Don-
An interesting article in the NY Post. Does this
signal a bottom in the Japanese economy?
nypostonline.com
JAPAN GETS READY, OUR TURN TO WORRY
By JOHN DIZARD
THE biggest financial and economic news of the year so far came last Tuesday, hardly noticed by the
media.
On that day the Japanese bank regulatory
authorities issued a set of tough, even brutal
guidelines for the banks on the loan-loss reserves
that have to be taken against bad loans. They came
as a big shock to the Japanese banks. But investors seemed to like the news and bid up the Japanese
bank stocks, which were the reason for the Nikkei's rally this week.
Since the beginning of the Japanese depression, the banks have been able to keep their zombie assets on the books long after their real value has
collapsed. Americans, both on Wall Street and in
the government, have gotten their moralistic
jollies lecturing the Japanese about how they have
to face reality, come clean, take the hit, just
like we did after our coke-and-debt fueled Decade
of Greed.
History tells us that the Japanese nation
alternates between prolonged dithering and
indecision and powerful, fully coordinated drives
to well-defined goals. For the past several years,
the Japanese have wandered aimlessly trying to
agree on what to have for lunch. Now they seem to
have decided that they're going to be General
Grant's army on the way to Richmond.
The interesting question for us, of course, is what is in this for us? Americans, I mean, and Wall
Street people in particular? There will be a lot of assets priced to sell in Japan. So the
value-investing community will at last have
something to do there. And our financial markets
will once again have the Japanese economy as a
serious competitor for the world's spare cash.
The losses the Japanese are going to take are
rough. In the U.S., for example, a category-three
defaulted loan requires the bank to set aside
reserves equal to 50 percent of its value. From now on, in Japan the bank will have to set aside
reserves equal to 70 percent of the face value for
an equivalent asset. And it's not just a couple of
overextended oil wildcatters and strip-mall
developers we're talking about here. The official
estimates for the Japanese bank's bad loans are
around $600 billion for the top 17 banks and $800
billion for the banking system as whole. If the
economy continues to sink for much longer, the
estimates go up to $1 trillion.
One trillion dollars. I seem to recall getting a
letter from Publishers Clearing House saying I
could already have won that much. To put it in some perspective, $1 trillion is the most commonly
accepted number for how much more the Japanese have - net - lent or invested in the rest of the world.
In other words, all those VCRs and Toyotas and
Hello Kitty toys, all the empty office towers in
Houston and Bangkok, assembly plants in Tennessee - they're all going to pay off the bad judgments of
their financial managers.
Most people don't like to admit to making mistakes
like that. Not even universal geniuses such as we
have in the U.S. Treasury's international staff who have been generously devoting their advice to the
Japanese over the years. Let's give the Japanese,
specifically the Bank of Japan, credit for picking
up the shovels to clean out the stables.
For the moment, though activity in the Japanese
economy is still sinking fast. Housing starts are
the worst since 1984, employment is still falling,
retail sales look like a summer resort's in
November and price deflation - crippling for
borrowers - is threatening to continue.
But the forces of darkness - represented by the
sinister Ministry of Finance and the old postwar
business establishment - are in retreat.
It's hard to understand how important bank
write-offs and loan-loss reserves are until you see the effect they can have on turning around a
business. Back in 1990, I was in a small workout
partnership that specialized in reorganizing
private companies in New Jersey, New York and
Connecticut. We were looking at taking over a
200-unit convenience-store-chain in Jersey that
couldn't make the payments on its bank loan. We
offered to put up some new equity, found a
successful c-store-chain owner willing to be the
operator and went to the bank that held the paper
to get it to take the needed 40 percent haircut on
the loan. The bank officer who'd made it
stonewalled taking the loss. The reason, of course, was that the bank didn't have the capital to take a write-off, and it would mean his job. The result?
We walked away, poorer for our time and the
lawyer's fees. The bank was forcibly taken over,
much to our delight, the stores folded, the loan
was a write-off and, I hope, the loan officer
became a store clerk himself.
The point is, recognizing a loss makes it a lot
easier to get restarted. Now the Japanese people -
not just a few commentators - have recognized that. The Japanese government, or rather, its more
progressive faction, is saying that it will chip in new bank capital - subsidized by the taxpayer, of
course - to make sure the system stays in place
after the write-offs are taken. It's too early to
finish the process by the Japanese year-end in
March, but the bank crisis should be over by, say,
April of 2000.
*Please send e-mail to
dizard@nypost.com
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