Few Japanese have ever heard of Hirofumi Gomi and Takeshi Go Kimura. Yet in Tokyo banking circles, they are loathed and feared. Gomi is the head of the Financial Services Agency's inspection division. Kimura is a brash former Bank of Japan official who is president of KPMG Financial K.K. Co., the Japanese branch of the international accounting firm. No ordinary bean-counter, Kimura has the ear of Prime Minister Junichiro Koizumi. Together, Kimura and Gomi are triggering panic attacks among Tokyo's pinstriped set.
Why? Gomi's FSA, which oversees Japan's banks, has its 360-member inspection division conducting in-your-face examinations of the loan books of Japan's major banking groups, including giants such as Mizuho, Mitsubishi Tokyo, and Sumitomo Financial. In the past, such audits had the intensity of a croquet match. Nobody ever asked the obvious question: Are any of your biggest borrowers about to fall on their faces?
As a result, banks spent years glossing over the true extent of their problems. Many analysts suspect Japan's bad loans approach $1 trillion. The official estimate is $135 billion.
Few believed regulators had the guts to force the real numbers into the open. But they are now. In announcing results for the half year ended in September, Japan's top 13 banks tripled earlier projections of the bad debt they are holding. Top lender Mizuho says it will write off $16 billion in dud loans. In all, the top banks will set aside an additional $50 billion as reserves against nonperforming loans for the fiscal year ending in March.
CRACKING DOWN. This suggests the arm-twisting by Team Gomi is having an impact. And the fact that the auditors have the freedom to ask hard questions is due to some hard lobbying by Kimura. In private meetings with Koizumi and top Liberal Democratic Party brass, he argues that the banks need to take off the kid gloves when dealing with their major clients. Until the banks reveal the true value of their loans to the 30 or so biggest borrowers, he says, "they are avoiding reality."
The FSA auditors are providing that reality check. Since early November, they have spent hundreds of hours poring over the banks' own evaluations of borrowers' balance sheets. The goal is to flush out the bad loans, get them properly classified and provisioned, then start to crack down on chronic deadbeats. Already, the FSA figures that 15% of the loans at the top 10 banks need to be reclassified, which means declaring many "problem loans" as nonperforming.
With the FSA bloodhounds at work, the question is what Koizumi will do with the results. Opposition to the auditors' demands is building. Akira Kanno, vice-chairman of the Japanese Bankers Assn., argues it would be suicidal for banks to damage vital corporate relationships by cutting companies off at the knees. International Monetary Fund Asia-Pacific Director Kunio Saito calls such statements "an excuse for not taking action."
Koizumi, whose reform drive has foundered of late, needs the audits as political cover for an unpopular bailout of the banks. The agency likely to play the central role is the government's Resolution & Collection Corp. The RCC plans to issue bonds for as much as $100 billion that will be purchased by the Bank of Japan. The RCC will then use the proceeds to buy bank loans from lenders and come down hard on delinquent borrowers--either shutting them down or refinancing their debt on much more stringent terms. Hard-hit industries like construction may try to head off such action. But Koizumi's strategy, no doubt with advice from Gomi and Kimura, is clear: He knows that before the bankruptcies and mass layoffs can begin, the auditors have to reveal the true extent of the banking fiasco.
By Brian Bremner in Tokyo
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