,
Saito's point was holding executives accountable was a
political necessity.

5. (SBU) At the same time, Saito said, he spent considerable
time speaking to journalists and other opinion makers to
convince them IRCJ was not "bailing out irresponsible
corporations" but rather working in the interests of
taxpayers. By insisting on "haircuts" before restructuring
corporations and recapitalizing banks, he largely succeeded
in muting Japanese public criticism of IRCJ,s work.

6. (SBU) Saito strongly urged the U.S. to continue to focus
on direct capital injections into the banking system. The
Japanese government has had to recapitalize the banking
system three times in the postwar period, and each time the
move has convinced investors that the market had bottomed out
and restored private sector confidence. The alternative
strategy of government purchases of distressed assets through
public auction carried risks of unintended consequences for
the prices of unrelated assets. Since rating agencies would
be forced to use the auction price as a reference for pricing
other non-markets assets held by banks or other financial
institutions, a low auction price could negatively affect the
balance sheets of many other companies.

7. (SBU) Although direct capital injections can be
politically controversial, Saito acknowledged, regulators and
government officials can convince taxpayers of the steps'
merits if regulators insist on corporate executive

TOKYO 00003151 002.2 OF 002

responsibility for past failures. Taxpayers can even profit.
For example, the Bank of Japan intervened in financial
markets in the late 1990's by directly purchasing bank stock
and, eventually, the BOJ "made huge profits", Saito explained.

8. (SBU) In the long run, Saito concluded, it is critical for
governments to reiterate as strongly as possible the core
role of markets in the economy. "State capitalism was the
disease of the past 100 years," Saito emphasized. "And,
while everyone recognizes regulators and other market players
made mistakes in managing aspects of the financial system,
these mistakes do not undermine the importance of the market
as the best guarantee of long-term economic growth and
prosperity."

9. (U) This message was cleared by A/S Sullivan subsequent to
his departure from Tokyo.
SCHIEFFER

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