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International Business: JAPAN
BANK ALARMS ARE BLARING
Across Japan's banking terrain, land mines are exploding. Depositors are yanking their money out of weakened lenders. The $155 billion housing-loan industry--the Japanese version of America's thrifts--is virtually insolvent. And the plunging stock market, off 27% this year and 65% since its 1989 peak, has erased the value of equity portfolios that big banks hoped would help defray the cost of write-offs on huge quantities of bad and restructured loans. Even the Ministry of Finance (MOF), which spent years cloaking the financial system's fragility, is visibly more concerned. Among smaller players, at least, "we will see a few bank failures," says Fuji Research Institute Chairman Toru Kisukawa.
So, are MOF's influential bureaucrats finally dipping into Japan's $19.6 trillion in financial assets to pay for a massive bailout of the nation's troubled lenders? Well, sort of. An estimated $1 trillion in bad or barely performing loans--the equivalent of 20% of Japanese gross domestic product--now burden lenders' books. And as the banking crisis has deepened, the possible framework of a far-reaching, government-financed program to refloat, merge, or restructure scores of troubled banks and housing lenders is starting to emerge.
SELLING WAVE. The rescue effort could involve new tax breaks on loan write-downs, direct infusions of government cash, and the sale of at least $85 billion in government bonds to finance relief. But the plan apparently isn't ready for prime time. MOF's June 8 announcement of an emergency banking package, while drawing parallels between the current financial mess and the great Showa banking panic of the late 1920s, in the end contained little substance. "They've put nothing concrete on the table," says one disgruntled senior banking analyst.
MOF's failure to come up with a firm plan touched off a selling wave among local life insurers and other investors, who hammered the Nikkei stock average down 7%. That left the Nikkei stock average below 15,000 for the first time since 1992. It's no wonder they're selling. MOF Vice-Minister Kyosuke Shinozawa told parliament on June 12 that the ministry would not use Postal Savings System and public pension money to boost the stock market--as it did during 1993--to give banks time to clean up their act.
MOF is reluctant to provide further help right now for several reasons. Yen-pinching tax bureau officials--worried about the cost of rebuilding earthquake-shattered Kobe, declining government revenues, and the future needs of an aging population--are fighting against opening the public purse to the banks. And bankers themselves remain hugely unpopular for reckless lending in the 1980s that sent property prices spiraling out of many consumers' reach. What's more, MOF and the Bank of Japan walked right into a scandal last December when they attempted a $2 billion bailout of two shady Tokyo credit cooperatives with political ties. "There is now no distinction made between rescuing corrupt managers and rescuing the entire financial system," admits Kengo Inoue, the central bank's deputy director of research and statistics.
Public contempt for bankers hasn't made it any easier for Prime Minister Tomiichi Murayama's wobbly coalition to muster the political backing for a quick cleanup. But a cleanup remains necessary if banks are to resume lending and help lift Japan out of its economic doldrums. That's why analysts think MOF may be ready to let the stock market crash to convince the public once and for all to support a publicly funded banking rescue.
To be sure, a stock market collapse would pose dangers for bourses worldwide if Japanese investors start dumping assets overseas to cover mounting losses at home. A collapse would also breed more price deflation, even slower growth, and new pressures on the banking system if it were not followed quickly by a financial aid package.
Well aware of these risks, MOF may have to come up with $100 billion in aid to get its rescue plan going, estimates UBS Securities analyst Yukiko Ohara. Japan can certainly afford that much. The Postal Savings System alone has $2.36 trillion in deposits, while the Bank of Japan's cash reserves and government bond holdings exceed $747 billion. What's more, as the economy has slowed, worried consumers have been salting away more of their incomes. The savings rate among salaried households has jumped to 30% recently. That's twice the rate for the nation as a whole.
But tapping public savings won't be easy. Raiding the Postal Savings System would cause a public stir unless the government were able to win parliamentary approval for such a drastic move. And much of Japan's private savings are already tied up in stocks and bonds. Unless the Bank of Japan made certain that short-term rates stayed low, selling large sums of new government debt would probably push long-term interest rates up and tank the stock and bond markets. Indeed, analysts are betting that the central bank will have to start printing more money. It may cut its discount rate, already at a record-low 1%. And under legislation passed during a stock market crash three decades ago, the central bank has carte blanche to turn on its money spigot to help lenders.
In fact, financial authorities are preparing for some heavy lifting. Their first line of attack will be to shore up housing-loan companies--called jusen--which were set up in the 1970s to supply credit to homeowners. After a disastrous lending spree to golf-course and condo developers in the late 1980s, roughly 50% of the industry's $136 billion loan portfolio is now under water, figures J. Brian Waterhouse, a senior analyst with James Capel Pacific Ltd.
UNTHINKABLE. Any failures among the eight jusen would damage banks that are major shareholders and lenders to the industry. They include Sanwa Bank, Sumitomo Bank, Dai-Ichi Kangyo Bank, and Long-Term Credit Bank of Japan. Japan's 2,700 agricultural cooperatives have themselves lent $65 billion to jusen. The prospect of Japanese farmers, a big political constituency, losing their shirts is unthinkable in Japan. At least $40 billion in public money will be needed just to stabilize this sector, says Baring Securities (Japan) Ltd. analyst James P. Fiorillo. Bankers figure that bad co-op debts would be transferred to a vehicle like the Resolution Trust Corp. that would be funded by public money and Bank of Japan loans. Loans with any possible value might be repackaged into government-guaranteed bonds to be sold to the public.
The real trick for financial mandarins will be restarting the moribund real estate market, where commercial property prices have fallen 50% since 1991. But until Japanese leaders summon the will and the cash to get serious, the property market and the entire financial system will continue to sink. Unless a rescue plan gels soon, Japanese lenders, and perhaps global stock markets as well, could face some scary times.
THE PRESSURE POINTS IN JAPAN'S FINANCIAL SYSTEM
HOUSING LOAN CORPORATIONS With funding from banks and agricultural cooperatives, these companies--called jusen--made $136 billion in real estate loans. Half those loans are now unrecoverable. As many as seven of the eight housing loan companies are struggling to survive, and the co-ops will need $40 billion to stay afloat. The money could come from government bond sales.
LARGE BANKS The top 21 lenders are lobbying the Ministry of Finance for huge tax breaks on loan-loss provisions. They also want low-interest loans from the Bank of Japan to cover the cost of taking over weaker players.
SMALL BANKS Analysts figure $100 billion is needed to shore up the capital base of smaller banks in danger of failing. Funds would come from the government and Bank of Japan.
REAL ESTATE With commercial real estate prices down 50% from their 1991 peak, the government may have to start buying land to restart the property market.
DATA: BUSINESS WEEKBy Brian Bremner in Tokyo