Can Japan’s megabanks ignore the devil's whisper?
The last time a financial crisis hit Japan, the fallout was exacerbated by the agonizing slowness with which management disclosed their problems. This time around executives at all three financial groups have told Euromoney that their firms had little to hide; that they had disclosed almost all of their exposure to sub-prime related securities.
According to FSA figures, the sum for all Japanese banks now stands at just over ¥600 billion (about $6 billion), less than the total loss at some US banks but still three times as much as had initially been disclosed. This is an ominous trend. The ever-increasing scale of the losses might be explained by cumulative write-downs as sub-prime related investments bleed value: the banks, in other words, are disclosing losses as their portfolios lose value.
There might, however, be some truth to the suspicions of traders at foreign banks in Tokyo that some megabanks decided not to announce losses in order to make an already-disappointing reporting season less depressing for shareholders.
Analysts at Standard & Poor’s and Japanese firm Rating and Investment Information say that there are more losses to come but that they don’t expect significant surprises on the scale of write-downs at the worst-hit US banks.
It’s vital that they’re correct: aside from the resulting shock to the financial system, the announcement of a large, previously undisclosed loss at one or more of the megabanks would signal that nothing had changed and that management still preferred to save face rather than confront internal issues in a responsible fashion.
Results for all three financial groups were down significantly in the nine months to December 2007: profits at Mitsubishi UFJ Financial Group, the largest of the three, fell 54% to ¥315 billion compared with the same period in 2006. Nobuo Kuroyanagi and Yasumasa Gomi, chief executives of the group’s commercial banking unit and its securities arm, both assured this magazine that the worst of the crisis is gone and no big losses are yet to be disclosed.
The grounds for suspicion are for now mainly, perhaps unfairly, historical: Japanese firms have a track record of buying risky investments and attempting to bury the resulting losses. Most notorious among these were the derivatives-related blow-ups of the 1990s, in which it seemed everyone from top banks to yoghurt drink makers Yakult were suddenly the victims of secret, toxic investment products. The nature of the present global crisis is such that the losses are hidden: like toxic bacteria in a yoghurt pot, rotten investments might fester for a while undetected on the balance sheets of seemingly healthy investors worldwide before causing serious indigestion. Let us hope the toxic culture of secrecy is a thing of the past.