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Comment on "Did the Japanese Stock Market Appropriately Price the Takenaka Financial Reform? (Joint with Yoshitsugu Watanabe)"

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Finacial Sector Development in the Pacific Rim This PDF is a selection from a published volume from the National Bureau of Economic Research Volume Title: Financial Sector Development in the Pacific Rim, East Asia Seminar on Economics, Volume 18 Volume Author/Editor: Takatoshi Ito and Andrew K. Rose, editors Volume Publisher: University of Chicago Press Volume ISBN: 0-226-38684-8 Volume URL: http://www.nber.org/books/ito_07-2 Conference Date: June 22-24, 2007 Publication Date: February 2009 Chapter Title: Comment on "Did the Japanese Stock Market Appropriately Price the Takenaka Financial Reform?" Chapter Author: Takatoshi Ito Chapter URL: http://www.nber.org/chapters/c0403 Chapter pages in book: (341 - 345) Comment Takatoshi Ito Let me first illustrate what I think the most important aspect of the so- called Takenaka plan. By now, many policymakers and academics share a high praise for the Takenaka plan of October 30, 2002 as the decisive way of ending the decade-long banking crisis of Japan.1 However, few remem- ber how its reputation has evolved from being too tough to being too com- promised, and finally to producing moral hazard by rescuing shareholders of a failing bank. Ironically, appearing too tough made the stock prices de- cline, and failure, nationalization, and bailing out shareholders of the Res- ona Bank produced a moral hazard rally in May 2003. Let me explain the evolution briefly. (See Hoshi and Ito [2004] for a re- view of the Financial Services Agency from 1998 to 2004.) In the spring to summer of 2002, a hot debate regarding the soundness of the Japanese banking system took place. Minister Yanagisawa, then in charge of Finan- cial Services Agency (FSA), maintained the position that banks have am- ple capital and basically sound. Critics, including Mr. Takenaka, Minister for State for Economic and Fiscal Policy, argued that much of bank capi- tal consists of deferred tax assets (DTA) that are based on optimistic profit streams in the future.

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