Bank of Japan finally pulls its head out of the sand Central bank admits bad loans causing crisis
By Paul Wiseman
USA TODAY 9-23-02
TOKYO -- When the bad loans started piling up in the early '90s, Japanese bankers stuck to an unspoken, unbreakable rule: Never admit that anything was going wrong.
Telling the truth was taboo. When one loan officer at a regional bank spoke out against the reckless lending, his supervisors reassigned him to a job scrubbing toilets, recalls a former colleague, Hamao Yokota, who went on to write the best-selling exposé Diary of an Outlaw Banker.
The Japanese government has been equally unwilling to own up to the mammoth scale of its banks' bad debts, putting off painful solutions in favor of delay tactics and half-measures.
''Japan is a place where mistakes are not supposed to happen,'' says Noriko Hama, economist at the Mitsubishi Research Institute. ''Therefore, they do not happen. Therefore, they must be concealed when they happen.''
But denial is getting harder daily. And there are signs that the government might be rousing itself to action. Most notable was the Bank of Japan's stunning announcement last week that it would help banks unload battered stock market investments, enabling -- and challenging -- them to get on with the grim business of writing off bad loans.
Action is long overdue. More than a decade after troubles surfaced, Japanese banks' bad debt still rose 29% in the last fiscal year to $350 billion -- an official figure widely believed to be short of reality. Some private analysts think banks are holding more than $1 trillion in dud loans and that a taxpayer bailout will be needed.
The mess extends beyond the bad loans. With their balance sheets creaking under the weight of bad debt, banks have been in no mood to look for worthy new borrowers. So bank lending has fallen 56 straight months, depriving the economy of financing needed to grow and contributing to a decade of stagnation.
And as if the bad loans weren't enough, banks also are sitting on huge losses in the stock market -- a legacy of the discredited days when banks and their corporate customers tied themselves into tight financial knots by buying each other's stocks.
In the past, banks could sell some of their $200 billion in stockholdings to absorb loan losses. No longer: The Tokyo stock market has been in a free fall. Japanese stocks this month hit 19-year lows. So banks' stock investments are well underwater now.
Under accounting reforms that took effect last fall, banks must subtract stock market losses from ''tier one'' capital, the financial firewall that protects them from insolvency. Jason Rogers, credit analyst at Barclays Capital in Tokyo, reckons that the average big bank's tier one capital will sink below the 4% of assets required by regulators if Japan's broad Topix stock index falls below 700. It closed Friday at 926.78.
The capital shortage is worse than it seems. Japanese bank capital is largely papier-mâché. Just 1% of banks' tier one capital is shareholders' equity, the good stuff. Nearly half consists of tax breaks that aren't worth anything unless the bank reports a profit. It's useless as capital for banks struggling to stay alive. No wonder the financial world watched warily as stocks fell and bad loans rose.
And confidence in last week's government announcement is shaky. On Friday, Japan failed for the first time to find buyers for all the 10-year bonds put up for sale at auction. Analysts said that reflected investor concern about the government's resolve to fix the nation's economic problems.
Bank of Japan takes action
Last week, the Bank of Japan -- the country's central bank -- finally got fed up with the see-no-evil approach to banking regulation taken by its bureaucratic rival, the Financial Services Agency (FSA). BOJ Governor Masaru Hayami, breaking with protocol that requires central banks to stay above the political fray, said BOJ would buy bank stock holdings directly from more than 10 big banks, bypassing the market so the banks could unload their shares without driving stock prices even lower.
By easing the market pressure on bank capital, BOJ was challenging the FSA and the banks to finally tackle the bad debt problem. ''They would look totally foolish if they do not respond to this,'' Hama says. ''They are in a difficult position because they have maintained that there is no financial crisis. The BOJ is specifically saying they are dealing with a crisis.''
The move was met with skepticism. Standard & Poor's, wary of the credit outlook after the BOJ action, said it would review Japan's sovereign debt rating in October. Earlier, it said it had no plans to take further action on the AA-minus rating this year. Fitch Ratings in London said Friday it was cautious about the move, reversing an earlier statement welcoming it.
Failure to make companies face music
At the heart of Japan's banking troubles is its refusal to crack down on deadbeat borrowers. Neither banks nor policymakers have aggressively pulled the plug on doomed companies or restructured loans to those that are troubled but salvageable. In fact, the FSA last year put pressure on foreign-controlled Shinsei Bank to continue extending loans to weak borrowers.
The hesitancy is understandable. Wiping out hopeless companies would be painful. An aggressive attack on bad loans would raise bankruptcies and eliminate hundreds of thousands of jobs. Most analysts say it shouldn't even be tried without a simultaneous program to ease the pain -- tax cuts, government spending, a push by the BOJ to flood Japan with money by buying Japanese government bonds.
Under the FSA's watch, Japanese banks this year have organized 17 major corporate bailouts worth a total of more than 2.9 trillion yen, nearly $24 billion, says Rogers of Barclays Capital.
Perhaps the most spectacular involved Daiei, a discount retailer founded by the visionary Isao Nakauchi, who in happier times wrote a book with management guru Peter Drucker. Under Nakauchi's leadership, Daiei ran up debts of 2.1 trillion yen, more than $17 billion, surpassing the gross domestic product of Panama. Faced with Daiei's impending failure at the start of this year, Japanese banks organized a $4 billion bailout. The move saved 100,000 jobs, but maybe not for long. ''Seven months and 520 billion yen later, the unprofitable odor of decay still emanates from the company,'' The Asahi Shimbun newspaper reported.
Deadbeats drain economy
Keeping zombie companies alive imposes enormous costs on the Japanese economy. For one thing, healthy companies must compete with deadbeat firms that have nothing to lose, saddling Japan with massive overcapacity that drives down prices and profits. What's more, brain-dead companies tie up people and capital that could be put to more profitable use elsewhere in the Japanese economy.
The FSA insists the banking troubles are under control. It says bad loans rose sharply last year largely because its examiners took a tougher approach when they inspected banks' books earlier this year. The examiners forced banks to classify loans that in the past might have been considered healthy as non-performing and to move more swiftly to identify and intervene with troubled borrowers.
Nobuyuki Kinoshita of the FSA's supervisory division predicts that bad loans will drop by 6 trillion yen ($49 billion) the fiscal year that ends March 31. He says that the FSA is already pushing banks to write off 10 trillion yen ($80 billion) in bad debt this fiscal year.
But critics say the government has talked tough before. Richard Katz, senior editor of The Oriental Economist, says the government promised to halve non-performing bank loans within two or three years. Instead, bad loans are still rising. ''Their credibility is gone,'' Katz says.
Failure to enforce discipline
Critics were dismayed when officials watered down to irrelevancy a plan to limit taxpayer-backed insurance coverage of bank deposits. Limiting deposit insurance was considered key to limiting taxpayer exposure to a banking meltdown. And it was seen as a way to force discipline on banks: If they had too many bad loans, jittery depositors would desert them.
Gutting the plan ''is a sign of the FSA's failure,'' says Takatoshi Ito, economics professor at Tokyo University. ''Clearly, this was a defeat.'' The reversal on deposit insurance also has badly damaged Prime Minister Junichiro Koizumi's reformist credentials.
''Outlaw banker'' Yokota says exposing problems and owning up to them can pay off. After his book on the absurdities of Japanese banking was published in the early 1990s, his supervisors at Bank of Yokohama punished him for his candor. They shifted him out of his cushy office job to one hauling sacks of money to racetracks. After more than a year of the backbreaking work, he quit and started writing full time.
Non-conformity can pay off
Although he earned a comfortable six-figure salary as a banker, he now earns three times as much writing about Japan's financial shenanigans.
He's given up the button-down world of banking and works in somewhat eccentric fashion from his bungalow in western Tokyo. On the front door, he's hung a pair of boxer shorts, painted over with Japanese characters saying ''Welcome.''
''I realized that if I wanted to stay in banking, I would have had to remain silent another 20 years,'' he says. ''I couldn't do it.'' |
