Steve Quayle News Alerts

June 17, 2002
By Anthony Rowley, In Tokyo

FEARS of a banking system crisis have begun to re-emerge in Japan as the stock market tumbled on Friday and as corporate bankruptcies threaten to hit record levels.

But the government is desperately trying to keep a lid on the situation until the end of the current financial year, when it hopes to shift much of the potential liability for bank failures off its own shoulders and onto those of bank depositors.

'The first priority for the government will be not to let a crisis happen before the end of next March, because if one takes place within the fiscal year that would encourage people who are against introducing the payoff system from April next year,' one well-placed official source told The Business Times.

Under the 'payoff' system, the government will be obligated to pay depositors only 10 million yen (S$143,000) per depositor per bank in the event of a bank failure, instead of offering a full guarantee as at present on current accounts. A banking crisis could add to the government's huge burden of debt because of the obligation to pay off depositors and 'if that happens, a very substantial part of Prime Minister Junichiro Koizumi's strategy will be affected', said the official.

'So, the government will do everything it can to prevent a crisis before the end of the financial year. This is partly a political judgement and also, as the economy is recovering, the government would not like to risk ending the recovery by a mishap in the financial side.'

The situation is potentially explosive, from a political as well as financial point of view. It also explains why when a banking crisis threatened in March this year Mr Koizumi chose to prop up the Tokyo stock market as an indirect way of shoring up bank capital rather than heed pleas from Bank of Japan governor Masaru Hayami to pump additional public funds into the banks. Mr Koizumi would have had to formally declare a crisis in order to activate those funds and that could have triggered political opposition to the payoff.

It also sheds light on why a special inspection this year by Japan's Financial Services Agency of bank lending to firms in key sectors such as retailing, real estate and construction avoided probing too deep into the banks' problems of bad and doubtful debt.

The FSA declared leading banks to be in basically sound health after the inspection and, while they were ordered to increase provisions against some doubtful loans, some analysts called the inspection a 'whitewash job'.

Meanwhile, an IMF probe currently being conducted into Japan's financial system may shed more light, some analysts say.

Japan's Financial Services Minister Hakuo Yanagisawa vowed last week the government would not heed calls to delay ending the full guarantee on bank current accounts beyond next April.

But experts said this strategy could backfire, and that the government should not try to escape its responsibility by limiting its obligations to depositors.

'You can't take the guarantee off until you have the banking system in a sound financial position,' said William Seidman, former chairman of the US Resolution Trust Corporation.

Mr Seidman warned during a visit to Tokyo that the ending of the deposit guarantee could trigger a run on banks. When the full guarantee was ended on time deposits as from Apr 1 this year depositors responded by shifting huge sums of money into short-term current accounts.

If any of the 'mega banks' created from mergers were to fail, they are too big to be nationalised and sold easily back to the private sector as other failed banks in Japan have been, Mr Seidman suggested.

Mr Seidman, who helped engineer a rescue of savings and loans institutions in the US in the 1980s, also said that Japanese banks are 'still very weak and their capital is still somewhat suspect' after being shored up by measures such as those taken earlier this year to prop Tokyo stock prices.

This strategy, which involved activating a special semi-official fund to buy up stocks being sold by banks, and introducing curbs on short-selling, managed to drive the Nikkei 225 Average from under 10,000 to nearly 12,000, at which point bank capital appeared safe.

But last week the Nikkei slumped back below 11,000. Bank share prices are likely to fall again 'as investors begin to consider that the government's make-shift bailout of the banks has not actually addressed the core problem in the sector', said analyst James Fiorillo at ING Barings in Tokyo.

'Ultimately, as it becomes clear that banks' non-performing loans and capital problems are not only unresolved, but worsening, a crisis will begin to develop,' he added.

Japan's leading banks recently reported increased NPLs. Mitsubishi Tokyo Financial, Mizuho Financial, Sumitomo Mitsui Banking and United Financial Japan said their NPLs jumped to 26.8 trillion yen from 18 trillion yen the previous year.

http://business-times.asia1.com.sg/news/story/0,2276,48466,00.html?