Image: Yoshimi Watanabe
Shizuo Kambayashi  /  AP
Financial Services Minister Yoshimi Watanabe, one of Japan's most vocal proponents for economic reforms, has urged Washington to use public money to tackle the credit crisis.
updated 4/23/2008 6:24:49 AM ET 2008-04-23T10:24:49

Likening the U.S. credit crisis to a broken bathtub draining water, Japan's financial services minister urged Washington on Wednesday to inject public money to fix the problem before it gets worse.

Sounding almost alarmist, Yoshimi Watanabe used unusually blunt language to warn that drastic action was needed to address the crisis that has battered global markets.

"If there is a big hole in the bottom of the tub, no matter how much hot water you keep adding, you will never have enough hot water," Watanabe said in an interview with The Associated Press.

Fixing the leak requires "an overall package, including monetary policy and public money," he said.

As the subprime fallout grows, the idea of a public bailout isn't sounding as far-fetched as it once did.

In an interview with The Wall Street Journal last month, Senator Hillary Clinton, a candidate for the U.S. Democratic presidential nomination, said the U.S. government should be ready to buy troubled mortgages from investors and avoid a prolonged slowdown.

"We might be drifting into a Japanese-like situation," she was quoted as saying.

Biggest dilemma since 1930s?
Last month, the U.S. resorted to a public bailout of sorts for Bear Stearns, a major brokerage. The Federal Reserve allowed JPMorgan Chase & Co. to borrow from the Fed, and provide that funding to Bear Stearns. Fed officials said the procedure dates back to the Great Depression of the 1930s but has rarely been used since then.

But Watanabe said the looming global credit crisis, which started with the subprime mortgage woes that surfaced last year, was the biggest financial dilemma for the world, and Japan, since the 1930s.

Watanabe, head of the Financial Services Agency, said Japan has a lesson to share with the rest of the world in how it dealt with the bad debt problems of the 1990s — and that the U.S. can learn from Japan's mistakes.

Japan acted too late, procrastinating for six years in tackling the piles of bad debts major banks had racked up during the excessive "bubble economy" years.

After wasting stimulus packages and other halfhearted efforts, Japan was forced to resort to billions of dollars of taxpayers' money to rescue the banks, said Watanabe.

He brushed off the differences in the historical backdrop between Japan's and U.S. problems. He insisted the basic result, lenders running out of capital, was exactly the same — and would ultimately need the same fix.

'Parallels'
Experts also said the U.S. credit problems were similar to those of Japan in the 1990s.

"There are parallels," said Eva Marikova Leeds, professor of economics at Temple University in Tokyo, pointing to the real estate bubble in both.

"The underlying problem was the assumption that housing prices would rise forever," she said. "Japanese regulators moved too late."

Watanabe, a lower house lawmaker who also oversees economic and administrative reforms, appeared convinced the U.S. government would use public money. He said that decision may not come during the presidential election because of the inevitable question about political accountability.

'Deep trouble'
Watanabe also said he was worried about export-reliant Japan and its massive dollar holdings if the U.S. fails to wrest itself out of the credit crisis. Direct subprime exposure among financial organizations here is believed to be relatively small.

"Japan's recovery is dependent on U.S. economic health and so we could be in deep trouble," Watanabe said.

Iwan Azis, professor of professor of management and regional science at Cornell University in Ithaca, New York, said comparing the U.S. and Japanese lending fiascos weren't particularly useful because the causes and mechanisms were so different.

What the U.S. needs is more regulation, while Japan needs to do away with restrictions to open its markets to foreign investment and new businesses, he said in a telephone interview.

"There are too many regulations in Japan," Azis said.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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