Asia Times: Close look at Tokyo's get-tough financial cures



	January 08, 1999	atimes.com

Japan Economy

Close look at Tokyo's get-tough financial cures
By Suvendrini Kakuchi

TOKYO - The Japanese government's recentnationalisation of a major bank and move to step up monitoring offinancial institutions signals what experts hope is a moreaggressive 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 onDec 13, Tokyo launched the Financial Revitalisation Commission(FRC), an independent watchdog for financial administration.

The commission's function will be to take over management ofbankrupt financial institutions and to screen the injection ofpublic funds into those institutions.

In Japan's view, the commission will be the main driving forcetoward strengthening of financial management in order to force aneconomic recovery at home. It will have the right to punish anybank that does not meet capital adequacy requirements.

Finance Minister Kiichi Miyazawa, a former finance ministryofficial, 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 notworking,'' he told journalists this week.

Nippon Credit Bank is one of Japan's three long-term creditbanks financial responsible for financing the nation's postwarindustrial success. Its takeover by the government comes after thenationalisation on Oct 23 of Long Term Credit Bank Ltd of Japan.

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

Indeed, the announcement of Nippon's nationalisation was madeon a Sunday, when global markets were closed, to avoid causingharmful aftershocks overseas.

Japanese banks, also weakened by huge exposure in troubledAsian economies, are estimated to have some 600 billion in badloans. They are not being repaid because the country is mired inrecession that has shrunk the economy by 2.6 percent in the lastquarter.

''Whether the decision will lead to a recovery in the economicrecession is too soon to predict,'' commented Takashi Miwa, aresearcher at Nomura Research Institute after news of NipponBank's nationalisation was reported.

''But there is no doubt that the government has sent animportant message to the world and at home, that it is finallyready to deal with the huge debt carried by Japanese banks thatwas at the core of our economic stagnation,'' added Miwa.

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

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

As a result, under the new Financial Rehabilitation Lawestablished in October, the Japanese government moved in andordered the nationalisation of the bank.

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

Hakuo Yanagisawa, minister of financial reconstruction, a postcreated with the new law, said it took so long for Tokyo to cometo a decision because ''the banking inspection system at that timewas substantially different from today's''.

Beyond the specifics of nationalisation cases, the FinancialReconstruction Commission marks a break with the tradition of cozyrelations between the banks and Japanese regulators.

Nippon Credit Bank, for example, is reported to have hid hugeamounts of bad loans in dummy companies and intentionallyprojected optimistic outlooks under the nose of Finance Ministryofficials.

Analysts also point out that the major difference shown by thenationalisation of Nippon Credit Bank was the fact it was thegovernment -- not the market or the bank -- that decided to comeinto the picture.

''The unusual step was taken because NCB's write-offs wereproceeding at a snail pace. There was no buying time any more forJapan and the government stepped in, a system that we can seehappening in the future,'' said Miwa.

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

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

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

As it is, speculation is rife that banks have not beenrevealing their exact losses on non-performing loans. The newsystem of financial monitoring forces banks to announce theirshare of bad loans when applying for public money to bail themout.

News reports have singled out two major private banks -- DaiwaBank and Yasuda Trust -- as among those expected to appeal for theinfusion of public funds after revealing massive losses due tospeculative investment.

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

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

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

(Inter Press Service)

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