By SHERYL WuDUNN
TOKYO -- From the stratospheric heights of their board rooms in glass-and-steel headquarters far above the narrow streets of Tokyo, Japan's top bankers once gazed with pride on the vast commercial empires they helped build.
Now when they look out, they see mountains of bad debt.
Japanese banks are the biggest on earth, but they are swaying frighteningly in the Asian financial typhoon. The possibility that a giant Japanese bank might one day come crashing down, sending shock waves around the globe, is a recurring nightmare, not just for Japanese bankers but for treasury officials and bank executives around the world.
Is that going to happen?
Probably not, most bankers and analysts say. But they do not say so with as much confidence as they would like.
When the United States and the International Monetary Fund rushed to bail out South Korea last month, their ultimate concern was less South Korea than its potential impact on Japanese and Western banks. Some of the Japanese banks are already wobbly because of a crushing burden of bad debts; indeed, the sum of bad debts held by Japan's banks is greater than the value of the entire economy of China, not to mention South Korea.
"It's very unstable," Alicia Ogawa, a managing director and banking analyst at Salomon Brothers Asia Ltd. in Tokyo, said of the financial system in Japan. "Everyone knows there's a huge shoe that's got to drop. Nobody knows when, who's going to pay and who it's going to land on. So, of course, everyone's sort of frozen and trembling in the corner."
For all the worries about Indonesia or South Korea, Japan's economy is twice as large as that of the rest of Asia put together, and so many analysts say the key question that will determine the future of the Asian crisis is simply this: What will happen in Tokyo?
Sure enough, the new finance minister, Hikaru Matsunaga, promised this past weekend that he would do his utmost to prevent any of the nation's top 19 banks from collapsing. Indeed, the money is there, for Japan is the largest creditor nation in the world, with assets that make the IMF look like a pauper, and so it is not risking the kind of liquidity crisis that felled South Korea. With $800 billion in bonds, direct investment and other securities abroad, the Japanese government is sitting on a comfortable cushion. "Japan still has a heck of a lot of money," said Kathy Matsui, strategist at Goldman, Sachs ( Japan ) Ltd. "It's a cushion that most Asian economies don't have and it's the cause of a lot of Japan's problems. They know that they have a cushion and can engineer a soft landing."
Still, there are jitters lurking in the market. Though it is unlikely to happen, the nightmare that still haunts bankers and executives around the world is the failure of a large Japanese bank that provokes a run on deposits. That run could even spread to otherwise healthy banks that might in turn prompt a sudden liquidity squeeze and paralyze these giants and eventually the global financial system. Markets could be battered from New York to London.
"There could be a systemic collapse, a meltdown," said James Fiorello, a banking analyst at ING Barings in Tokyo. "We're talking about a run that closes down proper banks."
The basic problem facing the Japanese banking system is bad debt, a mountain of it, and a subsidiary problem is that no one has a precise idea of how big the mountain is.
The banks report that they have $560 billion in bad or questionable loans, and they hold acres of boarded-up lots and half-empty buildings that they cannot sell but took possession of when loans went sour. When the stock and property prices fall, as they have been lately, the result is a further heap of bad loans piled on to the mountain.
Partly because of these bad debts, a few of Japan's major city banks are barely investment grade, and other banks are also being reviewed for possible downgrades by Standard & Poor's and Moody's Investors Service.
The bad debts have led to a series of incidents that could be called bank runs, except that the depositors lining up are so orderly that they do not seem very alarming. The authorities are closing down credit associations and small lending institutions around the country, and the vaults at the Bank of Japan, the nation's central bank, are swinging open as they never have before to provide cash for banks that anticipate withdrawals from depositors.
For months now, the Japanese have been switching a tiny portion of their 1,000 trillion yen, or $7.7 trillion, in savings from wobbly banks to the nation's top institutions and the government-run postal savings system. In December alone, Japanese flooded the postal savings institution with about 3.3 trillion yen, or $25 billion, about as much as the deposits at a major regional bank.
More important, the mountain of bad debts creates fears within the banking community that one of their number will fail, while holding money belonging to other institutions. So there is a fear that commercial banks would suddenly perceive one bank to be at risk and pull back their funds from it in the interbank market, the circulatory system for the financial world. The cutoff of funds could create a panic that would put healthy institutions at risk.
"Japanese banks are trendseekers, so if someone thinks one bank is dangerous, all the other banks pull the credit lines," said Naoko Nemoto, a financial analyst at Standard & Poor's.
Some worry that in a panic, money might be drained from even the big international Japanese banks, and those banks would then scramble for cover by pulling their lines from other institutions. The result could be a squeeze that would put strains on the banking system here and abroad even before Wall Street awakened.
The Bank of Japan has already begun to pour billions of dollars worth of yen into the markets, just to prevent a squeeze. Nonetheless, many banks have suddenly become aware of the fragility of their base of funding.
The government has stated that no more major financial institutions will fail, and it is issuing a 30 trillion yen bank bailout and a 2 trillion yen tax cut. Financial analysts and bankers say that the system will hold but that a couple of the weakest banks may be shut down, merged or absorbed by other institutions, perhaps even in the next few months.
"It is not desirable that you just drive them into a rock," said Paul Heaton, a financial analyst at Deutsche Morgan Grenfell, about the weakest banks. "It is better that you drop off a few lifeboats along the way." |
