No Floor Under Japan's Banks?

Could a pair of little-known, busted Tokyo credit cooperatives, similar to U.S. credit unions, threaten Japan's financial system? That's the warning Bank of Japan officials have been peddling ever since the central bank proposed a $1.98 billion, taxpayer-funded bailout of the Tokyo Kyowa Credit Assn. and Anzen Credit Assn. three months ago. On Mar. 17, BOJ Governor Yasuo Matsushita told a business group that letting the duo go under would unleash a "systemic risk" to the Japanese financial system.

It's tempting to dismiss such alarmist talk as justification for a rescue mission. This is not the first time that BOJ officials have forecast a financial meltdown, trying to scare banks into putting their houses in order. And the government has vast powers to prevent Japanese financial institutions from cascading into an abyss. Yet the system is particularly vulnerable now (tables). Many of Japan's other financial institutions are neck-deep in bad loans, at a time when bankruptcies keep mounting, loan growth has been negative for eight months, the yen is at worrisome highs, and a slumping stock market is pounding the banks' large equity holdings.