Ashikaga implodes.

EVEN THE BIGGEST OPTIMIST had to admit that it was all going a little too well to be credible. The Japanese banking system, though allegedly on the mend, is still the kind of patient that can suffer a sudden relapse and put the entire industry back on the critical list

With the end of the year in sight, Ashikaga brought Japan's banking collapse total to two. There were plenty of similarities between the nationalization of Ashikaga and the partial state seizure of Resona back in May. But it's the few critical differences that worry us.

First of all, there was the apparent lying and deceit--all the more disturbing because it was carried out by at least three central government institutions: the Prime Minister's Office, the Financial Services Agency (FSA) and the Cabinet Office. When the possibility of an Ashikaga bailout first broke, all three of those institutions brazenly denied that a bailout was even "under consideration."

That cannot possibly have been true.

The bailout of a bank is not an overnight decision, even in Japan. Yet the denials continued until just a few days before the [yen] 1 trillion [yen] bailout.

Then there are the circumstances of the announcement itself: at 10 pro on a Saturday night in the middle of a weekend that just happened to be a major public holiday in the US. Remember that the Resona announcement was also made during a Japanese national holiday weekend. Sunday newspapers were able to get the story into their last editions, and market players sitting at home over the weekend had a chance to let the news settle in.

As with the Resona bailout, the FSA and the Bank of Japan (BOJ) were at pains to limit the fallout of the collapse. Deposits were all guaranteed, the incompetent board of Ashikaga was sacked and replaced with an FSA team, the BOJ made sure there was enough cash liquidity to withstand a bit of panic and local companies in Tochigi (where Ashikaga is the dominant financial institution) were treated to some sage advice on how to save their businesses.

As with Resona, the Ashikaga measures are very likely to provide the sort of makeshift bandages that the overall banking system needs to continue limping on. But the Ashikaga mess has revealed considerable discrepancies between what the management was saying about the state of its bad loan problems and the reality of its predicament. Other banks may not be in quite such dire straits as Ashikaga (the Bank of Japan had long warned that there were problems lurking there), but many of them cannot be far behind.

The next biggest concern is therefore how the government is going to treat each case, and it is here that the Ashikaga experience sends the most worrying message. The nationalization of Ashikaga, unlike that of Resona, left shareholders in the bank with absolutely nothing. The shares were seized, not bought. And the government offered no concessions.

--The Editors