Do something. Anything. That has been the plea of global investors to Japan's rulers and financial mandarins for years, as the country's banking industry turned into one of the great black holes in the history of money. Tokyo responded with half-steps, shoring up the banks enough to keep them staggering along, but never forcing them to write off the bad debt that was at the root of their problems.
Maybe something bold is finally in the offing. Ohtemachi, Tokyo's financial district, is abuzz with rumors that Prime Minister Junichiro Koizumi has a plan in place for the biggest workout ever of Japan's bank problems. Although the plan may not be as thorough a cleansing as the smaller U.S. salvage operation for its savings and loans, it could still be a long step forward.
To understand Koizumi's plan, you have to realize what he is up against. First, it's clear the government will have to buy the loans to get them off the banks' books soon: Many banks, such as Mizuho Holdings, are reporting stupendous six-month losses. Rumors persist that some banks will founder. Yet popular resistance to a taxpayer-funded bank bailout is huge. And Koizumi has pledged to cap government borrowing, which would jump if he ordered a direct bailout. Second, government regulators have underplayed the extent of the bad-loan overhang for years. Finally, the banks have balked at writing off bad loans, since that would torpedo earnings and push clients into bankruptcy or reorganization.
But the World Trade Center attack has done something 10 years of slow-motion economic collapse failed to do: shock Tokyo's policymakers into action. With a world economy heading into recession, the fractious agencies that manage Japan's financial system are cooperating for the first time. "The progress in the debate on financial reform has been encouraging," says Morgan Stanley Dean Witter & Co. economist Robert A. Feldman.
So far there has been no formal announcement, but key pieces are in place for a new legislative package that should come before the Diet by yearend, says Akira Kanno, vice-chairman of the Japan Bankers Assn. Under a likely deal, major banks would sell as much as $145 billion in nonperforming loans to a government agency, the Resolution & Collection Corp., over two to three years. The RCC's limited brief--it's essentially a collection agency for the banks--would be expanded to let it buy loans, restructure and close companies, and sell assets and collateral.
Key to the deal is the role the Bank of Japan will play as lender of last resort. The RCC, which needs money to buy loans, will issue about $100 billion in bonds, economists predict. The BOJ, say bank officials, is now willing to buy a big chunk of those bonds--so long as the workout plan doesn't amount to a giveaway for the banks. Sounds like an abstruse piece of central bank finance. But it's actually astute politics. The Bank of Japan technically uses its own funds, so Koizumi won't have to add the borrowing to the deficit-wracked central government budget. "That would be a good use of monetary policy," says Eisuke Sakakibara, a former Finance Ministry heavyweight and adviser to Koizumi's economic team, who criticizes the BOJ's efforts to boost the economy by pushing cash on banks with no one to lend to.
The second step is something that could be labeled Attack of the Killer Auditors. By year-end, the Financial Services Agency, which regulates the banking industry, and the BOJ will unleash a fresh batch of audits of the banks' questionable loans. One target will be some $700 billion in loans on a "watch list." The audits, which will be monitored by Koizumi's own Council of Economic and Fiscal Policy and the International Monetary Fund, will probably declare many of these loans nonperforming, wearing down banks' resistance to selling them to the RCC.
The pressure doesn't end there. The FSA projected in late August that some $50 billion more in loans would go bad each year from 2002 to 2004. Now the toll will be worse, given that the economy is expected to contract. That adds pressure for a government-funded workout.
The RCC will have less leverage than U.S. regulators did in the S&L crisis. The Resolution Trust Corp., which disposed of the failed thrifts, had a simpler task because the banks were already in receivership. But Japanese bank examiners are likely to be pretty ruthless. The government has received extensive advice from L. William Seidman, who ran the RTC. Seidman spent two weeks in Japan last month.
Koizumi's cleanup efforts are clearly getting a tailwind from the Bush Administration, which is pressing the Japanese to do their bit for the global economy. On Sept. 25, the Economy, Trade & Industry Ministry hosted a debt-workout seminar featuring a video-taped speech by R. Glenn Hubbard, Chairman of the U.S. Council of Economic Advisers, in which he warned that "slow resolution [of the debt problem] leads to paralysis and stagnation."
One question is whether the RCC is up to the task. In the S&L cleanup, 10,000 U.S. government employees worked with 80,000-odd investment bankers, lawyers, property managers, and appraisers. The RCC has a staff of 1,000, and it lacks financial sleuths and workout specialists.
With the world economy sinking by the day, Japan and the RCC need to hurry. Corporate Japan's debt-to-equity ratio is 277%, about seven times that of the U.S. The Nikkei stock average's 30% plunge year-to-date has forced big banking groups to post heavy half-year losses on their stock portfolios. HSBC projects that corporate operating profits will drop 33% in Japan's fiscal second half, which ends on Mar. 31, 2002, so more loans are likely to turn sour. It's time to do something. Anything.
By Brian Bremner in Tokyo