By Brian Bremner
Well, it looks like the International Monetary Fund's financial sleuths will soon be winging across the Pacific to cast a gimlet eye on the loan books of Japan's rickety money-center banks. Kudos to Prime Minister Junichiro Koizumi and his top banking regulator Hakuo Yanagisawa, who goes by the bureaucratic moniker of Minister for Financial Services, for giving the IMF the green light.
Just a week ago, Yanagisawa was feinting left and right to avoid the look-see by the IMF. He told BusinessWeek editors just as much in New York on Sept. 4), before heading off to Washington, D.C., to consult with Treasury Dept. officials and U.S. Federal Chairman Alan Greenspan (see BW Online, 9/6/01, "Japan's Bad-Loan Mop-Up Man"). He also blasted the IMF for issuing a critical report that basically suggested Japan is underplaying the true magnitude of its bad-debt mess and the threat it poses to economic growth.
Why the abrupt switch? If history is any judge, a classic bit of Japanese political theater is now under way. When Tokyo's back is up against the wall and it faces tough political choices, gaiatsu, or foreign pressure, can be very helpful indeed. In this context, the IMF could flush out the really awful truth that Japan's banks can't be fixed without a lot of public money. Any Japanese pol who said as much would be committing political suicide.
The IMF might also serve as the kind of deflector shield Koizumi & Co. need to tackle a very tough job. If Japan embarked on another bailout of the banks -- it injected $50 billion worth of capital into big lenders back in 1999 -- what better political cover than to say, hey, the IMF made me do it. In Japan, foreign pressure does matter -- recall the mid-1980s Plaza Accord or the 1995 U.S.-Japan auto-trade deal.
You can count on one thing: The IMF is probably going come up with a much more serious prognosis for Japanese banks than Yanagisawa has thus far. He insists that about $146 billion of nonperforming loans at 15 major banks can be written off and disposed of in about three years, without any public funds. That's true as far as it goes. The banks have reserved against a big chunk of that exposure and are generating annual operating profits of around $26 billion.
Yet, the government would rather not discuss the $700 billion worth of loans known as "classified credits" at lenders big and small. These need close monitoring as they may go bad. Nobody knows for sure whether 10% or 80% eventually will. Yet with the Japanese economy now in a free-fall -- it contracted at annual pace of 3.2% -- in the April-to-June quarter, the outlook isn't promising.
Even before the latest recession, Japan's third in the last decade, some $26 billion worth of iffy loans turned bad in a six-month period ending in March, according to Standard & Poor's bank analyst Takamasa Yamaoka. Small wonder private bank analysts in Tokyo put the true dud-loan figure that needs to be addressed in the $600 billion to $1 trillion range.
Those gloomy numbers may be off. But it's a safe bet that Japan can't purge its banking system of this dreck without some sort of government help. Koizumi and Yanagisawa are right to object to another straight cash infusion like a few years back. The banks took the money, said thank you very much, but then did precious little to radically restructure themselves or cut off deadbeat borrowers.
As I have argued before in this column, a more promising tack is to shore up the resources of Japan's Resolution & Collection Corp., which has been buying troubled loans from banks on a modest level since 1999. Just like the taxpayer-funded U.S. Resolution Trust Corp. that stripped bad assets from busted thrifts and sold them to investors, a muscled-up RCC could do the same thing in Japan.
Yes, this exercise would drawf that of the U.S. S&L crisis. But it might work if the IMF, directly or indirectly, made it clear that Japan had no other choice but think big and bold. This time, though, it wouldn't be a no-strings-attached bailout, but an aggressive and accelerated debt workout in which both the government and the banks would take a nasty haircut on disposing the bad loans.
Under one scheme being kicked around, Japan's Deposit Insurance Corp., which runs the RCC, would have to issue scads of new bonds. Bank of Japan bond purchases aimed at the RCC debt would smooth fund-raising efforts. The RCC, which has acquired only $8 billion worth of loans at a fraction of their face value, would also have be more generous.
One idea making the rounds is for the RCC to offer above-market prices, even if the true value of the loans didn't justify it. Perhaps the government would absorb half the losses, and the banks would take the haircut on the remaining 50%. The RCC would sell what it could or hold onto the loans until land prices, the chief source of collateral, and the economy recovered down the road. The banks would feel some pain, too, but at least be in a position to start lending again when the economy recovers.
This would take some time and would certainly mean some losses for taxpayers. But they would be far better off in an economy growing 2% to 3% once more, rather than the stop-go growth of the last decade. Without a resolution to the banking crisis, forget about a recovery. If the IMF can provide the cover to let Koizumi et al make that happen, it would be well worth the embarrassment Japan now feels about bringing in the auditors to do a reality check on the loan books.
Bremner, Tokyo bureau chief for BusinessWeek, offers his views every week in Eye on Japan, only for BW Online
Edited by Douglas Harbrecht