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Where's Koizumi's Plan B?


It was supposed to be a salve to soothe investors worried over the sickly Tokyo stock market. On June 26, the Japanese government unveiled its blueprint for a fund that will buy up chunks of the stock portfolios long held by Japan's banks. The proposal is part of a larger scheme to help the banks write off bad loans and meet stricter capital rules. But the proposed fund is so small and so riddled with inconsistencies that critics are calling it dead on arrival--and also possibly Prime Minister Junichiro Koizumi's first policy blunder.

The government first floated the idea of a stock-buying fund in March, before Koizumi was named Prime Minister. The target is bank stock portfolios that include shares of everything from blue chips such as Toyota Motor Corp. (TM) to dogs like Sogo Department Stores, which went bankrupt last year. The banks held these stocks both as investments and as a way to cement relationships with corporate clients, who often belonged to the same corporate group, or keiretsu. As long as Japan's economy boomed, the stocks were good investments. That was important, because under Japanese law, banks could count their stockholdings as part of their capital. Of course, if the stocks instead lost value, the banks risked violating capital adequacy rules.

SITTING ON LOSSES. Today, the Nikkei index is near a 16-year low and many of the banks are sitting on big stock losses. Moreover, as of this year banks have to declare the true market value of their portfolios every six months, which means these losses will come to light. So the banks have been steadily selling off their portfolios. Since 1998, their value has fallen by almost $300 billion.

Trouble is, the more the banks sell, the more the Nikkei drops--and the less the banks' remaining shares are worth. That undermines the banks' capital position just when more borrowers are defaulting on their bank loans. To top it off, by 2005 new rules will severely limit how much of its stockholdings a bank can declare as capital.

This is where the government's plan comes in. The ruling Liberal Democratic Party, with an eye toward upper-house elections in July, now wants to create a fund that will buy some of the banks' shareholdings, then hold them to put a floor under the Nikkei's slide. There's a model for the Japanese plan. In 1998, when speculators were hammering the Hong Kong market, the government there made a massive purchase of the stocks that constitute the Hang Seng Index. The authorities have since packaged those stocks into the successful Tracker Fund that sells shares to the public.

But Japan's fund will operate differently. For starters, the banks will run the fund, with government backing. To raise money to buy the stocks, member banks will chip in $81 million, then borrow up to $16 billion from other banks, with the government guaranteeing the debt. The bankers will also choose which stocks they want to sell to the fund. In five years, the stocks will be bundled into exchange-traded funds, each consisting of a selection of stocks, and sold to the public. The government hopes to close the company by 2012.

ALARMING. Sounds good--until you look closer. The main problem is that the fund is underpowered. To meet the new capital requirements by 2005, the banks must sell an additional $110 billion in stocks. Yet the fund will have barely $20 billion in financing to buy up shares. More alarming, the government will not force the banks to run the fund for profit. That means the banks can dump their worst stocks into the fund and wait to get much higher prices on the open market for their shares in blue chips such as Honda (HMC), Toyota, and Sony (SNE). "It's going to be a graveyard for the worst equities in Japan and almost guaranteed to lose money," says Marshall Gittler, a strategist at Bank of America in Tokyo. If the fund can't pay back the billions it borrows, the government--meaning taxpayers--will have to pick up the tab.

This sure doesn't look like the kind of deft policymaking that Koizumi has pledged to carry out. The prime minister's backers say the plan is needed to stabilize the market while broader reform efforts take place. Critics say Koizumi has abandoned his tough-love reform campaign to appease conservatives in the party. "I told Koizumi that setting up the stock-buying plan contradicts [his goal of achieving] structural reform," says Yasuhisa Shiozaki, an LDP lower-house representative. Instead, says Shiozaki, the fund is destined to turn into a money pit. And Japan already has plenty of those. By Ken Belson in Tokyo


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