Japan's Government Imperils Economy, Banks, Ex-Regulator Says
By Finbarr Flynn and Komaki Ito
Dec. 4 (Bloomberg) -- Japan’s government is leading the nation’s banks and economy into a crisis worse than that in the U.S. by softening rules and encouraging lenders to make risky loans, the country’s former top regulator said.
“Politicians are trying to make the financial regulator relax discipline, which is the worst thing you can do,” said Hirofumi Gomi, who spent a decade at the Financial Services Agency and its predecessor, including three years as its chief until July 2007. “If this continues, it will lead to a terrible situation in Japan surpassing the problems in the U.S. and U.K.”
The government and the agency have urged banks in recent months to boost loans to small companies, and made it easier for lenders to ignore losses on their own stock holdings -- a recipe for disaster, says Gomi, 59, who stepped down as chief regulator at the end of his term.
A lack of political leadership and the deadlock caused by opposition control of Japan’s upper house imperil the world’s second-largest economy just as the international community faces the risk of another Great Depression, he said in an interview yesterday.
“The political vacuum is making the situation worse day by day,” he said.
Gomi led a push by authorities to protect the rights of investors and was responsible for forcing banks to disclose bad loans from the late 1990s, when lenders were saddled with property debts dating back to a real-estate bubble in the 1980s.
Pushing Lenders
Prime Minister Taro Aso‘s government is struggling to pass a bill allowing it to inject public funds into local lenders that may need funds after the Nikkei 225 Stock Average fell 47 percent this year, eroding the value of the 25.6 trillion yen in shares held by banks at the end of March.
The government wants lenders to ease financing strain on companies and is allowing banks to classify fewer loans as risky or non-performing. Finance Minister Shoichi Nakagawa met heads of commercial banks yesterday to encourage more funding for small firms, the Financial Services Agency said. Nakagawa doubles as minister responsible for the banking regulator.
Aso unveiled a 5 trillion yen ($53 billion) stimulus package in October after Japan slipped into its first recession since 2001. Takeshi Noda, head of the governing party’s panel for revitalizing rural areas, said on Dec. 1 “no one really believes the measures are enough” and urged more public works spending.
Gross domestic product will shrink 0.45 percent in the year through March 2009 and 0.3 percent the following year, according to the median estimate of 16 economists surveyed by Bloomberg.
‘Getting Pressure’
Japan’s rules on bank capital-adequacy ratios, which require lenders to set aside funds as a buffer against risk, will be relaxed until March 2012 to free up money for lending amid the global credit squeeze, Nakagawa said on Nov. 7.
Banks that adhere to domestic capital-adequacy rules, including most regional lenders and credit cooperatives, won’t have to deduct valuation losses on shares and bonds from their capital bases, as was previously required.
Allowing banks to hold onto shares that have declined in value without reflecting the losses against capital, while at the same time offering to buy the shares through a government agency at a loss to the banks, doesn’t make sense, Gomi said.
“There’s no way the Financial Services Agency could come up with such an idea,” Gomi said. “I can’t help but think they’re getting pressure from somewhere.”
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