Japan banks face crisis over rule change

Japan's plunging stock markets are threatening to trigger the country's worst financial crisis since the property asset bubble burst in the early 1980s, writes Ray Heath.

Analysts are warning that a fall below 12,500 in the value of the Nikkei 225, which today tumbled to 11,900, will force a wave of selling of the massive shareholdings held by Japan's banks.

'After 12,500 the next stop is 8500,' warned Dr Mark Konyn, director of Dresdner RCM Global Investors in Hong Kong.

Such a cataclysmic crash would be triggered by huge unloading of stocks held by banks who can no longer hide the massive losses on which they have been sitting for decades. Traditionally Japanese banks have valued their investment at cost, despite the huge falls in the market value of their equity holdings.

But a change in rules means the time is coming when assets must be put in the books at current value, or 'marked to market'. Many banks will be using the new system with their 2001 accounts.

The current losses have been estimated at five trillion yen (£340 billion), which would decimate the balance sheets of Japanese banks.

To maintain their capital ratios above the 8% required for the conducting of overseas business would mean forced selling of their holdings, warn analysts.

© Associated Newspapers Ltd., 13 March 2001

http://www.thisislondon.co.uk/dynamic/news/business_story.html?in_review_id=370308&in_review_text_id=316010

-- Martin Thompson (mthom1927@aol.com), March 13, 2001

Answers

This is a VERY important article but I don't give it much credence because they would simply change the rules again before forcing banks to adhere to the "new" rule and causing a collapse in their stock market.

If its a law that requires new accounting rules that are to be enforced by end of March well then, they can quite easily extend the deadline for imposing that law. The Japanese aren't going to allow a stock collapse just because of a new accounting rule.

-- Guy Daley (guydaley@altavista.com), March 13, 2001.

Banks must act to stem 'March crisis' fears

Yomiuri Shimbun

The following is the fifth installment of a seven-part series detailing The Yomiuri Shimbun's emergency proposals concerning how to avert a deflationary crisis.

Don't exacerbate anxiety

over the financial system again

-- Make arrangements for the disposal of bad debts

-- Establish a viable safety-net system

Fears that the nation's financial institutions could be hit by a "March crisis" have been spreading in the market.

According to this doomsday scenario, banks will incur sizable losses due to plummeting stock prices and will see their net-worth ratios fall short of the internationally required standard, making it inevitable for the government to inject a massive amount of public funds to stabilize the financial system.

The Financial Services Agency, meanwhile, has dismissed this theory, maintaining that even if the Nikkei index of average stock prices falls below the 12,000 level, the capital-adequacy ratio of major banks will stay above the 11 percent mark, far above the 8 percent required by the Bank for International Settlements for banks operating internationally.

Visible behind the March crisis rumors are domestic and foreign speculators who hope to make a killing through short-selling financial institutions' stocks.

As a country whose politics have fallen into a state of paralysis and whose capital markets are in the doldrums, Japan makes an ideal target for speculators.

Bur there are more fundamental reasons for the emergence of "crisis panics" in the financial markets when the March settlement term for businesses comes around every year.

Japan's financial system has been beset by a structural dilemma.

Banks tend to own a sizable amount of shares of other companies, mainly shares of those with which they have business ties.

As a result, their business performances are often significantly affected by fluctuations in stock prices.

With the introduction next fiscal year of a system in which accounts will be settled on a market-value basis, in accordance with international standards, businesses will be required to calculate the appraisal loss of stocks they own.

It is for this reason that banks are now hurriedly selling stocks they own, including cross-held shares.

A vicious circle is occurring now in which banks sell stocks to boost their capital strength, which drives down stock prices and further dampens business and consumer sentiment, thwarting the business performances of the banks themselves.

A related problem is the fact that the final disposal of bad loans has made slow progress.

In recent years, when the account-settlement term came around, banks have claimed the worst was over concerning their disposal of bad loans. In reality, however, the amount of bad loans they hold has not decreased at all.

The final disposal of bad loans made by banks between 1993 and September last year totaled 68 trillion yen.

Yet the outstanding amount of bad loans totaled 30.4 trillion yen for the term that ended in March last year, up from 29.8 trillion yen in March 1999.

Should the value of collateral for loans held by banks in the form of land and stocks fall, due to drops in their prices, and the business performance of companies with which the banks have business ties deteriorate, banks will be unable to reduce the value of their problem loans.

This is because they are threatened by war of attrition in which the value of bad loans held by banks may start rising if the banks merely write them off on their books by setting aside reserves for loan losses.

The nation's financial sector is far stronger today than it was in 1997 and 1998 when panic ensued following the collapse of Yamaichi Securities Co. and the Hokkaido Takushoku Bank.

However, if the financial system--the foundation for all economic activities--is not completely healthy, it will be impossible to realize a full-fledged recovery and rebirth of the national economy.

The problem is that the stability of the economy and that of the financial system are highly interdependent, with each being the cause of effects in the other. The financial system and the economy have to be cut free from this vicious cycle. Measures must be taken to make the banks strong enough not to be overly affected by fluctuations in stock prices.

A climate should be fostered in which bad loans held by banks can be set aside from the assets they enter in their books and disposed of completely. As a matter of course, a public safety net should be prepared at the same time.

While the U.S. economy is said to be dependent on the securities market--chiefly on Wall Street--activities of major corporations in Japan are still heavily dependent on loans from banks.

The ratio of the balance of bank loans to gross domestic product in Japan is 2.5 times larger than that in the United States. Under such a situation, the banks, as stable shareholders, have long owned stock of the companies they offered loans to. They have also been monitoring the management of those companies and helping them in emergencies.

However, under the powerful tide of globalization, the "pastoral" main-bank system is on its way out. The banks and the companies are now struggling to survive.

With the introduction of the market value-based accounting system, which includes appraisal losses of stocks, fast approaching, the banks have rushed to sell the shares of their business partners. The banks transacted net sales of a record 570 billion yen worth of such shares in February, fueling the fall of stock prices and inflicting pain on the banks themselves.

Banks' management should not be governed by fluctuations in stock prices. Realistic schemes to further limit banks' stockholdings should be studied. For the time being, it would be a good idea to promote the creation of a mechanism in which stocks currently held by banks could be purchased using private funds. This scheme is proposed in the ruling coalition's package of emergency economic measures. Under the scheme, a special investment trust firm would be set up so that banks could transfer their stocks in the form of capital investment or stock sales within a few years.

Yet the disposal of bad loans is a daunting task. If banks exclude some loans as "uncollectible" from the lists of their assets in their accounts, it would mean the collapse of the businesses whose loans had been deemed uncollectible.

This is because the value of liquidation is determined only after a recipient of a loan is declared bankrupt through legal procedures. If banks rush to make recourse to this "direct liquidation" system to write off bad loans, it would trigger a spate of bankruptcies among borrowing companies, further exacerbating the deflationary trend.

But if banks continue their practice of relying on the convenient liquidation method of abandoning loan credits, which is another form of direct liquidation, they will only give ailing companies a bit of breathing room, instead of helping the firms to rebuild themselves.

We urge banks to make efforts to change their style of financing from that aimed at a company as a whole to one aimed at supporting a particular corporate project. If banks divided themselves into smaller units to eliminate unprofitable sections, they could curb the occurrence of uncollectible loans without causing borrowing companies to go bankrupt and lay off their employees.

A legal framework including taxation-related legislation should be established to implement such a scheme.

The utmost efforts also should be made to securitize real estate held as collateral and loan credits. Full-fledged efforts are also needed to improve the market for such securities to be traded. If such real estate and loan credits are transformed into securities and put on the market, nonperforming loans could be directly liquidated without causing the collapse of borrowing companies. When banks received money back through the system, they could loan it to companies again. The financial market would then work properly.

The revitalization of land transactions should be the first step in revitalizing the economy. Taxes imposed on the transaction and registration of real estate should be lowered or abolished so that costs incurred in transacting real estate can be reduced.

For example, U.S. banks overcame the savings-and-loan crisis in the 1980s by securitizing real estate and loans, as well as carrying out corporate restructuring.

In the business settlement term that ends this month, at a time when stock prices are plunging, if banks go all out in trying to dispose of bad loans, some of them may end up in the red. The banks that have received public money to revitalize their operations promised the government they would maintain certain profit levels. Yet as long as the government urges banks to dispose of their bad loans, it is only natural for it to allow them to fall into the red for this term.

To prevent the unease over the financial system from recurring under the growing pressure of deflation, it is essential for the nation to establish and maintain a public-run safety net system to prevent financial crises.

The government has set aside 15 trillion yen in its budget for fiscal 2001, which starts in April to prepare for financial crises. This fund should be used in a flexible and timely manner so that corporate unease among small and medium-sized financial institutions does not shake the entire financial system.

Measures must be taken to make the banks strong enough not to be overly affected by fluctuations in stock prices.

A climate should be fostered in which bad loans held by banks can be set aside from the assets they enter in their books and disposed of completely. As a matter of course, a public safety net should be prepared at the same time.

While the U.S. economy is said to be dependent on the securities market--chiefly on Wall Street--activities of major corporations in Japan are still heavily dependent on loans from banks.

The ratio of the balance of bank loans to gross domestic product in Japan is 2.5 times larger than that in the United States. Under such a situation, the banks, as stable shareholders, have long owned stock of the companies they offered loans to. They have also been monitoring the management of those companies and helping them in emergencies.

However, under the powerful tide of globalization, the "pastoral" main-bank system is on its way out. The banks and the companies are now struggling to survive.

With the introduction of the market value-based accounting system, which includes appraisal losses of stocks, fast approaching, the banks have rushed to sell the shares of their business partners. The banks transacted net sales of a record 570 billion yen worth of such shares in February, fueling the fall of stock prices and inflicting pain on the banks themselves.

Banks' management should not be governed by fluctuations in stock prices. Realistic schemes to further limit banks' stockholdings should be studied. For the time being, it would be a good idea to promote the creation of a mechanism in which stocks currently held by banks could be purchased using private funds. This scheme is proposed in the ruling coalition's package of emergency economic measures. Under the scheme, a special investment trust firm would be set up so that banks could transfer their stocks in the form of capital investment or stock sales within a few years.

Yet the disposal of bad loans is a daunting task. If banks exclude some loans as "uncollectible" from the lists of their assets in their accounts, it would mean the collapse of the businesses whose loans had been deemed uncollectible.

This is because the value of liquidation is determined only after a recipient of a loan is declared bankrupt through legal procedures. If banks rush to make recourse to this "direct liquidation" system to write off bad loans, it would trigger a spate of bankruptcies among borrowing companies, further exacerbating the deflationary trend.

But if banks continue their practice of relying on the convenient liquidation method of abandoning loan credits, which is another form of direct liquidation, they will only give ailing companies a bit of breathing room, instead of helping the firms to rebuild themselves.

We urge banks to make efforts to change their style of financing from that aimed at a company as a whole to one aimed at supporting a particular corporate project. If banks divided themselves into smaller units to eliminate unprofitable sections, they could curb the occurrence of uncollectible loans without causing borrowing companies to go bankrupt and lay off their employees.

A legal framework including taxation-related legislation should be established to implement such a scheme.

The utmost efforts also should be made to securitize real estate held as collateral and loan credits. Full-fledged efforts are also needed to improve the market for such securities to be traded. If such real estate and loan credits are transformed into securities and put on the market, nonperforming loans could be directly liquidated without causing the collapse of borrowing companies. When banks received money back through the system, they could loan it to companies again. The financial market would then work properly.

The revitalization of land transactions should be the first step in revitalizing the economy. Taxes imposed on the transaction and registration of real estate should be lowered or abolished so that costs incurred in transacting real estate can be reduced.

For example, U.S. banks overcame the savings-and-loan crisis in the 1980s by securitizing real estate and loans, as well as carrying out corporate restructuring.

In the business settlement term that ends this month, at a time when stock prices are plunging, if banks go all out in trying to dispose of bad loans, some of them may end up in the red. The banks that have received public money to revitalize their operations promised the government they would maintain certain profit levels. Yet as long as the government urges banks to dispose of their bad loans, it is only natural for it to allow them to fall into the red for this term.

To prevent the unease over the financial system from recurring under the growing pressure of deflation, it is essential for the nation to establish and maintain a public-run safety net system to prevent financial crises.

The government has set aside 15 trillion yen in its budget for fiscal 2001, which starts in April to prepare for financial crises. This fund should be used in a flexible and timely manner so that corporate unease among small and medium-sized financial institutions does not shake the entire financial system.

http://www.yomiuri.co.jp/newse/20010314wo12.htm

-- Martin Thompson (mthom1927@aol.com), March 13, 2001.

Fears grow of Japan banking crisis

By Emiko Terazono in Tokyo Published: March 13 2001 17:53GMT | Last Updated: March 14 2001 03:53GMT

Japan's leading banker on Tuesday tried to shrug off fears of another banking crisis as the country's shares fell to a new 16-year low, but by Wednesday midday Tokyo had edged higher on the strength of a Nasdaq rebound.

Yoshifumi Nishikawa, chairman of the Japanese Bankers Association, expressed concern over the Nikkei benchmark index falling almost 3 per cent to 11,819, closing below 12,000 for the first time since February 1985. But he dismissed concern that this would trigger a crisis in the country's banking system ahead of the March year-end.

"There will be no March crisis in the banking system," said Mr Nishikawa, who is also president of Sumitomo Bank.

However, analysts warned a further decline could hit the banks' profits as they are obliged to write off valuation losses of their shareholdings if the market value of the stocks they own falls below 50 per cent of the book value.

"A further 10 per cent fall in shares could wipe Y1,000bn (US$8bn) off profits of the leading banks," said Jason Rogers, analyst at Fitch, the international credit rating agency.

Continued stock market falls will also severely affect the banks' ability to write off non-performing loans. The country's banks have used paper gains derived from their huge shareholdings to offset the pressure of writing off bad loans.

Hakuo Yanagisawa, financial services minister, on Tuesday expressed concerns over the result of the decline in shares. "There are various negative effects on the financial sector," he said.

Mr Yanagisawa last week called for banks to clean up their balance sheets by directly writing off non-performing loans, selling off collateral and cutting off extra support to weak companies. His proposal shook the country's bankers as it would mean more bankruptcies and a sharp rise in unemployment.

The so-called "Yanagisawa Initiative" has come as economic sentiment has deteriorated sharply, and has come under attack from politicians.

A prolonged stock market slump would also have a serious impact on the country's banks, which will be required to book latent profit and losses on their cross-shareholding portfolios from the new business year starting in April.

Under the new mark-to-market accounting rule, banks will have to value their shareholdings at market prices rather than the current method of using book value.

http://news.ft.com/ft/gx.cgi/ftc? pagename=View&c=Article&cid=FT3GOREW9KC&live=true&tagid=ZZZC19QUA0C&su bheading=asia%20pacific

-- Martin Thompson (mthom1927@aol.com), March 14, 2001.

Japan set to duck bank reform

By David Ibison in Toyko Published: March 20 2001 20:40GMT | Last Updated: March 21 2001 08:01GMT

At the end of this month Hakuo Yanagisawa, Japan's financial services minister, is due to release eagerly awaited measures to accelerate banks' disposal of bad debts, christened the "Yanagisawa initiative".

A key part of the initiative was a plan to force banks to write off most of their non-performing loans in one swoop, considered one of the most forward-looking steps in recent years towards addressing the problem.

This toughened stance was reflected in the joint statement issued following Monday's meeting between Yoshiro Mori, Japan's prime minister, and George W. Bush, the US president, in which Mr Mori promised "effective measures" to deal with the bad loan problem, without offering details.

But Mr Yanagisawa's language in recent days has prompted concerns that this part of his plan is being watered down - primarily for reasons of political expediency.

The package comes at a crucial time for the Japanese banking system, after rumours that Daiwa Bank might go bankrupt triggered fears the entire sector was in trouble and sent global banking shares downwards.

International confidence in the future of Japan's banking system - as well as the broader economy - suffered as a result, even though the rumours turned out to be unfounded.

The speculation, however, did serve to highlight the fragile state of the Japanese banking system and put the spotlight on Mr Yanagisawa's proposed reforms.

Far from pushing banks to write off large proportions of their non- performing loans, as initially indicated, Mr Yanagisawa is now talking about a range of other measures.

He has indicated he now favours debt waivers, tax breaks for banks that offer debt waivers, getting debtor companies to consolidate, and spinning off unprofitable businesses to focus lending on core profitable businesses.

Instead of directly writing off most of their bad loans, Mr Yanagisawa now appears likely to ask banks only to directly write off bad loans they have already provided for, while maintaining credit to marginal companies that agree to restructuring plans.

In addition it is thought he will suggest banks be granted more time to repay the government the¥9,300bn ($76bn) used to bail them out in 1998 and 1999, which will ease the pressure to offload cross-held shares.

Mr Yanagisawa may also extend the remit of the Resolution and Collection Corporation (RCC), which buys non-performing loans from healthy banks, by one year from March 31 this year.

After the banks were bailed out with public funds, the government received preference shares in return, which can be converted into voting shares if a bank fails to make a dividend payment, effectively nationalising the bank.

In order to avoid being nationalised, the banks struggled to make the payments. It is thought that Mr Yanagisawa may relax the rules surrounding dividend payments to allow them to retain more earnings.

All of the measures Mr Yanagisawa is considering would serve to ease the pressure on the banking system, with the possible exception of debt waivers, which can allow badly run companies to stay in business.

The suggestion to get banks to write off loans they have already provided for, demand companies implement broad structural reforms in return for credit and relax repayment timetables will also lighten their burden.

But what happened to directly writing off a large proportion of the bad loans?

When Mr Yanagisawa first mentioned direct write-offs, the reaction was almost universally positive, at least among the international investment community. It was seen as a sign that Japan was getting tough about structural reform and was willing to suffer pain to generate long-term gain.

Instead, a main plank of Mr Yanagisawa's initiative is in danger of being diluted away after nervous politicians deemed them political suicide ahead of elections for the upper house in July.

Directly writing off bad loans would result in an increase in bankruptcies and unemployment as banks foreclosed on companies.

It has been estimated by Goldman Sachs that the move could increase the unemployment rate by 0.5 per cent from the already record 4.9 per cent and might also reduce economic growth by 1.5 per cent.

The Liberal Democratic party - which is facing defeat in the July elections unless it can rebuild its credibility as a good manager of the economy - has taken the view that such measures are politically unacceptable.

Goldman Sachs admitted the political consequences of directly writing off a large proportion of bad loans made their actual implementation highly unlikely and instead argued a less aggressive plan would emerge.

One political analyst said: "Mr Yanagisawa has been told by the LDP that if he goes ahead he will not be in the next cabinet."

http://markets.ft.com/ft/gx.cgi/ftc? pagename=View&c=Article&cid=FT3KIQW0KKC&live=true&useoverridetemplate= ZZZ6MJPM90C&tagid=ZZZR4COD20C&subheading=asia%20pacific%20equities

-- Martin Thompson (mthom1927@aol.com), March 22, 2001.