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Japan's banking crisis:
Compromise
By Richard Hanson
TOKYO - Think of it as shareholders' meeting
turned soap opera. In an eleventh-hour drama, the
Japanese government late on Wednesday withdrew a threat
to castrate (in a financial sense) the wantonly
profligate management of most of nation's biggest
capital-short banks.
Instead, the government
will insist on more stringent controls on the financial
institutions that currently are unable to collect
payments from borrowers on at least 52 trillion yen
(US$423 billion) in bad loans (so-called non-performing
loans, NPLs for short). This pile of debt is growing
rapidly and poses a threat to the banking system and to
an already stagnant economy.
What the government
wanted to do is impose strict requirements on what can
be counted as bank capital - the prime measure of
financial health - by denying dubious accounting
practices involving tax policy. By forcing the banks to
be honest about their worth, the government would no
doubt force a large number of bad companies and some
banks out of business.
Coming from an energized,
reform-bent Prime Minister Junichiro Koizumi, the threat
was to be taken seriously. Koizumi represents the
government, which is the biggest shareholder in all but
one of the banks being targeted to clean up the
non-performing loan problems they helped create over the
past decade or so.
"This was a game of chicken,"
said one former central banker, referring to the
children's game where the first to blink loses. "The
compromise just means a slower death for the banks."
To emphasize how tense matters became, the board
of directors of the Bank of Japan (BOJ), the nation's
central bank, earlier on Wednesday, before a final
compromise was reached, approved measures that would
strengthen its ability to sop up the potential flow of
bank blood that would flow through the streets of
Nagatacho, Japan's political heartland.
BOJ
eased further its already ultra-loose grip on credit to
push money into an economy where growth is expected to
slow (put at 0.2-0.5 percent) later in the fiscal year
to next March.
For the past week, Koizumi and
his financial services minister, Heizo Takenaka,
appeared to be almost stage-managing the crisis that
gripped the media. The banks raised the specter of
having to cut back on loans and forcing companies out of
business if they were forced to accept stricter
standards for capital.
This is nonsense. What
they would face is a government willing in effect to
nationalize them if they could not meet basic standards
of financial health. The government in various forms is
already the largest shareholder in all but one of the
largest dozen banks. The government plan still includes
putting public money into banks that are failing, a
nationalization plan that was first used in the bank
crisis of 1999.
Koizumi and his backers -
including much of the business community - want a rapid
solution for the bad-loan problem. Koizumi has sent a
target of March 2005. He obviously wants to be still in
office to see the fruits of his policies that seek
reform of both public sector waste and a crippled
private financial sector.
What the government
proposes is a comprehensive "safety net" for companies
and workers that will be hurt by stricter controls over
banks and their lending. Japan's relatively low 5.4
percent unemployment rate is expected to rise
considerably. For the most part, these will make use of
existing or expanded government programs.
At the
moment, for Koizumi the only issue that weighs more
heavily on his mind is breakthrough talks begun in
September to normalize relations with a hostile North
Korea, which is now known to be developing nuclear
weapons.
That is a threat that the prime
minister cannot put off. But it is also clear that
prospect of a healthier of the economy - regardless of
the pain inflicted on Japan's banks - is still the best
deterrent from threats of all kinds. The shareholders
will probably agree.
(©2002 Asia Times Online
Co, Ltd. All rights reserved. Please contact content@atimes.com
for information on our sales and syndication policies.)
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