At Japanese Banks, Two Steps Back for Each Forward

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03/22 21:47 At Japanese Banks, Two Steps Back for Each Forward (Update1) By Bradley Meacham, Mayumi Otsuma and Yoshiko Matsushita

Tokyo, March 23 (Bloomberg) -- Any other week during this decade of economic stagnation, the headline in Japan's leading financial newspaper would have been unremarkable: Sakura Bank Ltd. and other lenders, the Nihon Keizai said, had forgiven $1 billion of debt owed by Mitsui Construction Co.

This hasn't been any other week. Reversing course after just seven months, the central bank cut interest rates to almost zero, meaning money costs next to nothing. And major banks are about to write off $8 billion in dud loans, the legacy of years of lending that failed to spur growth.

If anything, the Mitsui bailout was just more evidence that every step Japan's financial industry takes toward reform is followed by one -- or more -- backwards. Two years after a $65 billion taxpayer-funded bailout, lenders still won't cut off cash- strapped companies that burned up the funds.

Though today's failure of Tokyo Mutual Life Insurance Co. helped restore some credibility to banks, analysts said more needs to be done. ``You've got to attack the debtors or you'll never kick-start the economy,'' said Jim McGinnis, an analyst at Commerz Securities.

The stakes are high. This week's interest rate cut, which brought the overnight interbank lending rate to a scant 0.04 percent, represents the fourth time since October that policymakers have tried to boost stocks, and by extension, the economy.

In October, the government agreed to spend 11 trillion yen to boost growth. In January, it proposed companies be allowed to buy and hold their own stock. And earlier this month, it recommended cuts to capital gains and inheritance taxes -- to lift stock prices.

`Against a Wall'

Little has worked so far. ``Banks are up against a wall,'' said Hiroshi Nishikawa, a Sumitomo Bank director. ``Banks need healthy customers and they're in short supply.''

Though bank lending has been falling for four year, bad loans are again on the rise, Bank of Japan Governor Masaru Hayami said yesterday. Should the economy keep contracting, a ``deflationary spiral'' would make their disposal more difficult, he said.

Yet moving too fast on bad loans presents a dilemma. Banks are loathe to accept big writeoffs that would erode profits because unprofitable banks are vulnerable to a government takeover, under the terms of the 1999 bailout.

Sliding stocks, meantime, make it difficult or impossible for banks to generate profits to offset writeoffs. The broad Topix index fell 23 percent in the past year.

Unrealized losses on the stock holdings of Japan's 16 major banks are estimated to widen to 4 trillion yen from 1.5 trillion yen if the broader Topix index falls below 1200 from 1300, according to Nozomu Kunishige, a banking analyst at Lehman Brothers Inc.

`Political Suicide'

Making any rescue more difficult, business ties and political pressure have long forced banks to keep lending to companies likely to fail. The ruling Liberal Democratic Party, which lost dozens of seats in July's lower house election, faces an upper house poll in July.

And the government is hamstrung in its efforts to force banks to cut credit to ailing companies because swelling jobless queues are politically unpalatable in an election year. The jobless rate held at a record 4.9 percent in January.

The real estate, construction and services industries, a major source of campaign funding, account for 55 percent of bank lending and 85 percent of overdue credit, according to Goldman Sachs Group Inc.

`The government knows precisely what needs to be done,'' said Michael Ivanovitch, president of investment advisers MSI Global Inc. ``The question is whether they'll do it, because it will be political suicide.''

Against that kind of backdrop, the Mitsui Construction bailout is perhaps more understandable. Sakura Bank and a group of other lenders agreed to forgive 162 billion yen ($1.3 billion) owed by the Tokyo builder -- about half the size of the writeoff Mitsui sought in December, according to the newspaper report on Saturday.

All of which isn't to say that recent moves by banks to address their bad loan portfolios is discouraging.

Daiwa Bank Ltd., for example, said today it will lose 18 billion yen as it writes off bad loans. Daiwa is the main bank for Tokyo Mutual, which sought protection from creditors under 980 billion yen of debt.

Sanwa Bank Ltd. and two merger partners said they will write off 1.1 trillion yen of bad debt for the year ending March 31. And Mizuho Holdings Inc. and Sumitomo Mitsui -- the combination of Sumitomo Bank Ltd. and Sakura Bank -- may write off 1.5 trillion yen each, said Nozomu Kunishige, a Lehman Brothers Inc. analyst.

Spokesmen for Mizuho and Sumitomo Mitsui said decisions on write-offs have yet to be made.

Solutions

There are solutions, analysts say. The government could exchange its bonds for banks' shareholdings, ending the exposure of banks to the stock market and weakening links between banks and borrowers.

Also, since international banking rules don't require capital reserves for holdings of government bonds, the change would free capital for writing off more bad debt, Commerz Securities' McGinnis said.

The government could also offer tax deductions, or inject more public money into some banks, to encourage write-offs. About 10 trillion yen would be needed, said James Fiorillo, an analyst at ING Baring Securities.

Above all, however, it's a change in management -- in the political arena just as much as in corporate boardrooms -- that would do the most good.

``Can the government really drive crippled big companies out of business?'' said Takehiro Sato, an economist at Morgan Stanley Dean Witter Japan Ltd. ``That's impossible. We can never, ever expect Japanese politicians to show leadership on this.''

http://quote.bloomberg.com/fgcgi.cgi?ptitle=Top%20Financial%20News&s1=blk&tp=ad_topright_topfin&T=markets_bfgcgi_content99.ht&s2=blk&bt=ad_position1_topfin&middle=ad_frame2_topfin&s=AOrq5WBRDQXQgSmFw

-- Carl Jenkins (somewherepress@aol.com), March 23, 2001


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