Steve Quayle News Alerts

September 26, 2002

The Bank of Japan on Thursday urged the government to use an emergency 15,000bn ($122bn) crisis response fund to bail out the country's banks - the first time it has sanctioned granting the government access to the money and an admission that a crisis is pending unless radical action is taken.

The move is the latest sign that measures to be announced in October to deal with the banks' bad loans could include a direct injection of funds and comes the day after Masajuro Shiokawa, finance minister, backed a bail-out. It is also the first indication of how any potential injection could be financed.

One of the main hurdles that prevented an injection of capital was legislation that meant the crisis response fund - which is overseen by the Deposit Insurance Corporation - could not be used unless the government admitted a crisis was underway.

"The Bank of Japan's decision last week to implement initiatives to stabilise the financial system was tantamount to a declaration of a crisis." - Paul Sheard, chief economist, Lehman Brothers

This placed the government in the impossible position of trying to prevent a financial crisis after it had occurred. The BoJ's latest stance is designed to allow the government to act more proactively by moving from crisis response to crisis prevention.

It is understood the Bank of Japan's plan involves getting the banks to accurately assess the size of their bad loan portfolios, increase provisions for these loans and then receive a direct injection of capital from the†•15,000bn fund to shore up their capital bases.

The central bank believes current legislation could be re-interpreted to allow the government to access the fund.Under the Desposit Insurance Law, the government can invoke the Financial Crisis Response Framework if a crisis is underway or when "it is feared that, should such measures not be implemented", a crisis would follow.

"We agree with the BoJ interpretation and argue that the government would seem to have enough evidence to move forward - non-performing loans are at record highs and equity prices at near post-bubble lows," Mr Sheard said.

Before the government is permitted to draw any of the†•15,000bn, it must call a meeting of the Financial Crisis Response Committee, comprising the prime minister, finance minister, governor of the Bank of Japan and the financial services minister.

Of the four members of the committee, only Hakuo Yanagisawa, financial services minister, is opposed to the injection of funds, a fact that helps explain the current speculation about his replacement in a soon-to-be-announced cabinet reshuffle.

Masaru Hayami, governor of the BoJ, Masajuro Shiokawa, finance minister, and Heizo Takenaka, economics minister, have all indicated this week that they favour a bail-out package. Junichiro Koizumi, prime minister, speaking through Yasuo Fukuda, his chief cabinet secretary and close political ally, also said on Thursday a bail-out should be considered.

Mr Yanagisawa's position would be untenable if any direct injection occurred, given his past insistence that the banks can eliminate their bad debts from operating profits and that the Financial Services Agency's assessment of the size of problem is accurate.

Representatives of Fitch Ratings, the credit rating agency, were in Tokyo on Thursday as part of their rating assessment process. "What we fear the most is a continuation of the muddle through scenario," said Brian Coulton, senior director for Asian sovereign ratings. "We view a direct injection or the proper use of the Resolution and Collection Corporation as potentially ratings positive."

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