The Deflationary Spiral
19 Largest Banks Have Negative Capital
TOKYO - The head of the government economic agency said Tuesday Japan could tumble into a dangerous deflationary spiral, as banking experts here warned that Japan's huge financial problems could rapidly deteriorate if government inaction continued.
''The banking system is quickly worsening,'' said Naoko Nemoto, a banking analyst at Standard & Poor's.
Yushiro Ikuyo, a banking analyst with Commerz Securities, said, ''Bad loans are increasing because of the domestic economy.'' Japan's weakening economy means more companies are unable to repay loans, thus depriving banks of the money they need to make new loans.
Taichi Sakaiya, head of Japan's Economic Planning Agency, highlighted the serious deterioration of the economy. He said that although Japan's economy was not in a deflationary spiral, it was ''at the entrance of one.''
Mr. Sakaiya's remarks followed the release of the agency's monthly report on the economy, which called the current situation ''very severe.'' Mr. Sakaiya said Japan must be vigilant ''so that we will not be sucked into a deflationary spiral,'' Reuters said. ''We must not make a mistake,'' he said. ''We are in a dangerous situation.''
A deflationary spiral is a Depression-like situation, where falling demand causes prices and sales to drop, which causes profits to fall and inventories to pile up. That leads companies to cut back on investments and employees, which causes demand to fall further.
Mr. Saikaiya said he expected the economy to revive once the government's plans for renewed spending and tax cuts were enacted. But experts fear that the banking crisis could explode by then, unless the government accelerated the disclosure of troubled loans, forced banks to dispose of those bad loans, aggressively injected hundreds of millions of dollars in public funds into viable banks, and closed insolvent ones.
Analysts said efforts by the governing Liberal Democratic Party to prop up weak banks, the so-called soft-landing approach, would lessen the immediate panic. But it will also delay resolving the problem, because it will not result in a banking system that can generate its own profits, meaning more bailouts would probably be needed.
''The risk of trying to engineer a soft landing is that the potential for a hard landing, or in other words crash, is quite large,'' Yukiko Ohara, a banking analyst with Morgan Stanley Dean Witter, wrote in the Economist, a leading Japanese business weekly magazine.
In the article, Mrs. Ohara calculated that on Aug. 28, Japan's 19 major banks had more liabilities than assets. She estimated that the largest 19 banks would be $7.6 billion in the hole, if banks were required to write off significant portions of their bad loans. ''The amount of bad loans has expanded like a snowball sliding down a slope,'' said Seiroku Kajiyama, a Liberal Democratic Party politician and banking-reform advocate who ran against Keizo Obuchi this summer for the post of prime minister. In an article for the October edition of ''Bungei Shunju'' magazine, Mr. Kajiyama wrote that the $229 billion in rescue funds approved by the government last winter was sufficient then to deal with the banking problem. ''But since the government has not thoroughly dealt with the bad-loan problem, Japan is now at a critical stage,'' where even $382 billion might not be enough, he said, according to Reuters.
Mr. Kajiyama criticized the Liberal Democratic Party for preparing to inject possibly billions of dollars into the ailing Long-Term Credit Bank of Japan Ltd. without explaining whether this would solve its problems. The party's ''soft-landing'' approach has led it to try to force Sumitomo Trust & Banking Co. to take over Long-Term Credit. Despite intense pressure from Mr. Obuchi, Sumitomo Trust so far has balked at the plan, because the government wants it to continue to lend to many of the shaky customers at Long-Term Credit Bank.
Analysts have said such a merger could weaken Sumitomo Trust. Nevertheless, to try to change Sumitomo Trust's mind, the party plans to pour massive amounts of public funds into Long-Term Credit. The opposition parties have blocked this plan, up until now, saying they would not agree to a bailout until the government disclosed the extent of Long-Term Credit's bad loans, which the government has refused to do. The opposition has said the banking industry must be consolidated and a few of the weakest banks should be allowed to fail. But Kyodo news service reported Tuesday that the opposition parties might be backing down on their disclosure demands.
Because the government has refused to reveal Long-Term Credit's financial condition, there is widespread speculation that it is insolvent, something the Liberal Party has denied. Banking experts speculate the party does not want to admit Long-Term Credit's dire finances for political reasons. Last winter, the government stipulated the bank was not insolvent when it gave Long-Term Credit and other top banks a cash injection.
Another concern for policymakers is that bank failures can hurt profits in other industries, which are already reeling from Japan's recession. That is because under Japan's traditional business structure, Japanese corporations were expected to buy the stocks of their main banks. In fact, about 25 percent of all of Japanese bank shares are held by nonfinancial corporations in Japan, according to Craig Chudler, a strategist at Salomon Smith Barney. So a bank failure can wipe out a hefty portion of a corporation's assets.
Despite the focus on Long-Term Credit, analysts warn that Japan's banking troubles are more widespread. ''I think there are other banks, more than a couple, in a shape similar to Long-Term Credit Bank,'' said Mr. Ikuyo.
One bank with large amounts of problem loans, Sakura Bank, last week announced it would seek an emergency infusion of $2.3 billion cash from Toyota Motor Corp. and Mitsui Group. Sakura Bank has been the main bank of Mitsui, which includes 80 core companies and about 2,000 other closely linked firms.
James McGinnis, a banking analyst with Dresdner Kleinwort Benson, said the corporate bailout might help the banking system, if Sakura Bank used the opportunity to radically restructure to become profitable. But he said he saw no indication that would happen. Other experts questioned whether companies would have enough cash to bailout Sakura Bank, given their own falling profits.
International Herald Tribune, September 9, 1998 |
