[educational use only]

STRATFOR's ASIA INTELLIGENCE UPDATE

April 14, 1999 Volume: 2, Number: 71

Red Alert: Fear of Increasing Failures and Foreign Domination May Lead to Nationalization of Japanese Banks

Summary

Speaking in Tokyo on April 13, Hakuo Yanagisawa, head of Japan's Financial Reconstruction Commission, said that he feared many Japanese regional banks may intentionally go under, judging that relying on the government safety nets is more profitable than continuing to operate under current conditions. Yanagisawa said he was worried that if too many regional banks collapse, foreign banks will dominate the Japanese financial landscape. In commenting on the voluntary closure of banks, Yanagisawa asked, "If such cases are to surface, I wonder how we should prevent them?" Given the threat of a financial market consisting primarily of foreign banks, it seems possible that the solution will involve continuing moves to nationalize Japanese banks.

Analysis

The head of Japan's Financial Reconstruction Commission, Hakuo Yanagisawa, warned that the impending collapse and subsequent government takeover of Kokumin Bank might signal a wave of other regional banks folding. Speaking in Tokyo, Yanagisawa said, "When faced with the collapse of Kokumin Bank I strongly felt that second-tier regional banks may start finding their banking business unprofitable and thinking they may as well dump their business because the government will protect them with a well grounded safety net." He added, "Since we have established a safety net which is too perfect, the banks do not fear making a mistake. Indeed, they may voluntarily start going under. If such cases are to surface, I wonder how we should prevent them."

During the speech, Yanagisawa also brought up a common fear in Tokyo, that of the so-called Wimbledon effect, where foreign players dominate a local event. Yanagisawa warned of the possible consequences of many Japanese banks closing, saying, "We are in trouble if the Japanese financial market becomes like the Wimbledon tournament where almost no British players appear."

Tokyo is faced with a serious dilemma if Yanagisawa's concerns prove warranted. Japan has been slow to enact serious economic and financial reforms in the interest of maintaining social stability. Instead, Japan attempted to divert attention away from the underlying structural problems of the financial system by pumping public money into weak banks and by focusing on national security and the North Korean threat. As the problems deepen, it is growing increasingly difficult for Japan to initiate meaningful reforms without radically upsetting the balance of social order.

The conflux of the overwhelming desire to maintain social stability, the potential of a new wave of collapsing banks, and the fear of foreigners taking over the domestic financial market leaves few options for Japan. While Yanagisawa advocates greater responsibility by bank executives for solving their own problems, it seems likely that the steps taken with Kokumin Bank will be repeated. Within the terms of Japan's banking reforms, there have been several actions suggesting a slide toward nationalizing pieces of the banking system, including the use of public funds to bail out private banks, forced mergers, and government takeovers of weakened financial institutions.

As the economy continues to slide, and more banks go under due to bad loans or mismanagement, Japan will be forced to act soon or face growing foreign pressure in its local markets. Already another regional bank, the Kofuku Bank, warned it was near collapse on April 12, just one day after government took over Kokumin Bank. It is quite possible that the trend to nationalize banks in Japan will continue, but at what cost - fiscal and political - to the regime, no one has estimated.

-- a (a@a.a), April 13, 1999

Answers

Ya just got-ta shake your head and wonder.Tman...

-- Tman (Tman4609@netscape.net), April 13, 1999.

a: An interesting post and scenario. Maintaining social stability, fear of gaijin takeovers and the potential cultural ramifications of "saving face", all in confluence with major financial and econonmic instability and challenges. Rock and a hard place. Maybe PNG will throw in two cents.

-- Rob Michaels (sonofdust@com.net), April 13, 1999.