Wall Street Journal - 10/01/98
By BILL SPINDLE, NORIHIKO SHIROUZU and JATHON SAPSFORD
TOKYO -- A key Bank of Japan survey released Thursday painted a grim picture of business conditions in the world's
second-largest economy a day after the stock market fell to a new 12-year low.
The survey adds to a raft of bad news Wednesday that included the country's largest regional government's declaring a fiscal crisis,
a new wave of corporate-debt downgrades by ratings companies and a new reminder of the extent of Japan's bad-loan problem.
The benchmark Nikkei 225 average shed 415 points, or 3%, on Wednesday to close at 13,406, the lowest point since February
1986. The Japanese economy's most vulnerable areas-the real estate and financial industries-led the rout. At the end of the morning
session Thursday, the index was down 123.91 points to 13282.48, following the release of the central bank's tankan survey, which
showed business conditions even worse than many economists expected.
The stock market's decline on Wednesday, which left the Nikkei closing out Japan's fiscal half-year at 18% below where the stock
average began the year on April 1, came late in the trading day as investors realized that an infusion of public funds that many
thought would buoy the market never materialized. In the final hour of trading, investors refocused their attention on the depth of
Japan's problems.
There was plenty of new grist for concern:
The municipality of Tokyo, Japan's largest prefectural government, became the third regional government to declare a state of "fiscal
crisis." The severe budget shortfall at the municipality, just one of several large regional governments in dire straits, is important
nationally because cutbacks at the local level could undermine the central government's efforts to revive Japan's moribund economy.
Moody's Investors Service Inc. cut its rating on the debt of Japan's largest broker, Nomura Securities Co., in the latest of a wave of
such downgrades by U.S. credit-rating agencies. On Tuesday, Standard & Poor's Ratings Services took the highly unusual step of
simultaneously placing 22 major Japanese companies on review for possible downgrades.
Bank shares plummeted more than 5% as a group on Wednesday. After the market's close, Fuji Bank Ltd., one of the banks whose
shares were pounded hardest, gave a new accounting of its problem loans that was more than 50% larger than it had previously
disclosed. In doing so, Fuji Bank became the first Japanese bank to disclose the huge new category of "gray" loans, which are
considered problematic but not in default. While considered largely recoverable, Fuji's newly disclosed loans were a reminder that
many banks may still not be fully facing up to the true size of their problems.
The developments come against the backdrop of Japan's deteriorating economy, which is in its longest and deepest slump since
World War II. The Tankan survey, closely watched because it serves as an important policy making guide for the central bank,
showed that confidence among major manufacturers as measured by the bank's "diffusion index" plunged to a minus 51 from a
minus 38 in June, the last time the survey was conducted. The index indicates the percentage of responding companies that believe
conditions are improving minus the percentage who believe conditions are growing worse.
Among major nonmanufacturers, confidence slipped to a minus 36 from a minus 28 in June. Confidence among small manufacturers
dropped to minus 57 from minus 49, while the index for small nonmanufacturers fell to minus 44 from minus 42. Wednesday, the
government reported that, in August, industrial production fell 0.6% from the previous month's level; retail and wholesale sales
dropped 6% from a year earlier; and housing starts were down 11% from August 1997.
Local Governments Strapped
Tokyo City's plight illustrates how the gloom is spreading. The central government is now implementing a 17 trillion yen ($126.3
billion) tax-cut and spending package to spur the economy, but the program has shown few results so far and its success has been
further thrown into doubt by the escalating problems at regional governments such as Tokyo. Tokyo Gov. Yukio Aoshima on
Wednesday told prefectural officials that a severe tax-revenue shortfall is almost certain to force the municipality to trim spending.
Tokyo is the third of Japan's 47 regional governments to declare a fiscal crisis, and analysts say several more will probably follow. If
local governments begin skimping on their portion of the spending in the economic-stimulus package -- in which they participate by
voluntarily matching some central-government expenditures -- the stimulus package could end up significantly diminished. That
would further hobble Japan's economy when consumer and business spending are falling. "There's only one engine of growth in the
Japanese economy right now: public spending," said Ron Bevacqua, a Merrill Lynch economist.
Even Strong Companies 'Vulnerable'
The precipitous decline in the economy -- gross domestic product has contracted for three straight quarters -- is already taking a toll
even on some of Japan's strongest companies. S&P said its move to place the 22 companies on review reflected the deteriorating
overall economy as much as the circumstance of each company. "Even strong companies could be vulnerable if their key
customers, suppliers or lending banks become embroiled in problems," the agency said in a statement.
The companies whose ratings S&P will review include Toyota Motor Corp., Toshiba Corp. and Nippon Telegraph & Telephone Corp.
Toyota denied that its ability to meet obligations will be impaired. A Toshiba spokesman said the company was "puzzled" by the
ratings move. An NTT spokesman declined to say whether the action was appropriate. Nomura said it will try to remedy
weaknesses that Moody's cited in its downgrade.
Fuji Bank's Disclosures
Fuji Bank's new accounting of its problem loans, while considered a step forward by some analysts, was a stark reminder of the
obstacles to the resolution of Japan's financial problems, which many economists say are standing in the way of recovery. Fears
remain that a political deadlock in Parliament will prevent a key package of banking laws from passing before Oct. 7, when the
session ends. "There is still confusion and a lack of consensus" among lawmakers, said Naoto Kan, chief of the opposition
Democratic Party of Japan.
Fuji Bank stock, the most-active issue on Tokyo's exchange Wednesday, fell 43 yen, or 14%, to close at 275 yen. That helped to
push the bank's management into holding a news conference to disclose more information about its problem loans. The bank said
that as of March 31, it had 2.5 trillion yen in loans that are considered bad, problematic or requiring special attention. That is higher
than an earlier figure of 1.6 trillion yen.
Fuji Bank's disclosure is expected to cause other banks to follow suit, something critics would welcome. But boosting disclosure
raises new problems. Fuji Bank officials, for example, say they have only set aside "a few percentage points" in reserves in case
these gray loans turn bad. Many critics say reserves of 15% to 20% would be prudent, considering Japan's economic state.
But, says Fuji Bank Deputy President Tosaku Harada, "raising reserve requirements would just make the credit crunch worse." |
