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It's macho time in bad loan
land
By Richard Hanson
TOKYO
- C19H28O2! These days this macho male chemical may
be the key to understanding Japan's current economic and
financial problems and may even point the way to any
solutions forthcoming in the next few weeks.
As
far as markets are concerned, somebody better be quick
about finding out if they will work before the last
gnome, with a testosterone deficiency, is asked to turn
off the lights and lock the doors of the Tokyo Stock
Exchange (TSE) and the Bank of Japan (BOJ).
That
won't happen, but the markets don't know that.
Consider this. The price of stocks on Monday in
Tokyo fell to the lowest level seen in 12 years. Prices
have been doing that often in recent days. And investors
can take comfort in a thinking about focus that goes
back just a little over a decade, when the price of
stocks, land and about everything else (government
exempted) began to fall precipitously.
Reality
is that another few hop-skip-and-jumps and the TSE index
will be remembering the second oil crisis and the
still-golden era of the early 1980s when Japan still
could rev up some of its enormous resilience as an
economy. The numbers for the future showed a return to
some form of postwar expansion.
That is no
longer necessarily the case, or, at the very least,
there are no illusions that growth can be achieved
without solving some very big problems.
Start
with the banks. They produce a number that has become
the most visible Public Enemy No 1 of the past decade
(apart from economic growth or foreign-exchange
projections). In numbers there is comfort. So the
government has reduced the bank problem to a very large
number - 52 trillion yen (US$418 billion), or a rising
multiple, say three times, of that number.
These
are loans that will never be repaid. Only powerful
people (men and women) understand a slippery number like
that. Many of these are bankers who have lost a very,
very large amount of the money that was entrusted to
them by ordinary people (known as savers). These are
called bad loans, or more theatrically non-performing
loans (NPLs).
The reason the people of Argentina
do not see on their televisions Japanese citizens
rioting on the streets is that the Japanese government
has tried to protect both banks and savers from the
truth. So nobody knows how much of assumed value held by
the banks is worth zero.
One reason is simple.
The government has very limited resources to figure it
out. This is the job of the Financial Services Agency
(FSA), created in the late 1990s to take over the
functions of the "old" Ministry of Finance. The FSA is
understaffed on the inspection side.
And for a
very young bureaucratic institution it may have been a
tad overconfident about its regulatory methods and
prowess as an institution. One example is choosing
between really black bad loans and a gray bad loan. (A
famous American patriot named Benjamin Franklin once
remarked on such subtleties with a feline allusion: "At
night, all cats are gray.")
The result has been
a decade of estimates of bad loans that continued to
rise against a false premise that economic measures
might swing the problem around. For the banking industry
this has meant leaping from one crisis to another.
In the mid-1990s, the government was forced to
abandon a policy of zero failures by banks, a bad
hangover from the wartime and postwar periods. The
government created a mechanism to utilize public funds
to bury banks, including nationalizing one of them,
which was later bought by a syndicate with foreign
capital.
What Japan now faces is the big crisis.
There have been small steps taken in recent days to
signal how serious the crisis will become.
The
Bank of Japan will purchase amounts of stocks that are
held by big banks to infuse them with more capital. An
unknown number of big Japanese banks will be hard put to
meet international capital-adequacy measures drawn up by
the central bankers' bank, the Bank for International
Settlement (BIS), which come into force in 2004.
The Bank of Japan, from the governor on down, in
the past year concluded that even the realization in the
past two years of the completion mergers creating four
mega-bank groups has not stabilized the industry.
To be sure, there are stronger bank groups. But
they must live with the reality that Japan's credit
rating overall has deteriorated. Since the late 1990s,
this includes a gradual downgrading of the government's
own debt issues. Japan Government Bonds (JGBs) carry a
rating that put them at the lowest ranking among their
peers in the Group of Seven industrialized nations.
"We realized that the banks became much larger,
but they cannot produce the revenues and profits to
sustain their bad loans," says one senior central
banker. The only viable solution is some form of
nationalization by using public funds that have already
been earmarked for such an event.
Over the next
couple weeks, the government will weigh its options.
There is an emergency fund on the books, and
institutions already in place, that that could provide
trillions of yen in capital infusions.
Ironically, the greatest resistance to any
government plans will come from the bankers themselves.
They have good reason to be afraid. Their jobs are on
the line.
To seek help, which the current
regulations require, means that a bank is admitting it
has failed and an inevitable disclosure of the ugly
truths behind its failures. A less system-threatening
failure of a group of housing-loan institutions in the
1990s, the so-called Jusen, ruined many a career and
tainted the political world for its unseemly relations
to bad people. Japanese banks have loans linked to
gangster problems.
The repercussions of unseemly
disclosures, it is feared, could undermine banks that
the government chooses to give infusions of capital. One
simple means would be for banks to issue preferred
shares to be bought by a government institution. All
this will not sit well with bank customers, who have a
right to ask hard questions about why a land reputed as
frugal and fastidious can't clean up decades of lousy
banking and incompetent bank regulators.
That is
why the final solution, if there is to be one, will
depend heavily on Prime Minister Junichiro Koizumi, 60,
who is revving up for the next Diet (parliament)
session, which starts on October 18, and is overdosing
on the afterglow of forming his second cabinet last
week. This will be the test of his C19H28O2.
It has spread to his key
economic ministers. Hit hard is Heizo Takenaka, 51,
minister of economic, fiscal and financial policy. He is
in charge of everything that Masajuro Shiokawa, 80,
finance minister, is not in charge of. That is heady
stuff even with a normal testosterone level. And it is
his turn to show that he can do a better job than his
predecessor, Hakuo Yanagisawa, who lost his job as
financial czar over the issue of providing banks with
public funds.
In the next couple weeks, Takenaka
will lead a newly formed task force to provide the prime
minister with a plan. Whatever the government proposes
will run into opposition. That is when the markets will
reveal their own levels of testosterone.
(©2002
Asia Times Online Co, Ltd. All rights reserved. Please
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