The Toughest Job in Japan

Akio Kioi's obscure agency is on a mission to clean up the banks. But what are the chances of success?

You've probably never heard of him, but a no-nonsense lawyer from Osaka has one of the most crucial--and thankless--jobs in Japan. If the biggest bank-salvaging job in history ever gets under way in earnest, much will depend on Akio Kioi, the president of Japan's Resolution & Collection Corp. Kioi's goal is nothing less than turning the RCC into the giant wrecking ball that finally smashes the unholy alliance between banks and Japan's corporate deadbeats. He even wants to pry loose the grip that the Japanese mob has on the country's financial system. But it's far from clear whether he can overcome the array of powerful forces that stand in his way.

The spotlight has shifted to the RCC since Jan. 11, when new legislation kicked in and gave it much broader powers not only to buy nonperforming loans from the banks, but also to decide the fate of insolvent corporate borrowers. Some that are beyond hope will be shut down, their foreclosed property and assets sold for whatever they can fetch, and their employees sacked. Others will be forced to earn RCC refinancing by embarking on serious restructuring programs. "We have a very clear mission," says Kioi.

It may be a clear mission, but it's an extraordinarily difficult one. The 67-year-old Kioi, however, is considered a tough administrator and negotiator who will try to force the banks to hew to his will. The problem is, he has all the responsibility of L. William Seidman, the head of the Resolution Trust Corp., which oversaw the U.S. cleanup of the savings-and-loan mess back in the 1980s, but few of the resources. Seidman deployed 8,000 government employees plus thousands of bankers, lawyers, accountants, and appraisers to get the job done. Kioi's RCC has just 1,000 employees.

Kioi, a former head of the Japan Bar Association and a bankruptcy trustee, was handpicked for his job by the first president of the RCC, Kohei Nakabo, who made himself a darling of the press in his own fights with Japanese organized crime. Kioi is less comfortable in front of the cameras; his idea of excitement is a challenging game of igo, or Chinese chess.

Chess expertise might come in handy as Kioi tries to negotiate loan handovers with banks that are reluctant to damage their balance sheets by acknowledging their dud debt. On top of that, Kioi's job is to be an enforcer in a government that seems to have lost the will to play hardball with banks and their borrowers. Prime Minister Junichiro Koizumi's top financial regulator, Financial Services Agency Minister Hakuo Yanagisawa, insists that the banks themselves have the resources to deal with their soured loans within three years. In an interview with BusinessWeek on Feb. 8, Kioi said it won't be so easy: "Detaching from these loans will mean bleeding."

Until the corporate zombies being propped up by the banks are taken out, Japan has no chance of a lasting recovery. That's why private economists, business leaders and Bank of Japan Gov. Masaru Hayami all want the RCC to take the lead. On Jan. 29, Hayami applauded the expanded role of the RCC and warned that "if disposal of nonperforming loans is delayed, this might threaten the stability of the entire financial system."

Yet tough-love advocates such as Kioi are on the defensive. With U.S. President George Bush set to arrive in Tokyo on Feb. 17 for a state visit, Koizumi has ordered up a new set of emergency policies to reverse Japan's economic slide. This is likely to include another taxpayer-funded rescue for the banks. The question is whether this will be another no-strings-attached bailout, such as the $57-billion capital injection back in 1999, or something with real teeth. This time around, says HSBC bank analyst J. Brian Waterhouse, the government must force the banks to offload dodgy loans to the RCC or foreign investment banks.

Kioi has already brought the investment banks on board. On Jan. 25, he announced a tie-up with Goldman Sachs, Mitsubishi Trust, and Asahi Bank to pool some $750 million in bad debts from 150 corporate borrowers, turn them into marketable securities, and sell them to global investors. Kioi is also talking about using a mix of debt-for-equity swaps, restructuring benchmarks, and loan rescheduling to rehabilitate troubled but worthy borrowers. Although obstacles remain, ING Barings analyst James Fiorillo thinks the RCC will "be a critical part of Japan's workout."

How much money does the RCC need to do its job? The bad-debt mountain is expected to top out between $600 billion and $1 trillion. But Waterhouse thinks an RCC budget of $225 billion would be enough to make a critical difference. That's a staggering amount--more than twice the annual budget of Japan's Deposit Insurance Corp., of which the RCC is a division. The plan is for the DIC to raise money by issuing bonds that the central bank would purchase.

If the RCC can pull off this massive rescue operation, Kioi will go down as a legend in Japanese finance. Tokyo officialdom has yet to clearly state that it has declared open season on shoddy banks and clueless borrowers. In Japan, as Seidman said last fall, "that decision is political dynamite." But if Tokyo commits itself to the task, Akio Kioi is the designated demolition expert.

By Brian Bremner in Tokyo

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