Crunch Time At Japan's Banks

How do you deal with a colossal banking mess? Swoop down American-style on failing lenders, dump massive amounts of distressed real estate onto the market, and sock the government for a massive bailout bill? Or hem, haw, and hope that a recovering economy will eventually cure the system's ills? In Japan, the latter seems to be the case.

According to some estimates, up to $300 billion in bad loans now burden Japan's once-buoyant banks. Yet tightfisted Ministry of Finance regulators are refusing to mount the kind of wide-ranging relief-and-restructuring campaign that the Ministry of International Trade & Industry has performed in the past on such depressed industries as steel, mining, and paper. Instead, Finance Ministry bureaucrats are putting the squeeze on banks to clean up their own mess. If the ministry refuses to change its tune, the mop-up will be long and slow.

MORE TO COME. On Oct. 30, Mitsubishi Bank Ltd., the current leader of Japan's banking federation, unveiled a modest plan to let lenders get as much as $25 billion in bad loans and real estate off their books during each of the next five years by selling them to a receiver financed by the industry. "We expected a lot, but it turned out to be no real change," says Shinano Morita of Standard & Poor's Corp. "We were not impressed."

The low-key approach to the banking problem poses risks to the flagging economy, especially if the credit crunch gets in the way of Prime Minister Kiichi Miyazawa's $87 billion economic-stimulus program. If that occurs, the Finance Ministry and the Bank of Japan might have to move aggressively with direct aid and sharply lower interest rates. Already, bankruptcies are at record highs, with software houses and manufacturers joining real estate developers. The Tokyo stock market, once a source of cheap capital for banks and manufacturers, is in the doldrums. And bank lending is now running only 2.2% ahead of last year's pace, down from 6% in 1991 and a torrid 13% rate in the late 1980s.

Regulators are also understating the industry's problems. The Finance Ministry says bad debts at Japan's 21 biggest lenders jumped 54% in the fiscal half ended Sept. 30, to $100 billion. But that excludes loans less than six months in arrears and credits to troubled borrowers paying reduced rates. So the tally is sure to grow even larger by the time the fiscal year ends Mar. 31. Analyst David Marshall of the credit-rating agency IBCA Ltd. estimates the 21--including Dai-Ichi Kangyo, Sumitomo Bank, and Mitsubishi--now have $162 billion in bad loans. Already, some major banks are reporting sharply lower profits and cutting costs. Sakura Bank Ltd., for one, plans to close about 50 of its 601 branches. Fuji Bank Ltd. is shutting a Tokyo office, its first such closure in 21 years.

The Mitsubishi-designed relief plan was crafted after a frantic week that kept executives working until 4 a.m. It calls for major banks to set up a company that will buy bad loans and the real estate backing them from any lender at a discount from book value. The new company then will try to sell the property, passing proceeds along to the original lenders. Finance bureaucrats hope the scheme will generate enough transactions to help jolt the moribund real estate market back to life. The plan will also give banks some government help by allowing them to bypass Japan's slow foreclosure process and realize immediate losses on bad assets. Doing so will generate quick tax write-offs for hard-pressed lenders. But there are limits. For one thing, banks themselves will have to lend to the new company to finance purchases of their own problem assets.

CASH SHORT. Neither does the plan help banks address the mounting problem of bad debts weighing down many affiliated nonbank lenders. Take the nation's eight housing finance companies, or jusen. They are nursing tens of billions worth of bad commercial and consumer real estate credits and no longer have the cash to repay the dozens of banks that financed their lending spree in the 1980s. Half of the loans at the biggest such lender, Nihon Jutaku Kinyu, with $23 billion in assets, are now classified as nonperforming. Yet it has only $145 million in reserves to cover these problem assets. Two of its owners, Sakura and Sanwa Bank Ltd., are trying to restructure the lender's bank debts. But analysts believe few banks have set aside enough capital to cure the entire finance industry's ills. "The scale of the disaster that has overtaken the jusen," says the IBCA's Marshall, "is staggering."

Although several jusen are run by former Finance officials, that message still doesn't seem to have reached Japan's regulators. If the economy doesn't pick up soon, the guardians of Japan's financial foundation may have to start listening.

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