Anatomy of a Crackdown

How Takenaka may push weak borrowers over the edge

Call it the Takenaka Typhoon. Since economist Heizo Takenaka became Japan's top bank regulator on Sept. 30, nearly $200 billion worth of market value has vaporized from the first section of the Tokyo Stock Exchange through Oct. 9. The Nikkei is flirting with levels not seen since 1983. Now, Takenaka has proclaimed that, as he cleans up the bad loan mess, no company will be too big to fail--and investors are frantic to know if and how some of Japan's largest companies could go under. Here are the most pressing questions stock-pickers are asking.

Why is the Nikkei tanking if Japan desperately needs the real bank reform that Takenaka is promising?

Takenaka--now the boss of the Financial Services Agency, the bank industry watchdog--wants a quick and forceful cleanup of banks' loan books. If he's serious, the banks will have to cut off deadbeat borrowers. That probably means some major-league bankruptcies and a spike in Japan's already record 5.4% jobless rate.

Does anyone know which borrowers would go under?

No. The banks have not publicly identified their weakest borrowers. But investors have hammered heavily indebted, publicly traded companies that either have a recent history of operating difficulties or are big players in industries hard-hit by the slowdown. Stocks of highly leveraged construction companies like Misawa Homes, blue-chip names such as supermarket-chain and baseball club-owner Daiei Inc. and truckmaker Isuzu Motors Ltd., have all seen sharp sell-offs--even though these companies say they are in no danger (chart).

How would Takenaka pull the plug on deadbeats?

First, he has to make the banks come clean on the true extent of their bad loans. Private analysts have long suspected that Japanese banks are carrying twice the official bad loan estimate of $430 billion. Takenaka wants the FSA to launch a new raft of super-audits of the banks' books to flush these bad credits into the open.

But that's still a long way from taking action against troubled borrowers.

The audits are just the first step. Takenaka would then inject public capital into the weakest banks, which, according to the new audits, would be in violation of their capital requirements. As one condition of the bailouts, the FSA would insist that the banks get tough on their biggest, most troubled borrowers. This could include calling in loans and forcing the borrowers to restructure or even enter bankruptcy proceedings. If the banks' managers balk at this task, Takenaka would sack them.

How many of these problem borrowers are there?

It's impossible to say for certain. But last year, Takeshi Kimura, a former Bank of Japan official and head of KPMG Financial Services Consulting in Tokyo, set off a firestorm when he announced to Prime Minister Junichiro Koizumi that it was time to lower the hammer on the 30 borrowers that, because of their size and weakness, represented the biggest threat to the banks. Kimura is now an adviser to Takenaka.

Which companies trigger the loudest alarm bells?

The markets seem extremely doubtful about the future of retailer Daiei, whose shares have dropped 41%, to 84 cents, since Sept. 30. With $17 billion in debt and nearly 100,000 employees, its collapse would be felt keenly. Daiei swears that it will make it. "[The company] is working hard to implement its three-year restructuring plan of debt reduction and asset sales by 2005," a spokeswoman says. Investors are also biting their nails over auto maker Isuzu, which faces bond payments of nearly $433 million this fiscal year. Isuzu shareholder General Motors Corp., however, has agreed to inject $483 million worth of capital into the auto maker, and lender Mizuho may swap debt for equity.

Is there a chance Takenaka will prove more talk than action?

In a country that has pledged to reform for the past 12 years, that's always possible. Some analysts think Koizumi will allow a few big failures to show he's serious, but stop far short of purging Japan of all its zombie companies. That may be true, but global investors clearly aren't taking any chances until Takenaka reveals the details of his plan later this month. It's still typhoon season in Tokyo.

By Brian Bremner, with Chester Dawson in Tokyo

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