WHY JAPANESE BANKING REFORM IS AN OXYMORON: Japanese banks have been in a state of near-insolvency for almost a decade; Japanese politicians have spent that same decade hoping that massive public works expenditures would let the Japanese economy grow its way out of the problem. The banking mess has led to a decade of lost growth in that country. According to the Economist, "Total non-performing loans—those that borrowers have failed to repay on time or in full—now amount to around ¥52 trillion ($416 billion)." In the past month, however, Heizo Takenaka, A Harvard economics professor-turned-Japan's new economy czar, was proposing some tough love for the banking sector by allowing banks with lots of nonperforming debt to actually fail. This is a basic prerequisite for capitalism to function properly, but there are powerful political incentives to circumvent it.

So much for reform. According to the New York Times, the proposed banking reforms are on hold, to the surprise of U.S. policymakers. The Financial Times reports that Takenaka is facing a vote of no confidence in the Diet, though he'll likely survive. The NYT quotes one bank analyst concluding, "This is good news for the bad banks, good news for the bad companies, and bad news for the economy." It's possible that the delay is temporary, but I doubt it.

Why has this happened? The powerful political incentives kicked in for the ruling party. Their rhetoric, however, is telling. To quote the NYT article:

"Masashi Teranishi, president of UFJ Bank and chairman of the Japanese Bankers' Association, spoke out forcefully today against aspects of the plan, telling reporters at a news conference: 'It's like being told we can suddenly use our hands and play American football, when all along we've been ordered to play soccer. If the longstanding regulations were to change rapidly, it would cause confusion in the markets and among investors.'

His reference to America was pointed: Mr. Takenaka taught economics at Harvard University before joining the government, and his proposals are widely seen — and resented — as an attempt to impose on Japan an American approach to bank regulation."