Light at the end of the Asian tunnel?
Market Features: A Real Bailout for
Japan
By Justin Lahart
Senior Writer
6/11/98 7:40 PM ET
Whether true or not, it is a popular conceit that only a great
crisis can effect change in Japan. There are, after all, some
pretty swell examples of this: Commodore Matthew Perry
steaming into Uraga in those famous black ships of his,
thrusting Japan into an industrial world, or the country's
boom after the decimation of World War II.
It seems somewhat hyperbolic to lump Japan's current
economic crisis in with those more traumatic points in its
history, though given the Japanese government's
recalcitrance in dealing with its troubles, it's understandable
that various pundits would bemoan Tokyo's apparent
myopia. There may not be black ships on Japan's horizon,
but clearly things are not good.
There are indications, however, that Japan is making
motions toward paying its piper -- and not a moment too
soon. Expectations are that Japan's first-quarter gross
domestic product figures, set for release tomorrow, will
show a drop of 0.3% -- even George Bush would be forced
to say that suggests a recession.
Unemployment has reached a postwar high of 4.1%. (That's
worse than it appears -- Japanese labor statistics are more
forgiving than they are in the U.S.) The yield on the
benchmark 10-year government bond is threatening a drop
below 1%. And then there is the falling yen -- with dollar/yen
breaking through 144, fears have heated up that its
weakness will incite China to devalue the renminbi, heralding
a new leg down in the Asian economic crisis.
(TheStreet.com outlined the dangers of this scenario --
dangers the market has lately appreciated -- in a June 4
story.)
For many, the root of Japan's problem lies in the banking
sector's bad loans, which represent a massive drag on the
Japanese economy. Bank estimates put forth in January
suggested that they totaled 77 trillion yen -- 16% of Japan's
gross domestic product -- and that is likely a conservative
estimate.
"The true amount of bad debt is substantially larger than the
amount disclosed thus far," said Ryan O'Connell, senior vice
president at Moody's Investors Services. Until those loans
are cleared up, it's unlikely that Japan will be able to clear
itself of its muddle.
Russell Jones, a Tokyo-based economist at Lehman
Brothers, outlined the gist of the problem in a recent
research note: "[F]inancial institutions have taken a cautious
stance toward higher-risk lending, so that the availability of
credit for small and medium-sized firms (60% of total
outstanding loans) and individuals, whose credit risks are
relatively high and access to the capital markets is limited,
has been constrained. Aggregate bank lending to small and
medium companies has been consistently weak in the
1990s, while unlike past periods of monetary easing and
cyclical recovery, business investment by these enterprises
has also been anemic. Furthermore, with the sudden
deepening of Japan's economic and financial difficulties in
the middle of last year, it would appear that banks have
adopted even more restrictive credit conditions and
increasingly extended these to even larger firms."
A Man, a Plan, Japan...
With banks in such dire straits, the various economic
stimulus programs the Japan's ruling Liberal Democratic
Party has put forth have had limited effect on the economy.
While they may spur growth in the short term, they are
unlikely to get anything sustainable going. "The economy is
not responding to normal policy because the banking
system is in such bad shape," explained Richard Koss,
international economist at MFR. "An RTC-type program to
put the banking system back on its feet is certainly a high
priority."
Koss is nothing like a voice in the wilderness on that front.
Treasury Secretary Robert Rubin, speaking before the
Senate Finance Committee today, voiced his frustration
over Japan's slowness in creating "an effective program to
address the problems of the banking sector," and said
continued weakness in Japan puts the rest of Asia in peril.
It's certainly unclear whether an "effective program" to deal
with bad bank loans is in the cards, but it appears that
some kind of bailout plan is in the offing. Experts who
helped frame the U.S. savings and loan bailout, frequent
callers on Japan for a while now, have apparently been
spending even more time there lately. Japanese officials
have been quietly telling various strategists and opinion
leaders that plans are in the works to deal with the banks. A
notion that Japan will finally address its banking problems is
beginning to take hold.
Such a reform program will likely come after the July 12
upper-house elections -- and in many ways depends upon
how they pan out. Though commentators cite the lack of
political opposition as one of the root causes of Japan's
current problems (and surely this is in some ways the
case), in the current situation it is important that the Liberal
Democratic Party consolidate its position, showing the
credibility of the party's reform-minded factions. If the LDP
can add three or more seats to the current 64, which
appears likely at this juncture, the chances of meaningful
reform increase.
The announcement of a financial reform plan would likely
come very shortly after the election -- in time for Prime
Minister Ryutaro Hashimoto's trip to Washington on July
20. Photos of President Clinton clapping Hashimoto on the
back (watch it, Bill, the guy's good at kendo). Smiling shots
of Deputy Treasury Secretary Larry Summers catching
up with his old Harvard colleague, Vice Finance Minister for
International Affairs Eisuke Sakakibara. Rubin chatting it
up with whoever the heck his new counterpart is. You get
the picture.
Don't Believe the Hype?
To what extent will this scenario play out? Japan has offered
up so many head-fakes on this front that it would be a
mistake to say we are not treading on dangerous ground
here. Yes, some sort of bailout plan will likely be
announced. Yes, that may send the Nikkei hurtling toward
20,000. These things have happened before, and thus far
they have always ended in disappointment.
A bailout for Japan that truly flushes out the financial system
would likely run along the lines of the S&L bailout in the
U.S. and involve something akin to the Resolution Trust
Corp. to dispose of assets -- principally the real estate that
banks are holding on their books. It would be incredibly
costly.
"I made a prediction back in 1992 that they would have to
restructure," said Bert Ely of Ely & Co. -- a frequent
commentator during the S&L crisis. "I said that their crisis,
per capita, had the same cost for a bailout as the S&L
crisis. It's now several times that." The S&L crisis cost an
estimated $155 billion to $160 billion.
There are other problems as well. A true bailout would likely
mean the failure of some of the long-term credit banks, trust
companies and city banks -- just as many S&L's were
doomed to failure. Politically, that's immensely difficult. The
men running those banks often worked in Japan's Ministry
of Finance. They were in the same economics classes at
Tokyo University as MOF workers. Ties are deep, and that
makes allowing bank failure in Japan -- where the entire
business substructure is based, in part, on risk aversion --
even harder.
Additionaly, the reform plan will have to be enacted rather
quickly. Phil Suttle, economist at J.P. Morgan, estimates
that Japan's fiscal stimulus plans will start hitting the
economy in July or August. That added growth will not last
forever. It is imperative that the government strike while the
irons are hot -- otherwise the stimulus plans will have
amounted to a bigger national debt, a few more roads and
little else. The notion of any government, let alone the
Japanese government, getting things done in a timely
manner seems somewhat far-fetched.
Nevertheless, the possibility of real reform in Japan cannot
be entirely discounted. Japan is not interested in being cast,
as it has been lately, as the scapegoat for Asia's trouble. It
is true that there are cultural constraints in the way that
Japanese leaders work through problems -- just as there are
constraints the way U.S. leaders do things -- but it is wrong
to suggest they are stupid.
"Six months ago, there was not even a realization that there
was a problem," said Don Fine, chief market analyst at
Chase Asset Management. "Now they know there is a
problem, and they have to come up with a way to deal with
it. They realize whatever it is they do, it can't be sticking a
finger in the dike. If I'm wrong about this, and they come out
with some piddly program, then I think the markets will
severely punish them."
See Also
MARKET
FEATURES
Crumbling
Japan Raises
Specter of
Broader
Asian
Decline
6/4/98 10 AM
MARKET
FEATURES
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