Are bankers telling the truth this time? And if they're not, will regulators let them get away with lies? Those are the critical questions as the Japanese government gears up for what it bills as the final bailout of the nation's banks. Analysts are more optimistic this time that the bailout might succeed--if the official bad-loan numbers are accurate. But if, as critics still fear, bankers and their overseers intend to hide the worst, then trillions of yen in public money will likely disappear down the same sinkhole that swallowed earlier bailout funds.Either way, the result will sway Japan's economic fate. Since the year began, a few signs have begun to emerge that the Japanese economy has a chance to achieve the government's target of 0.5% growth in the year beginning in April. Unemployment in December, for example, slipped to 4.3% from 4.4%. But a real recovery will require confidence that the worst is over, and that won't happen if Japanese consumers fear an imminent collapse of the financial system.
While the government has tried to rescue Japan's banks many times before, the latest scheme--based on legislation approved by parliament last year--offers several causes for hope. One is the amount being spent. Banks are expected to ask for nearly ¥7 trillion ($62 billion) this time vs. the ¥1.8 trillion they received in March 1998, the first time public funds were given to all the top banks. The greater the spending, the more likely banks can fill all the holes on their balance sheets.
Another change: Authorities this time aren't simply writing cheques. Last year, an understaffed committee rushed through all the applications from banks in a few days, and the committee's chairwoman later admitted she hadn't looked at their balance sheets. Now, however, the government's Financial Reconstruction Commission is demanding broad restructuring from banks as a condition for receiving public money.
Already, banks are racing to withdraw from overseas business, close domestic branches and cut salaries to meet restructuring criteria. And the commission is widely believed to have prodded Mitsui Trust & Banking and Chuo Trust & Banking, two of the weakest players, into announcing a merger in mid-January. A third weak player, Yasuda Trust & Banking, is to become a subsidiary of Fuji Bank.
The upshot is that many analysts believe this infusion of funds could do the trick. The scenario goes like this: Helped by the public money, plus some fund-raising on their own, the big 17 banks write off all their remaining bad debts when they close their books for the year ending March 31. Add a few mergers and lots of restructuring prompted by the authorities, and soon Japan has a banking industry in fighting trim, ready to lend instead of squeezing credit.
"I think we're finally getting there. We have a real reason for optimism," says Adam Posen, senior fellow at the Institute for International Economics in Washington and author of the recent book Restoring Japan's Economic Growth. Eisuke Sakakibara, the vice-minister of finance, said on February 2 that the banking mess would be settled within two weeks.
Not so fast, say critics. They fear that the infusion of public funds will keep weak banks on life support for another year or two, but won't give them enough to lead healthy lives again. Lester Thurow, an economics professor at the Massachusetts Institute of Technology, says Japan might as well "throw the money in Tokyo harbour." He said in a speech in Tokyo in late January that Japan should nationalize all its troubled banks--a step adopted for only two banks so far--and auction off the assets to the highest bidder, even if taxpayers would have to bear the huge burden of recapitalizing the nationalized banks before they're sold.
The numbers tend to back up Thurow's argument. Even if the government doles out the full ¥7 trillion, that's only 1.4% of Japan's GDP--far less than most other countries have had to spend to solve banking crises. According to the government commission, the big 17 banks have ¥49 trillion in problem loans, so ¥7 trillion looks like a thin cushion. Still, says Noriko Hama of the Mitsubishi Research Institute: "Theoretically, it ought to be enough, unless there's a lot hidden."
Unfortunately, if past experience is any guide, there is a lot hidden. Rumours continue to swirl in Tokyo about several banks believed to be insolvent, even though all claim to be comfortably placed. The monthly magazine Sentaku, in its February issue, published figures supposedly leaked by authorities claiming that six of the top 17 banks as well as 28 smaller regional banks are insolvent--that is, their liabilities exceed their assets. Both of the banks nationalized last year turned out to have engaged in tobashi, the practice of "flying" bad assets into hidden paper companies to get them off the banks' books. It would surprise no one if tobashi were widespread at some of the surviving banks as well.
All this leaves the Financial Reconstruction Commission with a dilemma. If officials choose to inject public funds into banks widely perceived as lost causes, "their credibility will be shot," as one Japanese banker puts it. If they decide to get tough and nationalize the problem cases, however, it could put thousands out of work by forcing deadbeat borrowers into bankruptcy. And the blow to consumer sentiment could nip any recovery in the bud.
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