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. (After this story was published, Japan's Economic Planning Agency released figures showing that GDP had declined a far-worse-than-expected 1.3%.)
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." |
