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Ripples from a Japanese bank
collapse
By Hussain Khan
TOKYO - The Japanese government's November 30
decision to nationalize the insolvent Ashikaga banking
group has surprised investors who had expected a
Resona-style bailout - in which shareholders weren't
forced to take a haircut for the mess. The move means
that Ashikaga shareholders' capital will be wiped out,
leaving them with nothing, and the government will take
100 percent of the equity in the regional lender.
Since May 17 when the government decided, in
bailing out Japan's fifth largest bank, not to compel
shareholders to assume responsibility for the Resona
debacle, some foreign hedge funds had picked up regional
Japanese bank shares in expectation of similar
government relief measures. The lack of relief measures
in this case leaves investors in a quandary about future
government moves in event of further collapses.
Since the Resona bailout, the Japanese stock
market had been in a kind of moral hazard session, in
which the stocks of companies in shaky financial shape
have thus tended to rise more markedly. The banking
sector has particularly outperformed.
This all
takes place against a backdrop of national banking
disaster, with the system only stabilizing somewhat for
the larger banks over the last year. According to the
International Monetary Fund, the average ratio of
nonperforming assets to capital and reserves, at 65.7
percent in March 2001, rose to 83.4 percent in 2002.
Nonperforming loans, estimated at $US355 billion at the
start of this year, could well be twice that, or perhaps
as much as 15 percent of gross domestic product (GDP).
A striking rise in equity markets this year,
plus rising industrial production and recovering
consumer confidence, have cut that somewhat. But dud
loans continue to leave the banking sector in bad shape.
Thus the government's response to the Ashikaga matter is
being closely watched.
What has been
particularly stunning for investors is that the
government decided to pump 1 trillion yen into the
ailing bank, which was under the Ashikaga Financial
Group holding company, and had assets of only 5 trillion
yen. The bailout amount is significantly large, given
that only 2 trillion yen was injected into the Resona
group, which had nearly 40 trillion yen in assets. In
this case, local businesses, large banks - including
Mitsubishi Tokyo Financial Group, which held a 3.5
percent stake in the bank as of March - and insurance
companies will take the brunt of the losses.
The
infusion of the disproportionately large amount of
public funds into Ashikaga is thus fanning speculation
that the bank may be in very bad shape indeed. When the
equities markets opened on December 1, the listed
Ashikaga group promptly went limit-down, plunging by the
daily allowable limit of 30 yen to 51 yen. Some regional
banks ran into a sell-off as well as the news dampened
investor sentiment, although by and large, the bulls
remained in charge of the broader market.
In
addition to pumping 1 trillion yen into Ashikaga, the
Bank of Japan (BOJ) on December 1 increased liquidity in
the banking system to prevent any financial instability
following the collapse. The central bank supplied
another 1 trillion yen a little past 9 am, announcing
the move earlier than the usual time of 9:20 am. The BOJ
normally announces in advance what specific open market
operations it is going to conduct. But on Monday the
central bank was obviously seeking to ensure financial
market stability for the second time, the first being on
May 19 when it virtually nationalized Resona.
The BOJ action boosted the outstanding balance
of private financial institutions' current-account
deposits at the BOJ to 31 trillion yen, close to the
central bank's maximum target of 32 trillion yen.
Participants in the money market remained calm, with no
banks rushing to raise money. Overnight call rates
remained stable at around 0.001 percent. The central
bank says it will continue supplying generous liquidity
if it detects any sign of instability in the financial
markets.
Even without the Ashikaga problem, the
domestic stock market is fragile despite the runup this
year. Currency authorities bought more than 17 trillion
yen (US$157.2 billion) worth of dollars in the first 11
months of this year in their drive to stem the yen's
ascent, far more than the country's current-account
surplus during the same period and an amount that dwarfs
dramatically any Bank of Japan intervention in history.
The enormous scale of intervention has had the effect of
supporting the US stock market and encouraged foreign
investors to purchase Japanese equities. Meanwhile,
domestic institutional investors are increasingly
distancing themselves from the market after suffering
heavy losses in recent trading.
Moreover, the
administration of Prime Minister Junichiro Koizumi is
now scrambling to deal with issues that had been shelved
in the run-up to the general election, such as tax-hike
proposals. If added up and collectively put into action,
they would likely increase the financial burden on
households nationwide by 1.5 trillion yen in fiscal
2004, according to Credit Suisse First Boston Securities
(Japan) Ltd.
Nor is Ashikaga likely to be alone.
"Over-banking can be observed in many financially
struggling regional economies, so it is necessary to
downsize regional banking industries," said Akiyoshi
Horiuchi, a banking expert at Chuo University. Aside
from Ashikaga, many other regional lenders face the risk
of losing business if many of their major corporate
borrowers continue to shift their operations to other
prefectures or even offshore. Such banks, as a result,
end up serving mostly ailing businesses, demonstrating
that relationship banking alone is unlikely to alleviate
their plight.
Among regional banks that have
failed recently, Shizuoka-based Chubu Bank, which went
under in the spring last year, and Kanazawa-based
Ishikawa Bank, which collapsed in 2001, were not the
largest financial institutions in their respective
areas. Neither were a number of regional lenders that
went bankrupt in 1999. The bulk of their sound assets
were transferred to other banks. Ashikaga is the top
lender in Tochigi prefecture, however, and it is not so
easy to find other institutions to take over its
operations, which makes all the more crucial the task of
revamping Tochigi's overall regional banking system.
The government's seizure of the shares in
Ashikaga's holding company follows almost exactly the
temporary nationalization of Nippon Credit Bank, once
one of the world's leading lenders, in December of 1998,
and Long-Term Credit Bank in 1999, both of which were
ultimately sold to the private sector. Both have been
reorganized and are now working as Aozora Bank and
Shinsei Bank respectively. Both are now under the
control of foreign financial groups. It is expected that
after Ashikaga Bank's management is overhauled and it
starts normal operations, it will also be sold off.
The collapse of the banking group could have a
serious negative impact on the regional economy if
depositors and corporate borrowers start to panic. Thus,
in a bid to bolster consumer and investor confidence in
Tochigi prefecture, the government and Bank of Japan aim
to implement a number of measures to stabilize the
banking system and the economy in the wake of the
collapse. Government-affiliated financial institutions
are to provide funds to companies that have borrowed
Ashikaga to help finance their operations. The BOJ aims
to immediately pump additional liquidity into the
banking system to prevent banks from running out of
funds.
Ashikaga Bank accounts for more than 40
percent of total deposits and loans extended by
financial institutions operating in the prefecture.
Public institutions such as the Japan Finance
Corporation for Small Business, the People's Finance
Corp and Shoko Chukin Bank are to begin providing funds
if the bank is unable to extend adequate amounts of
loans.
After the bank is fully nationalized, the
government will likely curb lending to firms that are in
danger of becoming insolvent, while continuing to loan
money to firms in good financial health. The Small and
Medium Enterprise Agency, the Tochigi prefectural
government and the city of Utsunomiya (capital of the
prefecture) will consider assisting corporate borrowers'
fund-raising efforts to complement the government rescue
package.
The central bank plans to offer
non-collateralized loans to Ashikaga whenever necessary
so as to secure sufficient funds to repay deposits.
While the government will protect all deposits, generous
amounts of money will be supplied to Ashikaga's
automatic teller machines in order to allay depositors'
fears.
In the meantime, domestic investors in
Japan's equities markets remain queasy. In addition to
selling in response to the Ashikaga Bank news, concerns
about geopolitical risks, fueled after two Japanese
diplomats were killed on Saturday in northern Iraq, also
led investors to unload shares early in the morning,
brokers said. But the US dollar's rise to around a
110-yen line earlier in the day warmed investor
sentiment, leading to purchases of export-oriented,
high-tech and auto issues, brokers said.
All
these stock market gains on the day when the insolvency
and nationalization of Ashikaga Bank was announced show
that the market soon absorbed the shock, assumed its
usual pace and continued to rise.
Analysts have
two central questions over the Ashikaga affair's ability
to eventually fan purchases of Japanese shares over the
medium to long term for two reasons. One is the
spillover from the continued US economic recovery over
the Christmas season, a recovery that will not indicate
a sense of the economy's peaking after posting an
annualized 8.2 percent expansion in the third quarter.
The other is whether the Koizumi administration
maintains its momentum for financial-sector reform
measures in the months ahead. If the administration can
show a clear, credible road-map for the reform plan
soon, the chance will increase that any stock market
confusion due to the Ashikaga failure will be
short-lived.
There will undoubtedly be some
domestic fallout, with some listed companies that hold
shares in Ashikaga Financial Group Inc forced to lower
their fiscal 2003 earnings estimates now that the
government has forcibly acquired all of the distressed
banking group's stock. Mass consumer electronics
retailer Kojima Co holds some 1 billion yen worth of
common and preferred stock in Ashikaga and may have to
lower its consolidated net profit estimate for the year
ending March 2004 from the current 900 million yen.
Major food production machinery maker Rheon
Automatic Machinery Co, whose assets include 230 million
yen worth of Ashikaga stock, could also revise downward
its consolidated net profit estimate for fiscal 2003
from the current 300 million yen. Oki Electric Industry
Co, which had Ashikaga shares worth 1 billion yen as of
the end of March, might also suffer a blow. At present,
it forecasts a net profit of 3.5 billion yen for the
current business year.
Machinery/metal producer
Furukawa Co, which used to operate a major copper mine
in Tochigi prefecture, holds 2.12 million shares of
Ashikaga stock. Last year, it purchased new Ashikaga
shares issued through a third-party share allocation.
The valuation loss will likely add to its current
estimate of 29 billion yen in net loss for fiscal 2003.
Pachinko pinball machine maker Sankyo Co for its part
said the collapse of the banking group is unlikely to
affect its fiscal 2003 earnings much, although it holds
2 million preferred shares and 4.25 million common
shares in Ashikaga.
A total of 626 regional
institutions, including credit cooperatives, submitted
plans on how to promote relationship banking to the
authorities by this summer. As part of such an effort,
Ashikaga Bank has been implementing a program to improve
its profit margin, for example, by forming a rescue team
for troubled borrowers, such as local inns that operate
hot springs.
Hussain Khan
holds a master's degree in economics from Tokyo
University and has worked in Japan as an equities
analyst. He is an independent Tokyo-based analyst on
current affairs and economic issues for various
newspapers and magazines. Email:hk@ourquran.com.
(Copyright 2003 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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