Moody's Investors Service Inc. jangled a few nerves recently when it blasted the way that Japan's Ministry of Finance (MOF) is handling the nation's long-running banking crisis. At a meeting in the Ministry's six-story fortress, MOF officials lit into Moody's analysts, suggesting their methods aren't up to snuff. "Moody's should do more research," said a member of MOF's banking bureau.
Moody's says it stands by its conclusions. But there's little wonder why MOF is edgy. Nearly six years after the bubble economy burst, the nation's top 21 banks still carry at least $550 billion in bad or restructured loans. Loan-loss provisions cover a third of this sum, figures James Capel Pacific Ltd. analyst J. Brian Waterhouse. Worse yet, the Nikkei stock average has fallen 60% from its 1989 peak--and at its current level of about 15,800 is still seen as overvalued. If that were not enough, plummeting property prices, deflation, and the high yen are pushing Japan into recession.
FLOTATION DEVICES? All of this comes as quite a blow to the elite University of Tokyo graduates who run MOF. For decades, these bureaucrats steered immense sums of domestic savings into Japan Inc.'s war chest. Now, they seem more preoccupied with keeping the financial sector above water. Doing so is rapidly draining the nation's wealth. But a lot more wealth may disappear unless the bureaucrats do what they have been unwilling to do so far--launch the massive deregulation and financial makeover necessary to bring the banking crisis to a decisive close.
To be sure, MOF will probably unveil a new bailout package in July. It's likely to include tax breaks on loan write-offs, government land purchases, and permission for banks to sell off bad loans in packages of securities. These measures are long overdue, yet they are also inadequate. The pity is that MOF can do much more.
A colossus, MOF lords over the U.S. equivalents of the Federal Reserve, the Treasury Dept., the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency. It also controls Japan's tax system and the national budget. But it's not hard to understand why MOF is dragging its feet. Fully addressing the banking mess will unleash market forces upon Japan's heavily regulated financial sector--and mean "less influence for the Ministry," says Kenichi Takeshita, a director with Nomura Securities Co.
With deregulation sweeping other countries' markets, Japan's financial institutions are demanding more freedom. Brokerages want to sell more derivatives. Banks, which have already been allowed to begin limited trading and underwriting, are angling for even wider access to the securities business.
"DESCENT FROM HEAVEN." Deregulation would also spur consolidation. But fewer banks and brokers will mean fewer highly paid sinecures for retiring MOF officials, a practice known as amakudari, or "descent from heaven." Although major banks and brokers have stopped taking on MOF officials in recent years, smaller institutions--many of them merger candidates--continue hiring MOF hands.
Given MOF's ultraconservative spending habits and Japan's lifetime job security compact, it's understandable that bureaucrats are wary of a U.S.-style cleanup that relies on huge public funding and ruthless bank examiners willing to push weak players under. Yet it's difficult to believe that MOF can put off consolidation much longer.
Back in 1991, the Ministry predicted banks' balance sheets would be cleaned up by 1996. To help the banks along, it pushed up the stock market in 1992 and '93 with an estimated $200 billion in public money. Higher stock prices allowed banks to dip into their vast reserves of equities to raise cash. But the maneuver was no more than a stopgap remedy. The stock market is swooning once again. And business failures and bad debts are rising as the high yen and the cost of the Kobe earthquake sap economic strength. As a result, MOF now says the woeful financial sector will need at least five more years to right itself.
With Japanese growth at a standstill, the country can ill afford another five years of financial drag. MOF officials may have to loosen their grip before the entire economy--as well as what's left of their reputation--takes a thrashing.