makoto itoh (firstname.lastname@example.org)
Fri, 15 Oct 1999 19:11:43 +0900
Tahnk you for your mail with detailed comments and questions. As I am busy
for preparing to attend a conference in China on Socialism, let me try to
answear briefly by quoting your mail.
>This is a continuation of the earlier discussion with Makoto and others
about whether or not the Japanese banking crisis is mostly over.
Makoto, I have finally had a chance to read the chapter from your book
that you posted several weeks ago, which I found it very intersting and
illuminating (and I highly recommend). I think I understand better now
some of the points of your earlier posts. Below are a few further
comments and questions. (By the way, what are the titles of the other
chapters in your book? When is it coming out?)<
The manuscript is ready by the end of this year to send to Macmillan.
1. I understand better the relation between stock prices and the bad loan
problem of Japanese banks. As I understand it from your chapter, Japanese
banks invested heavily in the stock market during the late 1980s boom and
then persuaded international regulators to let them use 45% of the
unrealized capital gains on stocks as part of the "capital", so as to meet
the Basil 8% minimum capital requirment (Japanese banks have historically
held a smaller percentage of capital (3-4%?). US banks objected to this
on the grounds that it gave the Japanese an unfair competitive advantage
and forced the international regulators to impose the 8% requirement on
the Japanese banks.) So when the stock market crashed, so did the banks'
capital, which in turn meant that they had to reduce their outstanding
loans in order to try to meet this capital requirement. And this year,
the Japanese stock market has recovered somewhat, which has lessened this
capital adequacy problem. Is this roughly correct?<
Yes, this is.
>There is a similar relation with land prices, since (as I understand it)
Japanese banks also own a lot of land, as least as collateral on real
estate loans (see below)
I can see how this affects the ability of banks to make loans, but I don't
see how it affects the *absolute amount* of bad loans outstanding (e.g. 76
trillion yen), which is what I thought you were saying in previous posts
(maybe you weren't). Doesn't the amount of bad loans depend on the
financial condition of the borrowers and whether or not they are
"servicing" their loans, rather on the value of other assets owned by the
The land prices did not recovered and continuously makes the bad loans
difficult to solve. Just as the collapse began from the share prices, the
land prices may follow the recovery of share prices, but it is not yet sure
>2. There is also another way in which the price of land and other real
estate affects the bad loan problem of banks (as I understand it). Real
estate companies (and related construction companies) became the main
customers of the banks over the last decade or so, because the big
industrial corporations developed other sources of funds besides the
banks. So a decline of real estates prices significantly affects the
financial condition of these important borrowers and therefore reduces
their chances of paying interest on their loans. Is this correct? <
>Are real estate prices actually increasing now in Japan?<
>I recently saw a chart
in Paul Erdman's latest book *Tug of War* that showed Japanese real estate
prices from 1990 to 1996 (p. 78). From a peak of 100 in 1990, the index
declines to around 20 in 1996. Is this index roughly correct? What has
happened to real estate prices since 1996? Has there been much
I do not know the source of Erdman's data. Upon the data I used in my
chapter, the land prices in Osaka area declined by one half and in Tokyo
area by 40 per cent to the level of 60 percent of the peak by 1996. After
that, the land prices are still coming down though slowly, but persistently.
There has not yet a news to inform improvement in them.
>The construction industry has
had positive profits over this period, but the amount of profits has
decreased every year (roughly 40% overall).
Are these industries (the banks' main borrowers) likely to do much better
in 1999? 2000?<
Not much if ever.
>3. Your estimate of the amount of bad loans (76 trillion yen) is for
January 1998. The WSJ article that Rakesh sent us (Sept. 14) estimated
the amount of remaining bad loans as $270 billion or roughly 35 trillion
yen. Do the think the latter is a reasonable estimate of the current
amount of bad loans or is it too low?<
It seems too low in the definition of Ministry of Finance, which was the
source of my number. Certainly the number here is subject to the definition.
>4. How much money do you think has been spent so far by the government
bank bailout program (out of the 60 trillion yen budgeted)? 20 trillion
yen? 30 trillion?<
I do not know exactly, but guess that it would be more than 20.
>5. Even if this bad loan problem is somehow managed in the next few
years, this may not necessarily lead to a resumption of bank lending.
The changing loan portfolio of the banks seems to suggest a further
problem: TO WHOM will the banks start to lend again? Probably not the
large corporations, who no longer need the banks. And also probably not
real estate companies and construction companies, at least not for a
while. Medium and small businesses, the other major customer of the banks
in recent years are in much worse financial condition that big businesses,
and hence are not a very good credit risk at the present time. So, it
looks like a revivial of bank lending to the private sector is a long way
off. Am I missing something?
According to Rakesh's WSJ article, there has been a significant increase
of bank lending TO THE GOVERNMENT in recent months, in order to finance
the huge budget deficits (10% of GDP and growing). So, in effect the
capital injected into banks by the government bailout program is being
relent to the government! And the dividends paid to the government is
less than the interest on the government bonds, so the bank owners are
being subsidized by future taxes. But this does nothing for the private
sector. This doesn't look like a sustainable recovery to me.<
I agree. The depressed consumer demand, and the resultant lowered level of
the rate of capacity utilization (or excessive competitive pressure in the
market) form a basic tone of difficulty for financial sectors as well as for
the whole economy in Japan.
All the best,
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