I think this analysis shows why the infusion of public money has not taken
Japan out of the danger zone.
Japan's Banks Remain a Drag on Economic Recovery
By George Melloan
The Wall Street Journal Europe
(Copyright (c) 1999, Dow Jones & Company, Inc.)
As has been the case for nearly a decade now, Japan's banks are at the
center of the problem. A massive bailout effort began last March, when the
government began pumping trillions of yen into the banking system. The
money has improved the capital structure of the banks, at least in
technical terms. But there are few signs that they are healthy enough to
finance a real economic recovery. What they mostly are doing is financing
the government with its own money. This kind of circular arrangement
doesn't necessarily spin wealth.
Specifically, Mr. Yanagisawa's objective is to "dispose of bad debts and
raise capital-to-asset ratios to global standards." There's also the chore
of selling off Long-Term Credit Bank of Japan and Nippon Credit Bank, two
large banks that were "temporarily nationalized" when they couldn't keep
their heads above water. According to reliable reports, an American
investment company, Ripplewood Holdings L.L.C., is one of the two bidders
for LTCB. The other is a Japanese consortium.
According to press reports, Mr. Greenspan was curious about Mr.
Yanagisawa's progress in ridding the major banks of that great mass of bad
loans that has been burdening them since the Japanese stock market and
real estate bubble collapsed nearly a decade ago. Some progress is being
made. The FRC chairman deals in trillions but since a U.S. dollar today
buys 109 yen, it is simpler to convert to dollars. Even then the numbers
look pretty big.
According to Mr. Yanagisawa, Japan's big banks have disposed of $541
billion in bad loans since 1990. At last count, their stock of
"non-performing" loans was $272 billion, meaning loans that have
been delinquent for three months or more. So there does seem to be
progress in tidying up the books, although this has been achieved at a
considerable expense to Japanese taxpayers.
Over $180 billion has been pumped into the banks during the current
bailout and no doubt considerably more will be needed before the mess is
Its total investment in the big banks is $82 billion, most of it in
convertible preferred stock but some in convertible debentures. Mr.
Yanagisawa says the government has no intention of exercising its
conversion privileges, so this is not a back door takeover of the banks.
The investment is structured so that the banks pay less in dividends to
the government than they earn on investments in government bonds. Because
of the incentives to buy bonds, a lot of money recycles back to the
government to help it support the huge national debt it has racked up
following Washington's economic stimulus advice.
Since government bonds carry a zero risk rating under the international
(BIS) risk-based capital adequacy rules, the banks preserve their crucial
capital-to-asset ratios by making such investments. Mr. Yanagisawa says
the average ratio for the 17 leading banks is 11.9% now, well above the
BIS 8% standard. But investing in government bonds doesn't do all that
much for the economy.
The FRC chairman says that private loan portfolios of the major banks are
still shrinking, partly because major Japanese borrowers are trying to
reduce their indebtedness. The government is trying to encourage lending
to small and medium sized companies, but of course those companies, many
of which supply Japan's industrial giants, are not likely to borrow
heavily until they have a greater need for working capital or expansion.
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