Commentary: Japan Can't Afford The Old Banking Ways

How serious is Tokyo about bank reform? Not serious enough. It turns out that when Prime Minister Yoshiro Mori appointed Kimitaka Kuze as Japan's top financial regulator in early July, he knew that Kuze had earlier accepted nearly $2 million from Mitsubishi Trust & Banking Corp., one of the nation's largest financial institutions. The payments were doled out over 13 years and ended in 1996. Mori said he didn't see any conflict of interest. But when word spread that Kuze had also taken $915,000 from Daikyo Corp., a major contractor, in 1991, Mori was forced to respond. He asked Kuze to resign as head of the Financial Reconstruction Commission on July 30.

Kuze's successor is 81-year-old Hideyuki Aizawa, a long-serving bureaucrat with plenty of financial experience but hardly any record of supporting reform--and apparently no interest in doing so now. Japan is supposed to be modernizing its financial institutions; Aizawa is interested in preserving the status quo.

STAGGERING DEBT. Consider just a few of the ideas he's promoted in the past year as head of the ruling Liberal Democratic Party's financial-issues committee. He wants to continue providing blanket government guarantees on savings accounts to keep investors from fleeing shaky--but politically wired--farm co-ops. Yet he doesn't see the need to set up a proposed U.S.-style deposit-insurance corporation. He's in favor of using public money to prop up failing life-insurance companies. He has urged the LDP not to issue banking permits to new players such as Sony Corp. and the supermarket chain Ito-Yokado Co. And he'd like the LDP to reassert its influence over the now-independent central bank. "The old way of doing things continues to crop up," says J. Brian Waterhouse, a banking analyst at HSBC Securities Japan in Tokyo.

Japan can't afford the old ways. Banks are saddled with $280 billion in problem loans--and that's after they have written off almost twice as much debt during the past few years. A slew of bankruptcies, including that of the retailer Sogo Co., suggests that the banks hold more dud loans than they admit. Moreover, the market is betting that one or more debt-ridden construction groups will fold. And the four bank megamergers announced in the past year are starting to fall apart. Tokai Bank Ltd. walked away from one deal, and insiders say the others are shaky. Analysts had regarded the merger plans as a sign that the banks were, at last, determined to try to operate more efficiently.

Meanwhile, the banks are dumping stocks, in part to raise cash for further write-offs. That's depressing share prices, however, and further eroding the value of the banks' portfolios. Japan's largest banks posted robust pre-tax profits of $18.6 billion last year after realizing gains of some $32 billion on the sale of these shares. But if the recent swoon in stock prices continues, that cushion will be gone by the time the banks' fiscal year ends in March.

Yet Tokyo is acting as if the banks need a regulator with a soft touch. Kuze was the fourth head of the FRC, which was created during the banking crisis of 1998. The FRC's first chief, Hakuo Yanagisawa, was hounded out of office precisely because he was tough on the banks. His successor, Michio Ochi, resigned after offering to go easy on financial institutions in return for political support. Ochi, too, had received more than $900,000 in loans from banks and credit unions before taking up the position of chief regulator.

Mori still plans to phase out the commission in January, as agreed when it was set up. In its place, the Financial Supervisory Agency, which reports directly to the Prime Minister, will be the only watchdog. This change would be a mistake. Mori needs to ensure that an independent FRC remains in operation with a reform-minded regulator at its head. In turn, Mori should push for the immediate passage of legislation that limits government guarantees on savings accounts to about $91,000, and that permits the quick sale of nationalized banks. He also needs to speed up plans to issue new banking licenses, which will increase competition. The situation is too serious for business as usual.

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