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Japan's banking crisis sends ripples across the ocean

Marina Kamimura By Marina Kamimura
CNN Tokyo Bureau Chief

October 30, 1998
Web posted at: 11:37 a.m. EST (1637 GMT)

In this story:

TOKYO (CNN) -- The bank towers that dot Tokyo's financial district of Otemachi are a long way from the corn fields of Iowa.

But there are plenty of reasons why Midwestern farmers, along with others the world over, should care about the problems plaguing Japan's banks.

It starts with the fact that Japan's banks have traditionally been among the world's largest lenders. There's also the impact their turmoil is having on Japanese businesses and consumers, which also extends abroad.

Consumer confidence, or lack thereof

Just last week, the Long-Term Credit Bank of Japan Ltd. -- the nation's 10th-largest -- was declared insolvent, the second of the nation's 20 largest banks to become so.

The troubled Long-Term Credit Bank has been nationalized  

The bank, established to help finance postwar growth, primarily dealt with corporate Japan. And most of its business of providing long-term loans to big business had dried up years ago.

So for most consumers, the bank's nationalization was mostly symbolic, the latest in a growing string of high-profile financial collapses.

Even so, all this is not without psychological impact. Worried consumers and companies have little desire to spend when they're anxious about the future. If they're spending less, that usually means less spent on imports, too.

And that, of course, creates a ripple effect across the ocean.

"We have had a 14 percent reduction in exports to the Asian community in the last four months," Thomas Donahue, president of the U.S. Chamber of Commerce, observed on a recent trip to Tokyo.

"We [in the U.S.] are beginning to lay off workers in factories, on farms, and in high-tech industries. And these are people of every level: technically competent people, moderately educated, and workers without skills. We need them at every level. And they will all lose jobs if we lose the source of where we sell our products."

The contagion of bad loans

Now, onto the primary source of the banking malaise: that much-discussed mountain of bad loans, many of which were made in the so-called "bubble years" of the 1980s.

Part of the problem was just plain old irresponsible lending. This has been a country where a relationship or personal reference could sometimes have as much weight as millions of dollars in collateral.

Hokkaido Takushoku Bank collapsed last November  

Other loans became a problem because they were backed by property and stocks whose value was vastly inflated in the mid-1980s, but then took a dive after Japan's stock market started to plummet at the end of the decade.

So why haven't the banks just cut their losses and written off the loans? At the very least, it would hurt profits. It would also be an admission of past mistakes, bringing up the question of management accountability.

Complicating matters are international banking rules that require money to be set aside to cover problem loans. That means less money is available to lend, a worsening problem as more loans default in the weakened economy.

So while clients can still head to the bank, they're more likely to leave empty-handed, without a loan. As some banks are calling more old loans, the credit squeeze tightens.

The credit squeeze so far has mostly been contained to smaller Japanese companies, and companies in other Asian countries.

But if it continues, there may be little to stop it from spreading to relatively healthier regions of the world.

"We start to see more companies failing and more economic problems in the region, which inevitably are translated into a problem not only for American banks, but large American companies that have significant operations overseas," explains James Fiorillo, of ING Barings Japan.

"And all of a sudden you find that the same disease or contagion you have in Asia, is now transferred over to the United States and it hits the individual consumer."

One man's tears represent thousands

Perhaps a good way to visualize how bad things can get is to look at a place where the impact of a bank's failure has hit home.

The collapse of Hokkaido Takushoku Bank preceded the nationalization of the Long-Term Credit Bank by nearly a year. Takugin, as it's called here, announced last November it would be closing its doors due to billions of dollars in bad loans.

For those in Hokkaido, Japan's northern-most main island, the news and its impact was analogous in some ways to what Detroit might be like if General Motors called it quits.

Established in 1900, the bank lent to six of every 10 companies in Hokkaido; its failure sparked a rash of bankruptcies through the island.

A visit to the unemployment center in Hokkaido's third largest city, Hakodate, offered a glimpse of a Japan rarely seen before: Rows of people lining up for unemployment benefits, and job-seekers elbow to elbow, checking out the postings.

Many said that if they were lucky enough to find a job, they only expected at most about two-thirds of the salary of their last job.

A man's eyes welled up with tears when he talked about losing his job of 22 years at a local fishing equipment supplier.

Mitsuyoshi Hirosawa's company told its workers it was going out of business last Christmas Eve, just 37 days after Takugin failed. At age 49, he holds little hope of finding a comparable job.

He told us he tried working at a hotel, changing beds. But he gave up, partly due to pride, but also because the meager salary did little to support his family's daily needs.

The official unemployment figure for the year's third quarter was 5.2 percent in Hokkaido, compared to the national average of 4.3 percent -- a record high in Japan. In Hakodate, there's less than one job for every three people looking for one.

Timing is everything

There are signs the problems are finally being formally acknowledged by the government.

Among other things, Prime Minister Keizo Obuchi's Liberal Democratic Party launched a $500 billion-plus financial stabilization package October 23.

Most of the money is earmarked for replenishing capital at banks so they will be encouraged to lend again. But concerns run high among business that the money will still not make it to the companies continuing to lay off employees like Mitsuyoshi Hirosawa.

Even if the money manages to stabilize the banking system and filters down to the smaller companies that are largely seen to be the biggest victims of this crisis, it will still take time to work itself through the system.

In the meantime, the problems of Japan's banks can still take that time to work themselves through the world's economic system, and even potentially into the corn fields of Iowa.

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