International Business: JAPAN
ARE THE JAPANESE READY TO BAIL OUT THE BANKS?
It was a scary reminder of the Japanese financial system's fragility. On July 31, roughly 1,800 depositors jammed the 24 outlets of Tokyo's biggest credit union after a newspaper reported that Cosmo Credit Corp. was about to collapse. Television coverage showed throngs of Japanese busily withdrawing $900 million, or roughly 18% of Cosmo's deposits, in just two days.
The Cosmo meltdown may be the opening act of one the most massive transfers of wealth in postwar history, as the government assumes the cost of Japan's post-bubble cleanup. Already, the bank run seems to be coalescing public and political support for a taxpayer-backed makeover of the Japanese financial system. Estimates vary, but the ultimate cost could run as high as $230 billion, figures Yukiko Ohara, a banking analyst with UBS Securities Inc. That's significantly more than the U.S. thrift bailout.
To pull off the restructuring, the Finance Ministry is trying to line up emergency backing for the weakest institutions: overextended credit unions, agricultural cooperatives, and home-lending institutions. On Aug. 2, it loosened restrictions on foreign currency investments by huge life insurers, a move that could bolster the Nikkei stock average and bring much needed relief to bank balance sheets. The yen weakened to 91 against the U.S. dollar, bringing hope of broader economic relief. The combination of bold moves may represent a turning point in Japan's efforts to come to grips with its financial problems.
RESCUE PACKAGE. In short, after spending the first half of the 1990s cloaking the true depth of bad-debt woes, Finance Ministry and Bank of Japan officials have now set an ambitious target of cleaning up the bad-debt mess by the year 2000. They plan to refloat and restructure the nation's troubled lending institutions, possibly using a Resolution Trust Corp.-style entity to handle asset sales. The pressures to act have become nearly overwhelming. "If they lose more time, the problem will only grow more serious," warns Toyoo Gyohten, chairman of Bank of Tokyo Ltd. and special ministry envoy on international finance.
The Cosmo crisis flared after a news report suggested that the credit union's soured late-1980s real estate lending spree was about to strangle it. Finance officials worked frantically over the weekend to throw together a rescue package. By Monday, July 31, the ministry had lined up hundreds of million of dollars in emergency money to cover deposits, and the Tokyo city government committed an additional $250 million.
In retrospect, Cosmo had been ripe for a fall. With more than 70% of its $5 billion loan portfolio in tatters, the credit union had been on everybody's watch-list for months. Its reliance on promotional campaigns, which offered attractive interest rates on large deposits, made it especially susceptible to a run. Ironically, the Finance Ministry may have hoped for just such a crisis to help convince the Japanese public of the severity of the bad-debt woes. "I think it was a sort of gamble to allow a managed panic," says Koyo Ozeki, an analyst with IBCA Ltd. in Tokyo.
TOUGH SELL. It may have worked. Until recently, Finance officials have had little luck selling the public on a taxpayer-funded plan to bail out Japanese lenders. Analysts estimate that their cumulative bad debt may run as high as $800 billion to $1 trillion. Understandably, most Japanese had little sympathy for the real estate tycoons who made one deal too many in the 1980s or for the greedy bankers who backed them. But with their own deposits at stake, consumers are likely to rally behind a rescue plan.
Still, it will be tricky to figure out where the money will come from. The Finance Ministry hopes to tap $2.36 trillion of private savings in the Postal Savings System but faces fierce political opposition. Likewise, such tactics as bond financing and tax hikes are a tough sell with the ministry's Tax Bureau officials, who are worried about the cost of the Kobe earthquake cleanup and caring for Japan's graying population. Complicating Finance's strategy is the political mess. Prime Minister Tomiichi Murayama's Social Democratic Party received a thrashing in upper-house elections on July 23. And a power struggle has emerged among Liberal Democrats, the coalition's biggest party, between Foreign Minister Yohei Kono and International Trade & Industry Minister Ryutaro Hashimoto.
But the Cosmo crisis seems to have bolstered Finance's rescuing hand. The small guys will be first. Credit unions, agricultural co-ops, and housing loan companies, or jusen, represent only 15% of Japan's domestic lending, but they are the least regulated. Bailing them out may well end up costing some $100 billion, according to Ohara. At least seven other credit unions have gone belly-up or been absorbed by stronger lenders since 1991. And many more rescues are expected. Although the struggles of Japan's top 21 commercial, long-term credit and trust banks are the most visible, the prospect of homeowners and farmers losing their shirts is more painful.
The woes of the jusen also loom. Similar to U.S. savings and loans, they were set up in the '70s to supply credit to homeowners. Because of a disastrous lending spree to golf-course and condo developers, some 50% of the industry's $130 billion loan portfolio is underwater, says J. Brian Waterhouse, a senior analyst with James Capel Pacific Ltd.
BOTCHED JOBS. The final hurdle in cleaning up the financial mess will be dealing with the huge money-center banks, staggering under bad debt to the tune of $390 billion. Lately, Finance officials say they are willing to let insolvent banks go under. But few believe the government would ever permit a major player to fail. Indeed, the Aug. 2 move to liberalize foreign investment flows was directed primarily at life insurance companies, but the banks also could be major beneficiaries. If their portfolios of stock holdings increase in value, that will give them greater flexibility in managing their bad debts.
But it's crucial that the public also pitch in. That's why the Cosmo fiasco served its purpose--in sharp contrast with two earlier botched bailouts. In December, Finance and the BOJ walked right into a scandal when they orchestrated a $2 billion bailout of the Tokyo Kyowa and Anzen credit unions. It turned out that Tokyo Kyowa Chairman Harunori Takahashi, a bubble-era real estate mogul, had steered depositors' cash into his own real estate ventures.
With tripwires going off across Japan's financial terrain, a reluctant public may be persuaded to part with some serious bailout cash. Top financial policymakers are counting on that to prevent the post-bubble banking crisis from hobbling Japan well into the next century.
THE SCOPE OF A BANK RESCUE
Here's how Japan will raise an estimated $230 billion to restructure its battered banking system:
-- Emergency credit lines from the Bank of Japan
-- Bond sales by the Finance Ministry to create a bailout fund
-- A Resolution Trust Corp.-style organization to sell off bad debt
-- Tax breaks and low-interest loans for strong banks that take on weak institutions
DATA: BUSINESS WEEKBy Brian Bremner in Tokyo