Japan could face financial crisis 'at any time': Fukui
Wed May 21, 7:12 AM ET
TOKYO (AFP) - Bank of Japan governor Toshihiko Fukui said the country could suffer a financial crisis "at any time" unless its near crippled financial sector is fixed, with the banks becoming more and more vulnerable to shocks.
The warning came after the BoJ downgraded its assessment of the economy for the first time in six months on fears about the impact of SARS (news - web sites), a weak dollar and risks at home after the government decided to bail out a major bank.
"If appropriate solutions to the problems of financial institutions are not carried out, we have to say Japan faces a situation where a so-called financial crisis could be triggered at any time," Fukui said Wednesday.
"Financial institutions are making efforts to overcome the bad-loan issue and at the same time are seeking to create more highly profitable systems to strengthen their health," the governor told a parliamentary committee.
"Against this background, we have to say that financial institutions still have difficult hurdles to overcome," Fukui noted, adding this meant their fundamentals remained weak.
The government has instructed banks to halve the ratio of bad loans on their books -- cited as a root cause of Japan's economic slump -- by March 2005.
Lenders must also evaluate their assets using stricter standards, which have eroded their capital base.
Japan's fifth largest bank, Resona Holding Inc., on Saturday was forced to ask for government help after admitting its capital adequacy ratio had fallen below the required level of four percent.
Fukui told lawmakers the banks were not yet in crisis but their resistance to shocks was declining.
"Therefore, if their problems cannot be solved in an appropriate way, difficulties at a single bank, for example, may spread to other financial institutions, triggering major fears," he cautioned.
Analysts, however, felt the authorities would prevent any crisis as demonstrated by their decision to inject funds into troubled Resona.
"We are likely to see the government and the Bank of Japan continuing to take action," said Paul Sheard, chief economist in Asia for Lehman Brothers.
Economic and Financial Affairs Minister Heizo Takenaka admitted Tokyo may end up spending 2.3 trillion yen (19.7 billion dollars) to bail out Resona Bank, the holding group's core banking unit.
Although an imminent financial crisis was unlikely, Japan's economy remained riddled with problems, analysts said.
An economic recovery "has come to a standstill and over the next quarter or so things will start to turn down," Sheard predicted.
"The weakness in the economy, serious deflation and at the same time weakness in the financial system ... is a slightly disturbing cocktail."
Deflation was one of the triggers prompting the BoJ to downgrade its monthly economic assessment for May.
The announcement came a day after the central bank eased monetary policy in a bid to support the economy and steady financial markets hit by fears about the spread of the deadly SARS virus and planned rescue of Resona.
"Financial institutions cannot be revived unless the economy itself recovers," said Hisashi Yamada, senior economist at Japan Research Institute.
Lawmakers are calling on the bank to adopt more radical measures, such as an inflation target, to reverse deflation and boost economic growth.
Therefore Tuesday's decision by the BoJ to raise liquidity in the financial system was largely ignored by the markets, while analysts described the move as more of the same and ineffective.
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