11/10/97 COMMENTARY: IS JAPAN AT THE BRINK, TOO?

COMMENTARY: IS JAPAN AT THE BRINK, TOO?

Imagine this: Japan, humbled by recession and a stock market crash, its weakened banks facing a new wave of bad loans across Asia, goes to the International Monetary Fund, hat in hand, for a bailout. Rather than dump its $291 billion in U.S. Treasury bonds and roil global markets even further, the Japanese use the bonds as collateral for a huge emergency loan. That may sound preposterous for a country as wealthy as Japan. Nevertheless, that's a rumor that made its way around Wall Street as global stock markets crashed on Oct. 27.
That traders are even thinking Japan would seek help to refloat its troubled economy says a lot about the anxiety level on markets. The rumor also says something about Tokyo's global image. After years of promises to reform its economy and get off the ground, Japan is flirting with recession again. Its international economic policy is so directionless that Tokyo lacked the clout to lead a bailout of Thailand, the epicenter of Asia's currency crisis. Its financial system is in such shambles that the survival of some big players is questionable.
DITHERING. This really matters to the rest of the globe. With growth slowing in Asia and threatening to cool in America, the world needs Japan's $5 trillion economy to pick up any slack. But instead of addressing its woes head-on, Japan is dithering. Take the problem of hundreds of billions of dollars' worth of outstanding bad loans stretching back to the bubble economy of the 1980s. Japanese authorities hoped that banks would use time and low interest rates, instead of massive asset sales and restructuring, to heal balance sheets. But James Fiorillo, an analyst at ING Baring Securities (Japan) Ltd., observes that bad loans have actually soared 18% since March as bankruptcies have surged. And the Tokyo Stock Exchange's 18% decline since summer now threatens to leave some lenders without capital to lend.
After a week of wild gyrations in concert with world markets, the Nikkei stock average remains around 16,900. If it should slip much below 16,000, major global lenders such as Fuji Bank, Asahi Bank, and Chuo Trust & Banking would face big losses on their portfolios of corporate stock. They count the value of this stock toward capital, and such a drop could leave them perilously close to internationally agreed-upon minimum levels. Should the Nikkei plunge to 14,000, Japan's 20 biggest lenders would face some $96 billion in portfolio losses. Such a drop could shut down bank lending at home, sending the economy into a downward spiral. As it is, gross domestic product may grow only 1% this year.
Banks are also facing jitters over how vulnerable their $265 billion in Asian loans and bank deposits will be in the face of a protracted regional slowdown. In Hong Kong, where a deflationary property bust is possible, lenders have $87 billion at risk. That helps explain the sell-off in bank stocks in Tokyo on Oct. 27, the day Hong Kong shares plunged.
Japanese insurers are also on the brink. UBS Securities Ltd. strategist Neil Rogers figures that at the Nikkei's current level, five of the nation's biggest life insurers have seen the market value of their stock portfolios fall below book value. That's making it nearly impossible for them to make dividend payments and returns promised to policy-holders. Rogers thinks one or two could collapse.
Clearly, someone needs to do something in a hurry to get Japan out of its paralysis. So what is Prime Minister Ryutaro Hashimoto's response? Instead of broad tax cuts and other strong moves, all he can muster are modest cuts in levies on property deals and corporate income, plus vague vows to promote satellite broadcasting and liberalize trucking rates. Hashimoto has done a better job pushing his planned ''Big Bang'' liberalization of Tokyo's financial markets. But the economy won't pull up until sweeping measures are in place to deregulate retailing, transportation, and construction as well.
Perhaps if the Nikkei really went into a free fall, the government would abandon its austerity measures and move to restore confidence. But right now, politicians and bureaucrats are fiddling while Japan freezes. For their own good and the rest of the world's, the Japanese need to remember that the big chill could extend far beyond their shores.
By Brian Bremner & Emily Thornton