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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

THE ASIAWEEK FINANCIAL 500

Tokyo’s Mission Possible
Troubled banks are recovering -- slowly


AT THE HEIGHT OF Japan’s property frenzy, it was often said that the Imperial Palace grounds in Tokyo were worth more than all of Canada’s land. No longer. The bubble burst in the early 1990s. Among the worst hit were Japan’s banks, which had given out billions in loans against vastly overvalued property as collateral. As of March 1997, says Otsuka Seiji, an analyst with Schroders Japan, the 20 biggest lenders had bad debts of up to 42.8 trillion yen ($357 billion at current exchange rates).

The good news is that the figure is down by 5.5 trillion yen from a year ago. By 1999, says Finance Minister Mitsuzuka Hiroshi, the entire banking system could shed another 27.9 trillion yen in non- performing assets. The weak yen and low domestic interest rates are helping. Kenneth Courtis of Deutsche Bank Capital Markets (Asia) says banks are using yen deposits on which they pay 1% or so in interest to lend out at higher rates. Or they buy U.S.-dollar assets that earn 6% or more -- and benefit further as the greenback appreciates against the Japanese currency.

The government is doing its part. “Japanese regulators will protect all deposits of the 20 banks to prevent the spillover of Japan’s financial woes into overseas markets,” says Nakai Sei, senior deputy director general of the Ministry of Finance. Take the Hokkaido Takushoku Bank. Its bad debts amount to 934.7 billion yen -- yet it has set aside only 321.7 billion yen to cover them. The government is brokering a merger with the smaller Hokkaido Bank, though the deal was unraveling last week. Tokyo also pushed Hokkaido Takushoku to sell its Sapporo headquarters and lay off 1,000 employees.

Hokkaido Takushoku will not be allowed to fail -- at least until 2001, when Japan’s Big Bang financial reforms begin in earnest. By then, Tokyo hopes the Big-20 banks would have recovered to face more foreign competition. And the rest? They must sink or swim. The five worst-hit regional banks -- Tokuyo City, Tokyo Sowa, Fukutoku, Gifu and Kanto -- are under pressure to merge with some of the leading lenders. Well before the Big Bang, the giant banks themselves may consolidate, which is what the Bank of Tokyo and Mitsubishi Bank did in 1996 to create the world’s largest institution. Many of Japan’s shinyo kumiai (community banks) may also take this route by 1999.

As added incentive, the Ministry of Finance is pushing an amendment to the Deposit Insurance Corporation Law later this month. If passed, the DIC would be empowered to purchase the bad debts of the merging institutions. It could also extend loans to a bank holding company that acquires a failed lender. So is the patient out of danger? A lot depends on continued economic growth, the property sector’s recovery and a low interest-rate regime. As well as the banks remembering that 2001 is just around the corner.

-- By Alexandra A. Seno and Aritake Toshio / Tokyo


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