Japan banks in shock over $27bn failure
By Tony Boyd, Tokyo
A political deal for reviving the Japanese financial system has triggered the country's largest ever bankruptcy, with the collapse of Japan Leasing Corp, a non-bank lender with total debts of ¥2.18 trillion ($27 billion).
The collapse sent shockwaves through the Japanese financial system, driving down the share prices of its major backers. The shares of its parent, the stricken Long-Term Credit Bank (LTCB), fell by a massive 40 per cent. LTCB was forced to abandon Japan Leasing as part of a bank stabilisation deal finalised in the early hours of yesterday morning between the ruling Liberal Democratic Party and opposition parties controlling Japan's Upper House.
The opposition forced the LDP to drop a plan for injecting tax money into LTCB, which would have allowed it to rescue Japan Leasing and two other non-bank affiliates by forgiving loans of ¥250 billion.
Under the terms of the deal, LTCB will be temporarily nationalised, but it is still not known how much government funding will be put aside to rescue banks; who will decide which banks are viable; and how viable banks will obtain fresh capital.
Economists said the fall of Japan Leasing was a sign of the growing deflationary forces in the Japanese economy that were likely to strengthen in the final months of this year. "I think what we are seeing right now is the wrenching impact of deflation on corporate sales and the knock-on effect to financial companies," said Mr Andrew Shipley, chief economist at Schroders Japan.
"This is the first of many financiers and big corporates to go bust in the fourth quarter as the economy continues to implode."
The sharemarket impact of the Japan Leasing collapse was neutralised by what traders said was a blatant "price-keeping operation" by the Government, which helped push up the benchmark Nikkei 225 index by 185.5 to close at 13,909.4.
The bank stabilisation deal also came as Asahi Bank and Tokai Bank, two of Japan's top 19 banks, announced a strategic alliance which eventually may create Japan's second-largest bank under a new holding company. However, the combined problem loans of the two banks are ¥2.1 trillion and officials from both admitted they must overcome the bad loan problem before the merger could proceed.
Meanwhile, LTCB was yesterday clinging to the hope that it could proceed with a planned merger with Sumitomo Trust & Banking.
Japan's Finance Minister, Mr Kiichi Miyazawa, said the Japan Leasing collapse was not surprising but the adverse impact from its demise would be outweighed by the "psychological effect" of a bank stabilisation agreement.
The Prime Minister, Mr Keizo Obuchi, urged the Japanese people to remain calm. "The Government will ensure all measures to stabilise the financial market," he said.
The catalyst for the Japan Leasing collapse was a move last week by creditors of the company, including Yasuda Trust & Banking, to seek collateral to protect their loans.
A credit analyst at a major bank in Tokyo said that if this sort of activity became widespread, it could trigger a collapse in the traditional support mechanisms in the Japanese financial system.
Major lenders to Japan Leasing were LTCB at ¥255 billion, Mitsui Trust at ¥145 billion and Sumitomo Trust at ¥145 billion. Its single largest shareholder was Ricoh, which had a book value equity investment of ¥3.7 billion.
The biggest single burden from the Japan Leasing collapse will fall on unlisted agricultural co-operatives and financial institutions, which are owed ¥350 billion. The agricultural "zoku", or tribe, in the LDP was behind the attempts to force LTCB to rescue Japan Leasing and its failure to do so is seen as a major turning point in Japanese politics.
"I think this is a very important event because the LDP members who are deeply involved in the agricultural sector have been defeated within the LDP," said Dr Yoshio Suzuki, deputy chairman of the opposition Liberal Party's policy board.
There was little positive to come out of the Japan Leasing collapse according to Mr Jim McGinnis, banking analyst with Dresdner Kleinwort Benson.
Japan was staggering towards a resolution to its bad loan problem and Japan Leasing was just one drop of bad debts in an enormous barrel. "They need ¥30 trillion to recapitalise the banks, but are taxpayers going to pay for that?"
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