ot 15:04 DJS Japanese Lawmakers Set To Pass Long-Awaited Banking Reforms
15:04 DJS Japanese Lawmakers Set To Pass Long-Awaited Banking Reforms
TOKYO -(Dow Jones)- A set of long-awaited financial-reform bills is
expected to pass Japan's lower house Friday, after Japan's ruling and
opposition parties ironed out their last remaining differences by agreeing on
a 10 trillion yen fund for placing weak banks under government control through
share purchases.
The bills, based on legislation previously proposed by opposition
groups, are intended to rejuvenate Japan's crippled banking system and
stimulate the world's second-largest economy, which is mired in its deepest
recession since World War II.
The four bills were jointly submitted to the Diet by the ruling Liberal
Democratic Party and opposition parties. In a memorandum outlining the points
of the pact, the LDP, main opposition Liberal Party and the parties included
in the Heiwa Kaikaku (Peace and Reform) group also agreed to divest the
powerful finance ministry of some of its policy-making authority over the
financial system by 2000.
The legislation also calls for the creation of a special committee to
oversee the cleanup of the financial system, and requires failed financial
institutions to be liquidated either by putting them under state control or by
transforming them into bridge banks. That marked a significant concession by
the LDP, which originally wanted to inject massive amounts of public money
into weak institutions to keep them afloat. The parties agreed to abolish a 13
trillion yen pool earmarked by the LDP for recapitalizing weak banks.
The bills do allow the injection of public funds into financial
institutions that take over a failed company purchased by the state. The
government will temporarily nationalize insolvent banks by using the new 10
trillion yen fund to purchase the banks' shares.
The final agreement, coming after weeks of haggling that resulted in
on-again, off-again accords, makes it virtually certain that key reform bills
will be passed into law this month. The so-called financial-revitalization
bills are expected to pass the lower house of parliament, the Diet, on Friday,
with passage in the upper house to follow by a week or so. Politicians have
vowed to extend the current session of parliament beyond its Oct. 7 deadline
if necessary.
Although the LDP lacks a majority in the upper house, its alignment
with the two opposition groups in backing the financial-reform measures
guarantees that the bills will eventually clear the upper house, despite
expected resistance from the Japan Communist Party and the Liberal Party.
The pact represents a major step toward resolving Japan's mountain of
bad debt, which some estimate could total as much as $1 trillion. The pile of
uncollectable loans has prevented banks from generating the fresh lending
necessary for stimulating economic activity in Japan and troubled neighboring
countries, generating fears of an even deeper crisis in Asia.
Although the legislation scrapped the former scheme to use the 13
trillion yen pool to replenish the capital of troubled banks, it will provide
a safety net to weak banks all the same. By allowing the government to
purchase shares in troubled institutions using the 10 trillion yen fund, the
plan will ensure to some extent the soft landing that many analysts say is
necessary to keep the fragile financial system from crumbling.
And by also allowing banks that take over the operations of a
nationalized institution to receive capital infusions of public money if
necessary, the bills create an incentive to throw a lifeline to financial
institutions in need.
However, the plan is still likely to result in more sudden bankruptcies
among insolvent debtors of weak banks, following the example set by Japan
Leasing Corp. last Sunday. That's because in theory, the process of
temporarily nationalizing weak banks would force the institutions to settle
accounts with their borrowers, clearing the system of bad assets.
Questions remain, however, regarding what sort of criteria will be used
to determine a bank's fate in some cases. The special committee established to
oversee the financial-system cleanup will be empowered to take charge of a
bank deemed to be facing imminent failure or having actually collapsed. But
it's unclear what criteria the committee would use to determine that an
institution is on the verge of collapse.
Also, in the event of a failure, the committee would have the authority
to decide if the bank should be put under temporary government control, turned
into a publicly owned bridge bank or liquidated. But again, it's unclear what
criteria would be used to decide which route to take.
Under the bridge-bank concept, the government would take over weak
banks, and separate good assets from bad while continuing to lend to clients
deemed creditworthy. The bad debts will be split off and placed under control
of the government collection agency, which will try to first collect on the
loans, and then sell the uncollectable ones for whatever they will fetch.
Regarding the thorny issue of divesting some of the Finance Ministry's
authority over the financial system, Thursday night's agreement stipulates
that the necessary steps for splitting off some of the ministry's power be
decided by the end of the next regular session of parliament and be carried
out by Jan. 1, 2000.
The government will also merge two other debt collecting institutions
to create a Japanese version of the U.S. Resolution Trust Corp. The plan
stipulates that no former officials from the Ministry of Finance or Bank of
Japan may act as executives for that institution until they've been retired
for at least five years.
The pact comes just in time for Finance Minister Kiichi Miyazawa to take
with him when he travels to Washington to attend Saturday's meeting of Group
of Seven financial authorities followed by an annual gathering at the
International Monetary Fund from Sunday.
Tokyo has been under increasing pressure from the international
community to straighten out its financial system and get its economy back on
track. Just as the LDP and opposition parties were announcing their agreement,
IMF Managing Director Michel Camdessus was explaining to reporters in
Washington that one of the "most important" factors that would help to ease
the turmoil in financial markets is for Japan to put its financial house "in
order." Camdessus also said, "There are ways to contain (the world crisis).
One way is for the major players to discharge their responsibility to
stimulate growth."
On Wednesday, the IMF slashed its growth forecast for Japan's economy -
the world's second largest - to minus 2.5% this year from a previous
projection of flat growth.
Copyright (c) 1998 Dow Jones & Company, Inc.
All Rights Reserved.
(:J.LTC) (:J.NOB)
10/01 3:04p CDT
|
