Japan's Banks: Immune to Subprime Pain?

So far, Japanese banks have escaped practically unscathed from the subprime tsunami, but skeptics believe they just haven't 'fessed up yet

Pedestrians walk past a branch of Japan's mega bank, Bank of Tokyo-Mitsubishi UFJ. AFP/Getty Images

by Ian Rowley

While banks in the U.S. and Europe are writing down billions of dollars in subprime losses, Japanese banks have been surprisingly stable. Japan's banking industry, hammered by the collapse of the nation's real estate bubble in the early 1990s, have not reported gigantic losses related to the collapse of the American real estate bubble of the mid-2000s. That's prompted some analysts to ask, Is it possible Japan's banks really do have relatively little exposure to the subprime tsunami that is wiping out billions in earnings at the likes of UBS (UBS), Merrill Lynch (MER), and Citigroup (C)?

Chief among the skeptics is Hans Redeker, currency chief at BNP Paribas (BNPP.PA). In a research note to clients early this month, he warned that Japan may be hiding billions of dollars in subprime losses that so far no one has admitted to owning. His argument is simple: Japan, as the world's largest creditor nation, plays a central role in pumping global liquidity, aided by its ultra-low interest rates. But its biggest banks, which include "megabanks" Mitsubishi UFJ Financial Group (MTU), Mizuho Financial Group (MFG), and Sumitomo Mitsui Financial Group (8316.T), have admitted to only $5 billion or so of subprime-related losses, a remarkably small figure considering the losses at American and European banks already run to more than $130 billion.

What's more, with some estimates putting the total subprime black hole at $400 billion to $500 billion, somebody somewhere could be sitting on $300 billion of subprime losses. Japan, in Redeker's view, is a suspect. "We think this is where the next big problem is going to pop up," he told Britain's Daily Telegraph newspaper, echoing comments he made in a research note to clients Feb. 1.

So Far, the Numbers Don't Look Bad

Japan's banks, backed by government data, insist that he's wrong. The Ministry of Finance reported Feb. 13 that Japanese institutions' total holdings of subprime investments at the end of December was $13.8 billion, an increase from $12.9 billion in September. Subprime losses, meanwhile, doubled to $5.6 billion during the same period. That's a tiny sum by global standards.

Indeed, for the big three banks, the numbers don't look especially damaging. Mitsubishi UFJ (MUFG), the world's biggest bank by assets, projects that for the year ending Mar. 30, its full-year subprime losses will be just $880 million, up from $510 million for the nine months ended December. "There is nothing to hide," a spokesman said in an e-mail to BusinessWeek. "We don't understand at all why they expect subprime-related losses of $300 billion [should be linked] to the Japanese banks."

No. 2 lender Mizuho says its subprime losses for the full year will increase to $3.7 billion after its securities arm ran up losses in the U.S. Mizuho also expects its net earnings to slip 24%, to $4.4 billion. Sumitomo Mitsui (SMFG), the third of the megabanks, projects its subprime losses for the financial year ending in March will run to $920 million, unchanged from December.

Tougher Reporting Requirements

Putting those numbers into context, Switzerland's UBS has written off $18.4 billion in subprime losses. Citigroup and Merrill Lynch have written off $18 billion and $14 billion, respectively. Clearly, it would take a huge turn of events for Japan to suddenly become the next subprime flash point. "I do not think Japanese banks have large subprime exposures," says Naoko Nemoto, managing director of Financial Service Ratings at Standard & Poor's in Tokyo. (S&P, like BusinessWeek, is owned by The McGraw-Hill Companies (MHP).)