Chances of quick fix for Japanese banks’ loan problems getting thin

Tamawa Kadoya TOKYO DEALING with Japanese banks’ massive non-performing loans is at the top of Prime Minister Junichiro Koizumi’s reform agenda but the chances of a quick solution are getting slimmer as the economy gets sicker.

Recent projections by Japan’s financial regulators, while bold for the government, merely underlined the deep-rooted problem, analysts said.

Financial services minister Hakuo Yanagisawa on Tuesday unveiled his ministry’s projections that non-performing loans (NPLs) at big Japanese banks would fall by roughly half in seven years and the bad loan problem could be over by “around 2005.”

But above all it showed that the outstanding balance of all categories of NPLs at major banks would hardly budge from current levels through 2003 because of the slowing Japanese economy and an expected sharp increase in fresh bad loans.

The Financial Services Agency’s simulation deals with a wider category of NPLs than those covered by the government’s pledge that banks will write off some 11.7 trillion yen in core bad loans over the next two years.

“What we wanted to show was the state of non-performing loans in three years’ time after an intense disposal period,” Yanagisawa said on Friday.

But financial markets perceived that the government was moving too slowly on reforms. That perception was one factor behind a sharp slide in Tokyo share prices this week.

A day after Yanagisawa’s announcement, the banking sector subindex lost 3.51 per cent, helping to drag down the TOPIX index of all firstsection shares by 1.53 per cent.

Analysts said the FSA’s projections were not surprising. “It’s nothing new, and in the FSA’s view, it indicates tougher action because the figures are a bit larger than what banks themselves have pledged to do,” said Hironari Nozaki, banking analyst at ABM Amro in Tokyo.

“But the FSA’s numbers are too optimistic because more fresh bad loans are expected to emerge,” he said.

Major banks’ NPLs are expected to fall to between 7. trillion and 10 trillion yen ($58.64 to $83.77 billion) during fiscal 2004-2007 and their bad-loan ratio would settle around two to three percent, according to the FSA’s calculations.

The bad-loan ratio is the ratio of non-performing loans against all loans.

As of fiscal 2000, major banks’ bad loans stood at 17.4 trillion yen and the ratio was 5.72 per cent, higher than the US peak of 5.47 per cent set in 1991.

IMF Probe? Yanagisawa will probably face a tough task as he heads to Britain and the United States next week to meet with senior government officials amid criticism over Japan’s handling of the bad loan issue.

The International Monetary Fund (IMF) has called on the Japanese government to comply with the IMF’s special assessment to analyse the domestic financial systems, including bad bank loans and provisions, the Nihon Keizai Shimbun said today.

Yanagisawa, who is scheduled to meet IMF Managing Director Horst Koehler, said he would welcome such an opportunity for IMF input, which the IMF is requesting of all member nations.

“I am very open to the idea of the IMF talking to the FSA and to financial institutions directly,” he said. “We have nothing to hide.”

But he added that it would be difficult to do so immediately because the FSA lacked sufficient manpower. The FSA is asking to beef up its supervisory personnel in budget requests for the fiscal year starting next April.

Asked whether he would comply if such a suggestion came up at his upcoming meeting with Koehler, Yanagisawa said: “I don’t think we can do it this time.” Yanagisawa is due to meet Koehler on September 5, a day before meeting Federal Reserve Chairman Alan Greenspan.

Murky Area: Analysts said the biggest problem was loans in the “special mention” category which includes those to borrowers whose businesses are in the red or have delayed payments.

They said that while the FSA had calculated that major banks would write off around three trillion yen over the next three years, they believe the figure could be higher by around four to five trillion yen.

“That grey zone will become the biggest focus because there are some big borrowers in that category,” said ABM Amro’s Nozaki.

“Banks won’t do anything about these problem loans so the authorities need to beef up the standards to evaluate the loans,” he said.

Analysts welcomed a suggestion by Yanagisawa on Sunday that market indicators such as stock prices and private credit ratings could be drawn upon to help put a value on such loans.

Under his proposal, banks would be required to apply stricter reserve build-up rules to companies in slumping business sectors. (Reuters)

http://www.economictimes.com/today/01worl04.htm

-- Martin Thompson (mthom1927@aol.com), September 01, 2001

Answers

Response to Chances of quick fix for Japanese banksÂ’ loan problems getting thin

After being bogged down by carrying all these bad loans on their books all these years, I wonder why they now think, puff, the magic dragon will just blow them away.

-- Uncle Fred (dogboy45@bigfoot.com), September 01, 2001.