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Japan watchdog tries to stop stock flood

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Many view bank stock holdings as a symptom of Japan's biggest business problem, its bad loans  


By CNN's Alex Frew McMillan

TOKYO, Japan -- Japan's bank watchdog is mapping out plans to stem the threat of Japanese banks flooding the market with stock.

The Financial Services Agency will let banks value stock at either the price it is worth or the price it was bought at, according to the Nihon Keizai Shimbun.

That would mean banks will value their holdings at the lowest possible level.

Starting in September 2004, banks will have to limit their shareholdings to the amount of capital they hold -- as measured by a standard known as Tier 1 capital.

Japan's banks own a mammoth amount of shares, last pegged at $367 billion (44 trillion yen) in March.

That will force many to sell shares. The idea of the FSA guidelines is to stop banks from selling off huge amounts of stock all at once.

The FSA is also recommending a graduated timeline. Instead of a hard-and-fast 2004 deadline, banks with stock holdings worth more than 200 percent of their Tier 1 capital would have until March 2006 to wind down their holdings.

Banks with ratios between 150 percent and 200 percent would have until March 2005.

Next January will see the creation of a state-backed fund to absorb stock losses by banks. Japan's government is trying to encourage them to unwind some of their vast cross-holdings.

Because Japan's banks own huge amount of stocks in their customer companies, and vice versa, the banks have little incentive to call in loans that have gone bad. Forcing companies out of business would hurt the banks themselves.

But experts say that Japan's banks are perpetuating its lagging economy by trickling loans to companies that are inefficient or even essentially bankrupt.

Many Japan watchers view problem loans at Japan's banks as the nation's biggest business obstacle.

Bank stocks moved up Wednesday. Investors are hoping for more specifics on bank reform.

The FSA also said it would inspect one of Japan's Big Four banks, UFJ Holdings Inc., and its subsidiaries in early September.

It will revisit 10 other banks that it has already visited twice since it upped scrutiny in 1998. The FSA, which claims estimates by private analysts of Japan's bad-loan problem are overblown, wants to see if they have improved problems that it noted.

Overseas analysts have been particularly vehement that the FSA is not doing enough to tackle bad loans.

Goldman Sachs recently estimated that the level of dud loans in Japan could be as much as half the whole country's gross domestic product. It faulted FSA math, particularly with deflation.

That has created something of a "persecution complex" at the FSA, some analysts say, that partly explains the agency's tough treatment of ING Barings.

This week, the agency reprimanded the investment bank, after it published a bank research report containing several errors. It requested several changes in its internal monitoring procedures.







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