After all the bickering, temper tantrums, threats of legal suits and raised hopes for solutions to Japan’s banking and economic troubles, minister for economy and financial services Heizo Takenaka has finally released plans to revitalize banking and the economy.
Despite Takenaka’s brave attempts to get tough and include strong measures in the latest recovery package, he failed, producing what many are calling a weak, watered-down compromise. It seems that for now the old establishment and conservative Japanese bankers have got their way yet again.
“The guys who run these banks are terrible at making loans but very good at sensing when their own self-interest is about to be affected,” says an economist in Tokyo. “They’ve been jumping all over Takenaka like he was Godzilla walking out of Tokyo Bay.” So while Takenaka calls his plan a good start, to many observers it looks as if he never made it out of the starting gate.
Bankers and analysts had been hoping for a string of confident measures that would show Japan’s new determination to tackle its banking crisis head-on and get the country and its institutions on the road to recovery. But what people didn’t want to come true has. The report has disappointed many.
The package includes little of substance, with timetables for implementing the few announced measures notable by their absence. One of the few solid dates included is the promise to work toward halving bad loans at the largest banks in the next two to three years.
However, when prime minister Junichiro Koizumi campaigned for power he said that the disposal of the non-performing loan problem would be completed in two to three years.
Just 18 months after coming to power, not only has the date changed, so has the amount. “They are just kicking the ball down the road. It is all a big fudge,” says one banker. Official estimates suggest that bad loans in the system could amount to ÈW42 trillion or 8% of GDP. Unofficial statistics put it as high as ÈW100 trillion ($816 billion).
Takenaka’s most controversial idea, the one discussed most by industry experts, was a change in the tax deferral laws. It failed to materialize, unsurprisingly. Now banks can count future possible tax refunds against the cost of writing off bad debts as part of their tier-one capital. In some cases this can amount to as much as 40% of the bank’s actual capital. Analysts and economists believe that this is a questionable definition of what core capital really is.
Takenaka had suggested that this should be reduced to 10%. But this proved very unpopular as it would have caused the hard landing that so many banks feared. Some of Japan’s major banks, including Mizuho Financial Holdings, would have seen their capital adequacy ratio slip below the 8% minimum, effectively placing them in government hands.
Bankers felt that to become bankrupt because of a change in an accountancy law was ridiculous and dangerous. They claimed banks would rein in lending as they attempted to get capital ratios back up, dragging the economy further into the quagmire.
When push came to shove – some banks threatened to sue if the changes were introduced – Takenaka backed off and no mention of when such accountancy changes would be introduced ever appeared. It is merely described as a measure to be studied further. Some believe it could be resurrected in November when the new programme’s timetabling is set.
JPMorgan’s head of economic policy research, Masaki Kanno, is, unlike other economists, slightly optimistic. “The new plan may be just a compromise for a couple of months while Takenaka satisfies the banks. But if no date is set in a couple of months they are simply delaying the process again and without a crisis then they will not take a radical solution,” says Kanno. “However, at least things have moved on slightly because now the Financial Services Authority admits that the banking sector has a problem. Before Takenaka, it never did.”
Another economist says: “Takenaka is a glutton for punishment and he will have another go at getting this passed in a couple of months. He is like the IMF, the man everyone loves to hate. He’ll take the heat while everyone else takes the credit.”
One suggestion that did make it into the report was the proposal to set up an industry revitalization organization. The government-run body would take the job of bailing out crippled corporates, removing them from the banks’ responsibility. But, claims Takenaka, it will only help out those companies that are “viable”. The problem is that the definition of viable remains unclear. It is suggested that it would only include those companies with liabilities of up to 10 times cashflow. But this limit is bound to be flexible as Takenaka distances his remarks that no corporate is too large to fail. For now the only institution being allowed to fail is the government. Which it does on a regular basis.
