It’s no secret. Since the big-bang reform of ‘97, the bad debt load of Japanese banks has actually grown from 4 to 6 percent of all loans, and fore- casts expect the $531 billion total of “nonperforming loans” to continue rising sharply. There is little chance anyone can collect these debts, yet the banks are increasingly unwilling to write them off as losses, and the markets are increasingly worried about Japan’s financial health. As Tokyo’s Nikkei index started to plummet anew earlier this month, the government stepped in with a “Japan Rebirth Plan” that quickly backfired. The Fitch ratings agency of New York delivered a vote of no confidence last week–placing 19 Japanese banks on “negative review” due to bad loans and weak share prices. The tremors reached all the way to Wall Street, helping to send the Dow Jones industrial average plummeting below the 10,000 level. Japanese Prime Minister Yoshiro Mori will be in Washington this week, trying to put on a bold face as calls mount for his resignation at home.
What went wrong? Japan seems to be taking a big step backward to the days of “command capitalism.” In the mid-1990s, Japan’s Finance Ministry manipulated supposedly private postal savings accounts to buy stocks and stem the downward spiral of the Nikkei. These quiet “price-keeping operations” were an open secret. The new Rebirth Plan is far more brazen. Announced March 10, it is a work in progress but appears likely to include both a public fund to buy stocks from banks and open encouragement (such as tax incentives) to private investors to buy shares they otherwise shun. “It’s gone far beyond price keeping. This is price manufacturing,” said Noriko Hama, a senior economist at the Mitsubishi Research Institute in Tokyo. “The markets are indicating huge problems, but politicians are trying to shoot the messenger.”
The woes of the world’s second largest economy are increasingly plain to see. Exports have flagged. Unemployment is at a record 4.9 percent and rising. Investors see few Japanese companies worth buying, and banks are at the heart of the troubles. Their reckless lending pumped up real estate and stock prices until the bubble deflated in the early 1990s. The extent of the bad-loan crisis remained largely hidden until the Asian Flu of 1997-98 forced several Japanese banks to collapse. The then Prime Minister Keizo Obuchi shut down several banks, urged others to merge and spent $437 billion in taxpayers’ money to shore up bank reserves. The idea was to rebalance the books and allow banks to grow out of the red.
That hasn’t happened. Obuchi did nothing to pressure deadbeat companies to become profitable and pay off their debts. In fact, he offered a massive new loan scheme to help small companies survive the recession. (Many of these debtors are in sectors like construction and real estate that are strong backers of the ruling party.) Tetsuro Sugiura, chief economist of the Fuji Research Institute, figures that two thirds of the bad debt is not a legacy of the bubble era, but a result of the bailouts implemented since it collapsed.
The burden of deadbeat companies is now dragging Japan down. Economist Kazutaka Kirishima of Sumitomo-Life Research Institute in Tokyo warns that the economy has been in decline since August and will be “entering a full-blown recession” by this summer. Richard Katz, author of “Japan: The System That Soured,” believes the ruling party was never serious about bank reform. “The government’s plan was to give the banks money so they could grow out of the recession by riding the alleged corporate restructuring and the alleged IT boom,” he says. “It was all a house of cards.”
As the Nikkei falls, some analysts now believe it could drop below the once unthinkable and psychologically devastating milestone of 10,000. The recent drop is due in part to banks’ selling off their extensive holdings in sister and client companies, in anticipation of new accounting rules that go into effect April 1. The rules will require banks to report the true market value of their stocks, exposing the real depth of their financial troubles. And as banks dump stocks, the government is stepping in to buy them despite a rare red flag from one of its own. Finance Minister Kiichi Miyazawa recently warned that profligate public spending raised the prospect of a “catastrophic” collapse in the financial system. A new bailout may help the big banks, for now, but raises the long-term risks for Japan.
