Why Japanese banks don't care about profits

"If you'd asked anyone six months ago what the chances were of Hokkaido Takoshoku or Yamaichi going down the drain they would have assigned a very low probability to both events," says Masaru Kakutani, the representative director of Moody's Japan. "The mindset was they were too big to fail. When the mindset is violated people come out with a new model. The paradigm is evolving into something else."

The failures in November of Yamaichi Securities and city bank Hokkaido Takoshoku were indeed a serious shock to the financial system. Last month the government gave its most honest appraisal thus far of the scale of the banking sector's bad debts. At ¥76 trillion ($600 billion), the number was a massive advance on the ¥27 trillion put forward in September by the Japanese Federation of Bankers' Associations.

There appears to be a welcome outbreak of honesty and action. Accompanying the...