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Japan: Imagine Life Without Bad Loans

The bad-loan problem, $750 billion worth, has not gone away. Not by a long shot. It has been a key factor in the making of fiscal and monetary policy for so long it almost seems like part of the landscape. But there is a glimmer of hope. Fifteen of the nation's top 17 banks turned recurring losses into profits during the fiscal year ending in March. Wider interest margins were a prime factor. Profits from the sale of equities helped. But the year was not as good as once anticipated. Overseas operating results suffered because of the strong yen, and bond-trading profits were small. The worst may be over for bad-debt write-offs, but only the worst — plenty of merely lousy lending remains to be absorbed. The end of Japan's zero-interest-rate policy, instituted in large part to allow sick banks to earn bigger operating profits, won't help banks. But the biggest problem is economic recovery itself. If the Bank of Japan pushed Japan back into a recession, a new round of problem loans could be unleashed.

RESTRUCTURING Four mega-banking groups led by Bank of Tokyo- Mitsubishi; Mizuho Financial, which includes Daiichi Kangyo, IBJ and Fuji; Mitsui-Sumitomo; and Sanwa-Tokai-Asahi are emerging from the post-bubble-era shakeout. The new groups should be better able to write off bad loans quickly. Expect consolidation among smaller lenders and further rationalization among other finanancial services institutions. Crucially, the combinations have so far not produced the efficiencies and cost-savings that were anticipated. The recently merged groups should begin showing their strategies next year.

LENDING Pressure to repay public funds has forced the banks to get tough with troubled, debt-ridden companies. But loan growth remains flat.

REGULATION The Financial Supervisory Agency has made banks more transparent. Introduction of globally accepted accounting standards like mark-to-market valuation of equity holdings beginning next April is pressuring banks to recognize paper losses. They will also be forced to acknowledge any decline of more than 30% below book value.

LIBERALIZATION The entry of companies like Softbank (which has just taken control of Nippon Credit Bank), supermarket operator and 7-Eleven owner Ito-Yokado, Sony, and Toyota into banking promises to shake up the stodgy industry like little else could.

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Rating show the number of banks in each category; "E" is the lowest grade for financial soundness. Souce: Moody's Investors Service

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