Truth or Dare in Japan

Upwards of $1.5 trillion in bad debt hangs over banks in the world's second-largest economy. For nearly a decade, Japan has tried to wish away that beast of burden by stimulating growth.

It hasn't worked. Japan's bubbling crisis still threatens a global financial crash, even as the bad loans make banks reluctant investors in Japan.

Now a new government economic czar, Heizo Takenaka, is starting to play American-style hardball by forcing banks to clean up their portfolios. He says banks are lying about the extent of bad loans and hints at a government takeover, which has sent bank stocks to the basement.

That's why Japan's seven biggest lenders Monday started to come clean about fixing the problem. The shame of nationalization would be too great. For the world's largest bank, Misuho, salary cuts and layoffs are expected at a time of record unemployment in Japan. Such a step in a country strongly averse to layoffs shows just how serious the crisis is.

A plan for wholesale bank reform recently was blocked by powerful politicians with ties to the banks. So Mr. Takenaka, backed by reformist Prime Minister Junichiro Koizumi, must now take a piecemeal approach.

A threat of nationalization may serve its purpose. Nationalization itself would shock Japan Inc. and likely wean it from many old practices that simply don't work in today's fluid global financial markets.