Japan problem gets worse

By Gillian Tett in Tokyo Published: April 17 2001 18:49GMT | Last Updated: April 18 2001 11:29GMT

Japan's economy is still creating new bad loans, on top of the mountain of problem assets that has dogged the banking system for the last decade, one of Japan's most senior and influential bankers has warned.

In particular, loans previously considered healthy are turning sour because land prices are still falling and the economy is weak, said Shigemitsu Miki, president of Mitsubishi Tokyo Financial Group.

"Until now, we thought we disposed of all our bad loans, but Japan's economy in the second half of last year has worsened and so new bad loans are being created," he said.

"In addition, we cannot really expect the economy to improve right now so in the first half of this financial year we expect the balance of bad loans to increase further."

Mr Miki insisted that large banks such as MTFG will still be able to write off all their bad loans over the next few years, in line with government demands. MTFG was formed from a merger of Bank of Tokyo Mitsubishi and Mitsubishi group financial companies this month, and is considered one of the healthier banks.

However, Mr Miki's comments highlight the problems still facing Japan's financial sector. The government has recently declared that it will force banks to write off their existing bad loans in two years, and new bad loans in three years. However, many analysts doubt whether this demand, in its current form, will resolve the banking problem.

One key problem is that the government is focusing on the banks' so-called "category three" and "category four" bad loans, or loans extended to companies which are bankrupt or near-bankruptcy. These total around Y33,000bn (£185bn). But the banks also hold "category two" loans, to "questionable" companies, valued at more than twice this size. Some of these loans also appear to be turning sour - creating the "new" bad loans which Mr Miki referred to.

The Financial Supervisory Agency, for example, estimates that between April and September 2000 alone Y3,600bn of new bad loans appeared, because of rising bankruptcies. More recent data is not available. The banks cannot write these new bad loans off out of existing earnings, because they only produce around Y2,500bn of profits each year, points out Brian Waterhouse of HSBC Securities. It is unclear whether they have enough existing capital to tackle the problem.

Some Japanese politicians want to strengthen the banks by creating a new government body to purchase the banks' equity portfolios, for cash. Shizuka Kamei, a candidate to lead the Liberal Democrat party and therefore become the next prime minister, for example, wants this institution to buy around Y10,000bn of banks' equities.

However, Mr Miki said Japanese bankers would only want to participate if they could chose which stocks to sell to the equity purchasing body. Many analysts believe this "free choice" system will be unworkable. "If the banks can chose," one official said, "they will just sell their worst stocks, creating a rubbish bucket of bad stocks, and more problems for the government in the future."

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-- Martin Thompson (mthom1927@aol.com), April 19, 2001