VZCZCXRO0860
RR RUEHRN
DE RUEHKO #3151/01 3180827
ZNR UUUUU ZZH
R 130827Z NOV 08
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 8827
INFO RUEHSS/OECD POSTS COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 6410
RUEHGH/AMCONSUL SHANGHAI 0509
RUEHHK/AMCONSUL HONG KONG 6630
RUEHNH/AMCONSUL NAHAQ51
RUEHOK/AMCONSUL OSAKA KOBE 4781
RUEHKSO/AMCONSUL SAPQO Q
RUEHFK/AMCONSUL FUKUOKA 0994
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