JAPAN: Close Look at Tokyo’s Get-Tough Financial Cures

By Suvendrini Kakuchi Reprint | | Print |

Suvendrini Kakuchi

TOKYO, Dec 20 1998 (IPS) - The Japanese government’s recent nationalisation of a major bank and move to step up monitoring of financial institutions signals what experts hope is a more aggressive policy to set right the shaky financial system.

So far, the government has been making positive gestures. Soon after it nationalised the debt-ridden Nippon Credit Bank on Dec 13, Tokyo launched the Financial Revitalisation Commission (FRC), an independent watchdog for financial administration.

The commission’s function will be to take over management of bankrupt financial institutions and to screen the injection of public funds into those institutions.

In Japan’s view, the commission will be the main driving force toward strengthening of financial management in order to force an economic recovery at home. It will have the right to punish any bank that does not meet capital adequacy requirements.

Finance Minister Kiichi Miyazawa, a former finance ministry official, called the new system a “sign of change” in Japan.

“We have realised that Japan’s old system, termed a convoy, (when everybody pitched in to stabilise an institution) is not working,” he told journalists this week.

Nippon Credit Bank is one of Japan’s three long-term credit banks financial responsible for financing the nation’s postwar industrial success. Its takeover by the government comes after the nationalisation on Oct 23 of Long Term Credit Bank Ltd of Japan.

The takeovers are being observed closely outside Japan, because Japanese banks are major players overseas and a spate of banking failures here could easily destabilise already nervous markets.

Indeed, the announcement of Nippon’s nationalisation was made on a Sunday, when global markets were closed, to avoid causing harmful aftershocks overseas.

Japanese banks, also weakened by huge exposure in troubled Asian economies, are estimated to have some 600 billion in bad loans. They are not being repaid because the country is mired in recession that has shrunk the economy by 2.6 percent in the last quarter.

“Whether the decision will lead to a recovery in the economic recession is too soon to predict,” commented Takashi Miwa, a researcher at Nomura Research Institute after news of Nippon Bank’s nationalisation was reported.

“But there is no doubt that the government has sent an important message to the world and at home, that it is finally ready to deal with the huge debt carried by Japanese banks that was at the core of our economic stagnation,” added Miwa.

NCB, established in 1957 to fund long-term real estate development, has been saddled with bad loans that amounted to almost 40 percent of its lending.

Despite injections of public money and help from the Bank of Japan during the past two years, Nippon bank failed to indicate it was in control of its non-performing loans.

As a result, under the new Financial Rehabilitation Law established in October, the Japanese government moved in and ordered the nationalisation of the bank.

The government will order a new management to write off Nippon bank’s bad debt and supply public funds to cover its losses. The new management will then try to resuscitate the ailing bank by selling off its better assets and keeping the bank running. Depositors will be protected, according to the government.

Hakuo Yanagisawa, minister of financial reconstruction, a post created with the new law, said it took so long for Tokyo to come to a decision because “the banking inspection system at that time was substantially different from today’s”.

Beyond the specifics of nationalisation cases, the Financial Reconstruction Commission marks a break with the tradition of cozy relations between the banks and Japanese regulators.

Nippon Credit Bank, for example, is reported to have hid huge amounts of bad loans in dummy companies and intentionally projected optimistic outlooks under the nose of Finance Ministry officials.

Analysts also point out that the major difference shown by the nationalisation of Nippon Credit Bank was the fact it was the government — not the market or the bank — that decided to come into the picture.

“The unusual step was taken because NCB’s write-offs were proceeding at a snail pace. There was no buying time any more for Japan and the government stepped in, a system that we can see happening in the future,” said Miwa.

To show how serious its financial reforms are, the Japanese government has set aside a 520 billion dollar fund to support this intervention scheme. The fund would be held till 2001, the year that Tokyo aims to complete a clean-up of the financial system.

However, Miwa says while the nationalisation scheme must be seen positively, there are other consequences that are of concern.

A major worry for Japanese banks that appear unhappy with the latest nationalisation is a loss of investor confidence, since many now worry about where they should save their money and wonder when the next bank will be declared bankrupt.

As it is, speculation is rife that banks have not been revealing their exact losses on non-performing loans. The new system of financial monitoring forces banks to announce their share of bad loans when applying for public money to bail them out.

News reports have singled out two major private banks — Daiwa Bank and Yasuda Trust — as among those expected to appeal for the infusion of public funds after revealing massive losses due to speculative investment.

Likewise, trouble in the banking sector will squeeze credit in the new year as banks rush to cut down on spending and try to appear creditworthy. This will throw cold water on future increases in corporate investment and growth, analysts say.

“Against this new harsh environment, next year is not going to a recovery year as some government officials are predicting. Instead we can expect even higher unemployment due to major corporate restructuring and bank collapses,” said Yoshiaki Kano, an economist.

Miyazawa himself says unemployment may hit a record 4.3 percent next year, although he believes economic woes have bottomed out.