Toyoo Gyohten is president of the Institute for International Monetary Affairs and senior adviser to the Bank of Tokyo-Mitsubishi, Japan’s prime financial institution. Formerly he was chairman of the Bank of Tokyo and for many years he served the Japanese government as Vice Minister of Finance and was special adviser to the prime minister.
His unique perspectives on international monetary affairs spanning four decades are documented in Changing Fortunes, a book he co-authored with former U.S. Federal Reserve Chairman, Paul Volcker.
In April 2009, he visited IESE Barcelona to participate in a meeting of the school’s International Advisory Board of which he is a member. During his visit, he was interviewed by Alfredo Pastor, professor in the Department of Economics, whose areas of specialization include the European Union, Spanish economic policy, the role of the State in a market economy and the Chinese economy.
Here begins a partial transcript of their conversation.
TOYOO GYOHTEN: Good morning, Prof. Pastor.
ALFREDO PASTOR: I would like to thank you, on behalf of IESE, for giving us this interview, because our audience is made up mostly of business people, executives and so on, and whatever comments you have will be of great interest.
GYOHTEN: Very good. I am very much honored and pleased to have this opportunity.
PASTOR: I will make the mistake of quoting you. This is something we always dread, when you say, “A few years ago you said…” You think, “Oh, gosh, what did I say on that?” Well, in 1992, you said that we needed a change of paradigm in the way the financial world and the economic world operated. Do you still think so? Do you think the change has happened or is bound to happen shortly?
GYOHTEN: I still strongly believe that. I think actual change really took place, particularly during the 1990s and early part of the 21st century. That was a great change.
PASTOR: For the good, or not?
GYOHTEN: Well, it is we who can change it either for good or for bad. At this moment, I have to say that we are still unable to ascertain whether we are on the right path or the wrong path.
PASTOR: With the experience that you have in your long life as a professional economist and a civil servant, and especially as vice minister for finance in Japan, how do you see the measures that different governments are taking to face the current crisis?
GYOHTEN: First of all, I have to confess that we did make a serious mistake when this current crisis started in the early part of 2007. None of us realized the depth and implications of the crisis properly, so our early response to the crisis, in my view, was very clumsy. The measures were taken too little, too late. We wasted time, and the situation was aggravated considerably.
After the so-called Lehman shock in September 2008, we all came to realize the real meaning of the crisis, and I think the policies we have been taking after that were, all in all, in a good direction. The problem is the speed and the amount of resources we are putting into that.
PASTOR: Are you thinking mostly of the fiscal stimulus or of the bank stimulus?
GYOHTEN: Both. Certainly we have started our policy responses in the right direction, in my view. But we are just at the very beginning. We don’t see how those measures will work. In the case of the financial measures – that is, the provision of liquidity into the market or clearing toxic assets and replenishing the banks’ capital – all these measures are necessary and the right ones. But we have just started.
PASTOR: But have we started?
GYOHTEN: Well, these areas are planned. For instance, in the U.S., which is the epicenter of the crisis, they just published the plan [March 2009], the so-called Geithner toxic asset plan. So there is a plan. Also, in the replenishment of capital, they have pledged to the public that they will start doing operations once they have collected and analyzed the actual, real situations of major banks. Well, plans are there. In that sense, steps have been taken. But we are still to see what will be coming out of these plans.
PASTOR: I think the U.S. has left aside the possibility of creating these so-called bad banks, which is a solution that has been adopted on other occasions. For instance, this was the strategy adopted in China, cleaning up the bad assets of the banks, so that they could operate normally. Do you think the bad bank is a necessity?
GYOHTEN: Well, what is necessary is to separate those bad assets from banks and somehow clear them, either by putting them in a new institution – you may call it a bad bank…
PASTOR: Which is not a bank, by the way.
GYOHTEN: …or you just sell it, liquidate it at market price. So I don’t think the structure of a bad bank itself is an absolute necessity, because there are other means of liquidating or clearing bad assets. The important point is to just clear those bad assets from banks. That’s a must.
There are piles of very difficult problems before we can get the right solution. First of all, to decide which asset is bad and which is good. Then, what should be the price of the asset? And thirdly, who is going to finance that transaction?
All these problems need to be solved before the transaction or operation can be a success. And the American plan is certainly one way of dealing with the problem – that is, to try to activate and encourage private sector participation in the whole process while the public sector, Treasury, or the Fed, is prepared to provide very significant financial support; to guarantee support, very significant support.
So this is one way of trying to solve that. But as you said, there are other ways, for instance, other countries did it in different ways. I think the Chinese are doing it a different way. I don’t think the bad bank per se is an absolute necessity.
PASTOR: But it may be very convenient in some cases.
GYOHTEN: Oh, yes, of course.
PASTOR: Is Japan adopting anything like it? Are toxic assets a big problem in Japan?
GYOHTEN: It was a big problem in the late 1990s.
PASTOR: In the previous crisis.
GYOHTEN: It is no longer a major problem. I think after spending almost, let me see, 5 percent of the total GDP in that operation, at the worst period, Japanese banks’ ratio of bad assets was almost 20 percent of loan assets, and it was reduced to just above 1 percent or so. That was a very heavy burden on public money.
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Note: The above text was lightly edited for grammar and factual accuracy. Please check against actual delivery on video.