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Japan's banking crisis: Capital
crimes
By Richard Hanson
Previously: It's
macho time in bad loan land
"The
banks say they have healthy amounts of capital. Too bad
much of it doesn't exist." - Asahi Shimbun headline
TOKYO - The problem was vexing.
How to
pump money the government didn't have (call it capital)
into a dysfunctional financial system (loosely made up
of a tiny group of banks), where only sharp-eyed
moneylenders profited from a crisis-ridden,
government-dominated economy? The trick was to dispose
also of the financial problems of politically powerful
and utterly broke segment of the economy - without
sparking open armed rebellion.
The crisis
sketched above actually was faced in the mid-1870s when
early Meiji's dominating leaders, such as Toshimichi
Okubo (considered Japan's first modern prime minister)
and his sidekick the brilliant Masayoshi Matsukata (the
father of Japanese banking), had massive problems.
For one thing the government didn't have enough
tax revenue and was in debt to foreigners, while a
fledgling banking system was chronically short of
capital to lend. The government couldn't afford to
support the disfranchised 5 percent of the population
known as samurai.
In the scheme of things, Okubo
ordered his jack-of-all-trades Matsukata to solve the
problem (government was small in those days). The
solution was to pay off samurai with almost worthless
government bonds that, however, could be used to invest
in the capitalizing (up to about 70 percent) of new
national banks. Lickety-split, the government from
1877-80 created 193 banks.
That explains a
couple things.
First, why there are still a lot
of banks around Japan with rather large numbers for
names. And why Japan's banking system is still
desperately dependent on government for survival. When
needed, they served government economic policy - Meiji
nation-building, imperial war-making, rebuilding after
defeat in war. You name it.
With a bit of
imagination, one might see in these historic shadows the
ghosts of the same problem in today's banking industry.
These are the same ones that that have become - along
with sweeping reform measures - the top economic and
political priority for the newly reshuffled cabinet of
Prime Minister Junichiro Koizumi, 60. Most attention in
that cabinet is focused on Dr Heizo Takenaka, 51, for
solutions to the banking problem.
In the new
cabinet, Takenaka assumed the dual posts of financial
services minister, ruling over the Financial Services
Agency (FSA), and state minister in charge of economic
and fiscal policy and information technology.
The political logic is that Takenaka, who came
from the academic world, agrees with Koizumi and others
who think that government urgently needs to resolve the
banking problem even if it involves putting public money
into banks to give them enough capital to stay in
business. The previous head of the FSA, Hakuo
Yanagisawa, an elected member of the Diet (parliament),
disagreed and was dropped.
What is being talked
about is in reality the takeover of control of the
capital, hence ownership, of some banks that will
otherwise fail. How to distinguish between a bank that
is not worth saving and one that can emerge as a strong
bank is a tough call. In the late 1990s, the government
used government-backed capital in effect to nationalize
several banks.
Last week, Takenaka formed a task
force to come up with a policy to address the bank
problem by the end of October. On the task force are
known hardliners who favor harsh measures toward the
banks with the worst problems. This has drawn mixed
reactions from critics in political circles and the
media. After sniffing bank blood in the streets, the
Tokyo stock market let its opinion known by sending
stock prices plummeting to values last seen in the early
1980s.
The prospect of tough steps drew praise
from senior economic officials in the US administration
of President George W Bush. That is of some value, but
Koizumi at the moment is not playing to the US audience.
He in fact has bolstered his standing in domestic public
opinion for his own initiatives in opening a window on
relations with North Korea, which has led to a partial
breakthrough in the emotional issue of Japanese
kidnapped many years ago by North Korean agents.
Politically, the banking dilemma that Koizumi
currently is wrestling with is a different beast
altogether.
What do you do with Japan's 135
banks - referred to by the Bank of Japan as "All Banks"
- that are collectively bankrupt because they can't
collect debts from loans to the some of the biggest
companies in land?
These corporate customers
borrowed money freely in speculative times, most
spectacularly in the late 1980s when the price of
stocks, land and other assets rose manifold. Of course,
these prices fell with just as much drama, leaving all
manner of bad judgment and ill-gotten gain exposed (see
Value of Zero, Part 2:
Uncharted territory: Bubble to bust).
This is a common enough story. Japan's
approach to the problem initially was not unique: denial
and a lack of political initiative in the early stages
to force a sensible reckoning while the numbers were
still manageable. That failure forever stains Japan's
behavior in the early 1990s as a crime against the
simple logic of what capital is.
You have to
have capital as wealth or you accumulate from earning
more wealth. In international banking parlance, this is
referred to as maintaining an adequate capital ratio
versus your liabilities. When Japan's banking system
seemed impregnable in the 1980s, Japan negotiated
special treatment for some oddball measures of capital.
One in particular lets banks count a percentage of
capital gains (profits) they might have if they sold
their vast stock holdings (these were held on their
ledgers at the price they bought them).
Since
the Tokyo stock market crash that began on December 29,
1989, those hidden gains have vanished. What the Bank of
Japan, the central bank, now admits publicly is that the
bad loans that banks have made to companies are no
longer related to speculative stock and property
bubbles, but rather to ongoing support through loans to
companies in deep financial trouble. The term "zombie"
has become a popular description for such companies.
They are very hard to exorcise. A lot of pain will be
inflicted on a wide swath of constituencies when they
are forced out of business.
There seems to be a
consensus that the Japanese electorate, after years of
relative prosperity, has developed a low threshold for
pain. Bankers, who have been pampered in their role as
wards of the state, are seen as particularly spoiled.
This wimp factor is bound to figure in how dramatically
the Koizumi government might be able to move in coming
weeks. The Diet convenes again this week. Meanwhile, the
election campaigns for a number of important vacant Diet
seats began this week. Voters usually don't vote for
pain.
But in banking as in life, the numbers
sometimes can't be ignored. This is, after all, a test
of the resilience of the second-largest economy in the
world.
The problem is simple. Most banks can't
make enough money (defined as capital) to pay their
bills. They lent the money to companies than can't pay
it back. Over the past decade, Japanese banks are
estimated to have written off 90 trillion yen (US$725
billion) in bad loans. The estimates for what they still
have to write off are unreliable because of how they are
calculated. The number could be anything from 50
trillion yen to three times that. These numbers are no
comfort to anyone.
Bankers look at more
specialized numbers. The top four banking groups all
report a capital adequacy ratio over 10 percent, which
is well above current international guidelines. But
these ratios include a number of factors that should not
in truth be counted as capital. They have been the
recipients of very large amounts of capital from the
public coffer already. This includes counting assets
related to taxes they have deferred. The government
became the single largest shareholder in most major
Japanese bank groups (34.35 percent ownership of the top
seven groups). This increased rapidly in the 1990s when
banks were being nationalized and then sold to investors
including foreigners. (That is one pattern that is
likely to be seen again in the near future, when large
infusions of capital are again going to be needed.)
The current lower end for capital adequacy
agreed to by the Bank for International Settlements
(BIS) is 8 percent. The standards will be tightened up
further by March 2004. Among those seven groups, the
average "adjusted" capital adequacy ratio is 0.95
percent, with two groups posting negative numbers,
according to JP Morgan.
The strongest group,
capital-wise, is Sumitomo Mitsui Banking Corp, with an
adjusted ratio of 3.56 percent (unadjusted it is 10.45
percent). The biggest bank, Mizuho Financial Group, has
an adjusted ratio of 0.61 percent (unadjusted at 10.56
percent). Mizuho damaged public confidence in these
newly formed mega-bank groups that began operating this
year with a series of computer-related mishaps in April
when the public was already nervous over the safety of
their savings.
It goes without saying that the
future health of the financial sector in the
second-largest economy in the world is important. That
it is in any doubt at all is probably the most serious
nightmare scenario any writer can imagine.
In
the Meiji era the balance of success held the key to
Japan's emergence as a global power. In that sense, the
gambles of an Okubo or Matsukata paid off. There are no
direct parallels to Japan of 2002. Personalities do
count, however. Takenaka is unlikely to match the
cunning and perseverance of a Matsukata.
Koizumi
will need some of the bravery of an Okubo, whose
impressive grave is located in the central Tokyo
cemetery, Aoyama Bochi. Okubo was buried there after
former samurai, no doubt disgruntled by the reforms of
the day, assassinated him.
(©2002 Asia Times
Online Co, Ltd. All rights reserved. Please contact
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