NEWSWEEK: Your new post has been called “high-risk, high- reward.” Agree?

TAKENAKA: If we expect high return in the economy, the government also should take some risk. Since I used to be a university professor, I’d like to use an economic term: the cost of adjustment. Liquidity will be needed. As factors of production like capital, labor and technology move to other areas, friction will occur. But through this process the potential power of our economy will increase.

Do those costs include forcing some large companies into bankruptcy?

In all market economies bad companies disappear. I do not deny this basic principle. But from a policymaker’s point of view it is quite important to reduce adjustment costs. If a poor-performing company still exists for some special reason, the government will accelerate the speed of market adjustment and provide a safety net.

Mergers have left Japan with four megabanks. Are they too big to fail?

Big banks have their merits. They enjoy economies of scale, which can strengthen their financial base. But we do not hold the idea that they are too big to fail. That would jeopardize good corporate governance and create moral hazard.

Are average Japanese aware enough of their country’s financial situation?

We’ve held a lot of so-called town meetings. Honestly, I’ve been surprised and impressed to find that people are well informed and have a sound attitude toward our economic and social problems. In that sense I believe in the will and ability of the Japanese people.

Experts are divided on whether stocks are falling because buyers fear reform won’t come, or will come. How should we read the market?

The government will be criticized whether it takes no action, or drastic action. But in the long run the market is searching for the right answer. Consider the case of Sweden. In the early 1990s the government injected capital [into the banks]. This was the right answer, but stock prices continued to decline. Then the government increased the size of the injections, but still stocks went down. Only a year later did stock prices finally start to rebound. So we need to be a little bit patient.

Korea responded to its crisis by nationalizing banks and finding new managers. Should Japan consider such measures?

We have to study the experiences of Korea, Sweden and the United States.

Last month the Bank of Japan announced that it would purchase stocks held by banks to help them fix up their balance sheets. Good or bad policy?

Honestly, when I first heard the news I was very surprised. I did not expect this twisted policy. The BOJ was sending a very important signal to the government that Japan’s banking sector is damaged. The message was that now is the time for the government to take decisive action. This must be my job.

Experts say you’ve got six months to show results. Are you racing the clock?

How do we measure progress? GDP growth? Stock prices? As I mentioned, it could be some time before we see results reflected in the economic indicators, and in that sense we need to be patient. We in government have to show to the market a very resolute attitude to solve this problem. I expect markets to react positively.

How will you respond should CEOs at major banks resist efforts to clean up the bad loans?

This is not resistance. It is the formal positions of the banks. It is important to expect CEOs not to say things like “our banks are bad.” We have to provide an incentive scheme to change the system. We will continue discussions with bank CEOs about providing incentives to [reform].