Is this what we've waited for?
From tomorrow's Financial Times:
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SATURDAY SEPTEMBER 19 1998ÿÿAsia-Pacificÿ
Japan's parties agree on finance formula
By Michiyo Nakamoto in Tokyo
<Picture: Graph>Japan's government and opposition parties yesterday agreed on banking sector reforms that pave the way for measures to tackle the country's massive bad loan problem and revitalise the failing financial sector.
The deal will allow Keizo Obuchi, the prime minister, to meet US President Bill Clinton next week with evidence that Japan is working to solve its financial sector problems. US officials have recently increased pressure on Japan to speed its banking sector reforms and resuscitate its economy to prevent a global slump.
The agreement calls for the temporary nationalisation of the troubled Long Term Credit Bank of Japan and the establishment of an independent body, the Financial Revival Committee, to oversee the process. A 13,000bn ($97bn) public fund to recapitalise weak banks will be abolished and the finance ministry will be stripped of its powers over financial policy formation.
The agreement was reached in Tokyo after round-the-clock negotiations on Thursday between the ruling Liberal Democratic party and an opposition alliance. In the end, Mr Obuchi and the LDP had to give in to most of the opposition's demands on key issues.
Naoto Kan, leader of the Democratic Party of Japan, the largest opposition group, hailed the deal as a victory for the opposition. "The government and LDP have accepted the proposals of the three (opposition) parties almost in their entirety," he said.
Mr Obuchi said his decision to give in to the bulk of the opposition's demands was based on his determination that "no matter what, Japan must not cause a financial recession in other countries".
There was general relief that a deal had at last been reached. However, analysts expressed concern that the measures agreed were not a comprehensive blueprint for reform but only one step in a long process of dealing with the problems of the financial sector.
"I think this is a very significant first step which is a much clearer plan (than the LDP's)," said Yoshimasa Nishimura, professor at Waseda University in Tokyo. "But it is just the beginning and it will be very hard to implement it."
Questions remained over how and at what price the government would buy the shares of LTCB and other banks which ask to be nationalised, and what criteria would be used to determine healthy and unhealthy borrowers.
Neither does the plan address the issue of how to revitalise weak banks and prevent a further credit squeeze, critics say. "You're going to have to privatise (the banks) eventually, which assumes someone needs to have the capital to buy the bank's good assets," said Richard Koo, chief economist at Nomura Research Institute.
Mr Koo warned that the strict measures could drive other troubled Japanese banks to cut off their weaker borrowers, resulting in a further credit squeeze. The LDP is calling for an alternative mechanism for recapitalising weak banks to be included in the deal.>>>>
Related article:
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SATURDAY SEPTEMBER 19 1998ÿÿAsia-Pacificÿ
JAPAN: Question marks remain over banks
By Paul Abrahams in Tokyo
The compromise reached yesterday between Japan's ruling Liberal Democratic party and the opposition may have brought the crisis of the Long Term Credit Bank (LTCB) of Japan to a close, but it goes only part of the way to solving the rest of the problems afflicting the Japanese banking system.
The decision to nationalise and then liquidate LTCB, forced on the prime minister, Keizo Obuchi, by the opposition, neatly solves some difficult problems. Although the bank's eventual failure was inevitable - at 19 (14 US cents) a share it was priced for bankruptcy - there were significant fears that an uncontrolled bankruptcy could lead to a collapse of the Japanese financial system.
In particular, many bankers were concerned that counterparties which had lent to the LTCB could lose their loans, or be left with below-value collateral. They also expressed anxiety about the bank's extensive derivatives contracts. In the event, the decision to nationalise the group solved its liquidity problems at a stroke, because LTCB's debts have in effect become sovereign.
Questions remain, however, about how the group will be wound up. It is unclear how much shareholders, such as Daiichi Mutual Life Insurance, Nippon Life and Asahi Mutual Life Insurance, would receive. The company's shares peaked 11 years ago at 2,820. But at 19 a share yesterday, the group's market capitalisation was just 45bn ($340m).
Also in doubt is the future of LTCB's joint ventures with UBS of Switzerland, and the proposed merger of LTCB with Sumitomo Trust. One option is that once the bank is nationalised its good loans will be sold to Sumitomo Trust, while the government uses public funds to cover the cost of poorly performing assets. After that it could eventually be liquidated. An alternative is that it could be used as a bridge bank, merging with other troubled financial institutions.
Whatever happens, LTCB will no longer exist in its present form. The bank will be little lamented. Hugely inefficient, it had outlived its original purpose - to supply long-term credit to critical industries. It had become an anachronism, made redundant by the growth of Japan's corporate bond market, which could provide credit more cheaply.
But although yesterday's deal means LTCB is now neatly trussed for a speedy demise, a huge question mark remains over the rest of the banking industry.
The pressures on the sector have not abated. The economy remains mired in the worst recession in 50 years. Bankruptcies are at record levels, and bad debts seem to appear faster than the banks can write them off. The industry is under-capitalised and has over-capacity.
The biggest danger is that the markets, having tasted blood with Hokkaido Takushoku and now LTCB, will move on to other ailing banks. Yesterday, Yasuda Trust, part of the troubled Fuyo business group, fell 2 per cent to 82. Daiwa Bank, whose shares rose 4 to 157, remains near its low for the year of 147.
Critical to the stabilisation of the banking system will be the creation of the Financial Revival Committee (FRC). This is the brain-child of opposition parties, and is designed to be an independent body holding powers previously wielded by the ministry of finance.
"The new committee is the key," says James McGinnis, financial analyst at Dresdner Kleinwort Benson in Tokyo. "First it must be created quickly, then it must draw up rules about what is a good bank and what is a bad bank, and finally it must then have the authority to act on that definition, powerful enough to see off the entrenched interest groups anxious to save particular institutions. It must be judge, jury and executioner, ready to put the bullet into the head of the bad banks."
Once the bad banks have been dealt with, public money will be used to recapitalise the healthy financial institutions. This would then allow them to begin expanding their balance sheets, ending the credit crunch and theoretically boosting the economy - as long as companies have not been so traumatised by the recession that they no longer want to borrow.
However, the speed at which the FRC will be created remains uncertain. The opposition hopes to have it in place by April. The LDP, which wants to keep shaky banks going because they provide loans to big contributors to the party such as construction companies, initially talked about 2003.
The pace of banking reforms - and the speed of economic recovery - will depend on the political wrangling over the FRC's creation in coming months.
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