The managing director of the International Monetary Fund is warning Japan to take decisive action to reform its ailing banking industry and reverse deflation.
IMF chief Horst Kohler told a news conference in Tokyo that Japan can only revive sustainable economic growth if the government aggressively restructures the financial system.
But Mr. Kohler says he is not pessimistic. "It is a time for decisive action and implementation," he said. "On the other hand, it is not that I want to paint a rosy picture or want to detract from the serious risk of crisis. I think it is not true and not really helpful if we are for every next day expecting the big crack in Japan. We should also be aware that what is, on the one hand, a very cumbersome slow [reform] process is on the other hand partly of the reflection of the different society. We cannot ignore that."
Mr. Kohler says that Japanese society is different from others because of the unusually close ties between the government, banks, the business world and the stock market. Because of these links, Tokyo sometimes appears reluctant to allow insolvent banks and businesses to fail, fearing that would cause a wider economic collapse.
The IMF has been warning Japan that it must change what is calls a muddle-through approach to disposing non-performing loans - one of the most serious problems threatening Japan's banks.
Japan's banks are struggling under a burden of bad debts estimated to be as high as $420 billion. For decades, the government encouraged banks to loosen lending at low interest rates, but now failed companies are unable to repay the funds.
Mr. Kohler also warned the government to make sure proposed tax cuts, which are aimed at encouraging consumers and corporations to plow more money into the economy, do not add to the enormous public debt.