Japan's Parliament Passes $517 Billion Bank Rescue PackageOctober 17, 1998
By SHERYL WuDUNN
OKYO -- The Japanese Parliament completed passage of a plan Friday that commits $517 billion worth of taxpayer funds to rescue the nation's teetering banking system in an attempt to get money flowing through a crippled economy.
Passage of the rescue legislation had been expected, but it was nonetheless welcomed as marking a conclusion to months of acrimonious bickering among politicians in Japan. The legislation had received worldwide attention as officials of other countries looked to Japan to help avert a global recession.
Along with a second set of newly passed banking laws, the package is the biggest in a series of bailouts that the governing Liberal Democratic Party has assembled to stave off a collapse of Japanese financial institutions -- in a system weakened by hundreds of billions of dollars in bad debt.
Nearly half the rescue money will be used to expand the capital base at the banks, which have grown reluctant to lend out of fear that they will not be repaid. A squeeze in credit, despite record-low interest rates, has deeply hurt many businesses and aggravated the worst postwar recession in Japan, the world's second-largest economy.
The rest of the rescue funds will be used to guarantee deposits at financial institutions and to nationalize failed banks. The portfolios of those institutions will be restructured so that they may be sold to other stronger banks or simply shut down in an orderly way.
Although Prime Minister Keizo Obuchi's approval ratings have sunk to between 20 percent and 30 percent, and a political alliance was hastily assembled to enact the banking rescue, the Liberal Democrats seem to have solidified some staying power because of the action.
Yet, if the banking rescue symbolizes the government's new political will, it also reflects its limits. Even as politicians and lawmakers called the rescue package a success, many analysts highlighted its drawbacks.
"This was the first major legislative victory for one of the weakest parties in history," said Shigenori Okazaki, a political analyst at Warburg Dillon Read in Tokyo. "They want to bail out all the banks, big and small. But now they are in a paradox. The banks don't want to take the money."
Indeed, the biggest challenge the government now faces is to get banks to take on the taxpayers' money.
Banks worry that managers will be forced to resign and that the conditions for taking the money will be too stringent. So they are reluctant to accept bailouts, preferring to try to muddle along as they have been.
"In addition, bankers privately express concern over the intense wrangling with the government that will be necessary for the rescue to work. Many are skeptical that the scheme will pour sufficient cash into the pockets of corporations any time soon and bring about the economic recovery everyone wants.
Thus, analysts say that while the bailout reduces the possibility of a collapse in the financial system, it is only a short-term solution and does not address the more protracted challenge of modernizing the banking system so that it can sustain itself.
"All they're doing is throwing paper on the fire," said Alicia Ogawa, banking analyst at Salomon Smith Barney in Tokyo. "The days they have left to continue muddling through are limited. I can see the car is going to hit the wall. And I think that is good. It will force them to do something."
Economists and politicians themselves say that it is still too early to determine whether Japan's misery is finally over and whether the economy will soon turn around. But at least, they say, there is a greater sense of urgency among the politicians that was absent just a few months ago.
"Time is short," said Yuji Tsushima, a member of the Parliament's lower house and a former Finance Ministry official. "That's why we have to do this."
"We have to do things that will persuade the world market that Japan's banking system is on the right track," he said.
The capital bases of the banks have dwindled to precarious levels, so that they have little cushion to absorb losses expected to arise from loans that are going bad. Even the government has said that the economy will shrink by 1.8 percent in the year that ends March 31, 1999, and with bankruptcies soaring with the sinking economy, the amount of debt that goes bad when those companies crumble also soars.
Bankers say that despite the record low interest rates -- a key overnight borrowing rate now stands at one-quarter of a percent -- they do not want to expand their lending at this time because many companies are facing financial difficulties. If they lend money, the banks say, they would just be throwing good money after bad.
The Liberal Democrats are hoping that with a large injection of capital, the banks would be more inclined to take risks and lend to companies throughout the country.
The Democratic Party, the main opposition group, had demanded that the government order the banks to take public money, for the sake of the entire financial system, but that demand was not incorporated into the new law. Yet, party and government officials have already begun raising the pressure on the top executives of the banks, in the hopes that infusions of money could begin within the next couple of months.
"Banks are supposed to take action voluntarily," Obuchi told a news conference Friday. "I really hope that they understand the purpose of the laws and behave appropriately."
In a sign of the potential problems ahead, Masaru Hayami, the governor of the Bank of Japan, the nation's central bank, on Thursday warned once again that the core capital base at the banks was too small, suggesting that the potential loan losses at some large banks may exceed the amount of their core capital.
Based on data from the internal findings of the Bank of Japan, if Japanese banks were as a whole to set aside profits to account for so-called "good" loans that are expected to go bad within three years, then the amount of their core capital could fall by at least half.
So it is not surprising that Hayami called upon the banks to apply for public funds to boost their capital adequacy. The funds would be injected through the purchase of newly issued common or preferred shares.
To nationalize failing banks, the government will set up a new ministerial committee to manage bank failures and to help draft plans to deal with financial turmoil. The Long-Term Credit Bank, one of the nation's largest and weakest banks, is expected to be temporarily nationalized under the rescue plan. The bank could apply to be put under state control as early as next week.
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