TUESDAY DECEMBER 15 1998
Asia-Pacific
JAPAN: Better late than never
Gillian Tett welcomes a few belated signs that Japan is - at last - starting to get to grips with its financial crisis
In recent months Japan has repeatedly startled outsiders by its never- ending ability to delay essential banking reform. This week the government surprised everyone again - with an uncharacteristic burst of resolution.
Almost before the public woke up to the problems at Nippon Credit Bank the government decided to nationalise it. This followed last month's ruling from regulators that NCB was insolvent. By the government's recent standards, that was remarkably bold. By comparison, the authorities let the share price of another troubled bank, Long Term Credit Bank, crash to ¥2 before they nationalised it in October. NCB, by contrast, was still trading at ¥158 (80p) on Friday, with no sign of a funding crisis.
The question now is whether this new resolution will pave the way for greater policy surprises. Is Japan, in other words, steeling itself to implement the banking reform that it has avoided for eight long years?
Certainly, recent history creates reasons for caution. The government had botched an earlier attempt to resolve NCB's problems by organising an inadequate "rescue" package in April 1997. Even its recent more vigorous action still look slow in comparison with the banking reforms which Japan's neighbours, such as South Korea, are implementing. It has offered the banks ¥25,000bn to rebuild their capital bases - but the largest 18 banks have so far promised to apply for just ¥5,800bn of this - not enough, most analysts think, to be decisive in tackling ¥87,000bn of problem loans. Some fear the latest move might prove just another costly gesture. "I think the bureaucrats have panicked," says Ken Okamura of Dresdner Kleinwort Bank. "They couldn't face putting even more public funds into NCB."
Perhaps. But this time round, there are reasons for some optimism. A momentum appears to be building behind Japan's banking reform, which might - just might - pave the way for a broader attempt to resolve the financial mess. "I think the government is now finally moving in the right direction," says James Fiorillo of ING Barings.
The optimists have two factors to point to. One is the Y60,000bn support package the government adopted in October. This includes the ¥25,000bn capital injection, ¥17,000bn to protect depositors, and ¥18,000bn to nationalise weak banks. So far, admittedly, none of the money has been spent. But a government committee will today start distributing the money. One of its first tasks will be set the purchase price for NCB and LTCB
(probably around ¥1 a share for both). Another will be the injection of funds into the banks' capital bases.
The second reason for optimism is that the authorities now appear more committed to real reform than they have been for a long time. The Financial Supervisory Agency, the banking watchdog established six months ago, is forcing the banks to disclose their bad loans with unexpected vigour. It and the Bank of Japan insist that any forthcoming injection of public money must be used by healthy banks to write off bad loans. They also insist that insolvent banks, such as NCB, will be nationalised as a temporary step only before their healthy assets are sold. Most strikingly of all, they are pressing for more bank consolidation. "I think in the coming years there will be only half the number of banks," says one senior financial official, who points out that the number of large banks has already dropped from 21 to 17. "We are serious about reform."
All this is evidence of a change of heart and minds on the part of the authorities. It goes some way to allaying fears that the Japanese government was not really committed to financial reform. But all the same, it is only half the battle.
Before Japan can actually solve its bad loan mess, at least three other changes must now also occur.
First, the government needs to show that it can indeed sell the healthy operations of the nationalised banks and dispose of their bad, unsellable assets.
Second, the healthy banks must remove the bad loans completely from their balance sheets, rather than simply make accounting provisions for them. Both these steps will involve legislative change. They will require widespread debt forgiveness - which is difficult under the tax code. And they will entail sales of the property collateral that lies behind bad loans - which is hard in the current tax and legal framework.
The Ministry of Finance says it will tackle these problems by changing the tax and property codes next spring. It also plans to create a new government institution next year that will purchase bad debts from both healthy and failed banks for the first time in Japan. This could effectively copy the model that the US used to clean up its Savings and Loans crisis in the early 1990s. But this scheme will not work without a genuinely liquid property market. And without this there is a risk that the nationalisation of banks such as NCB may simply leave the government holding NCB's problem loans on its own balance sheet indefinitely.
However, the third shift that must now occur is a mood change among Japan's bankers. Thus far, the events of the past year have given bank managers little incentive to adopt the type of "radical" restructuring that western markets demand. After all, though NCB implemented job cuts, its management did not reap any reward. And though LTCB cut its loan book, this probably actually hastened its fate by alienating the bank's traditional Japanese partners.
However, unless the Japanese government can now persuade - or terrify - the banks' managers into accepting a reform agenda, "restructuring" may remain cosmetic. That might in turn require more managerial changes than have been made so far (the top tiers of NCB and LTCB will be removed). As one western banker says: "What I find amazing is the lack of crisis among Japanese bankers. Most seem to be in denial."
The treatment of NCB this weekend could change the mood. "Many banks are panicking now. They will reform," claims one bureaucrat. In particular, the threat of more FSA action may force the banks to use injections of public money to write off bad loans. And if these steps are then accompanied by reforms to the tax and property code, this could pave the way for real progress next year.
Clearly, this relies on a lot of "ifs". And even assuming all goes well, it will still take time. Because the government has staved off banking reform for so long, most analysts now calculate that even a "best case" will require at least two more years to clear away the bad loans.
This weekend's decision on NCB might yet pave the way for reform. The tragedy is, though, that the government did not start the process when NCB hit its first crisis 18 months ago
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