By James SimmsNorth Korean Ties Complicate Japan's Efforts to Clean Up Banks
TOKYO -- To the U.S., North Korea is a member of the "axis of evil," but to Tokyo, Pyongyang is also part of Japan's huge banking mess.
The problem of failed Japanese credit unions linked to North Korea is complicating one of Prime Minister Junichiro Koizumi's toughest and most vital jobs, ridding the country's banks of their massive bad loans.
Stalinist Pyongyang, recently lumped with Iran and Iraq as a pariah regime by President George W. Bush, presents a particularly sensitive problem for Tokyo. Japan is under pressure from Washington to get tough with North Korea, including choking off the flow of funds that ethnic Koreans in Japan send to the North. But a hard-line stance toward Pyongyang might alienate neighboring South Korea, which has been pursuing a "sunshine policy" of rapprochement with the North.
The funds to North Korea come from Japan's chogin credit unions -- chogin literally means Korean bank -- which mainly serve the large community of ethnic Koreans in Japan who are loyal to the North. But many Japanese legislators, among others, allege the chogin have funneled billions of dollars to the secretive communist government in the North. Katsumi Sato, an expert on North Korea who heads the Modern Korea Institute in Tokyo, says many of the credit unions went bust from a combination of diverting money to the North and -- like many Japanese banks during the asset-inflation bubble of the 1980s -- from making reckless loans.
Much of that chogin money, according to people who have studied the Korean credit unions, may have been used by the North Korean government to buy weapons, while the populace has been suffering from malnutrition and even starvation for the past several years.
About 635,000 ethnic Koreans live in Japan, many of them laborers, brought to Japan during its brutal 1910-1945 occupation of the Korean peninsula, or their descendents. Most of the Korean community in Japan remains split along North-South lines, belonging to separate community groups, going to different schools -- and putting their money in different banks.
But there is a difference The Pyongyang-linked financial institutions are in deep financial trouble. From an original 38 credit unions -- after several mergers and 16 failures over the past few years -- there eventually will be seven once the cleanup is finished. The Japanese government spent more than 260 billion yen ($1.95 billion) to guarantee all deposits at chogin Osaka, which in 1997 was the first to go belly up, and more than 260 billion yen for nine other credit unions last year. Now, Japan appears set to spend an additional 500 billion yen as part of an agreement last month to let four groups of resident North Korean businessmen take over six failed chogin. The government must cover losses at the credit unions, in line with deposit guarantees for Japanese banks.
The chogin, set up in the 1950s with money ethnic Koreans pooled to lend to small businesses and individuals who faced discrimination from local Japanese banks, now boast loan portfolios of between 200 billion yen and almost 600 billion yen, with 24,000 to 45,000 depositors.
To be sure, the chogin are a drop in the bucket of Japan's overall bad-loan problem. Cleaning up the chogin could cost an estimated 1.3 trillion yen. By contrast, many private-sector banking analysts say bad loans at all Japanese deposit-taking institutions could total 100 trillion yen or more.
But there are diplomatic costs to consider. Leaning on the chogin could fuel criticism that Tokyo is discriminating against Korean residents, an especially touchy subject given Japan and South Korea will jointly host the World Cup next month. Yet, the prime minister could be labeled as soft on Pyongyang if he is seen as going easy on the chogin.
Suspicions about many of the chogin can't be ignored. Late last year, police arrested a score of former chogin executives and a former finance official at the pro-Pyongyang association that acts as North Korea's de facto embassy, on allegations that included embezzlement and covering up bad loans.
Government-appointed administrators looking into chogin Tokyo say they found 177 fictitious accounts containing deposits totaling almost 500 million yen. The Tokyo chogin officials also allegedly concealed 2.4 billion yen in nonperforming loans from inspectors, according to police documents. Police arrested former chogin officials and Kang Young Kwan, the former official of Chongryon -- the General Association of Korean Residents in Japan -- on charges of embezzling more than 800 million yen from 1994 through 1998. Police suspect Mr. Kang of disguising diverted funds as loans to individuals affiliated with the association.
So Chung On, a Chongryon official, denied Mr. Kang was involved in any wrongdoing, saying Mr. Kang wasn't even aware of the accounts in question.
Police officials in Tokyo and Seoul won't comment on whether they suspect the credit-union funds were diverted to North Korea.
U.S. and Japanese experts on North Korea estimate that anywhere from less than a $100 million to more than $1 billion flows from Japan to North Korea every year. In addition to legal remittances by ethnic Koreans, some of the money is undeclared taxable income.
"Quite a bit has gone to North Korea from the chogin borrowers," said LDP lawmaker Katsuei Hirasawa, a former National Police Agency security official.
Chongryon's Mr. So denies this. "There's absolutely no evidence. That's why they say 'suspicions.' It's very political."
But Hideshi Takesada, a North Korea specialist at the Japanese government's National Institute for Defense Studies, says between 30% and 50% of all hard currency flowing into North Korea ends up in the hands of the powerful military. Those funds apparently go to buying sonar and global-positioning systems and parts for missiles, submarines and spy ships, as well as precursor materials for chemical weapons, the lawmaker says. Some of that equipment comes from Japan itself, transshipped from ports such as Hong Kong, Singapore and Macao, he says. Some of the exports apparently also include pricey titanium-shaft golf clubs, which can be melted down and used for missile parts. Pyongyang launched a long-range missile over Japan and into the Pacific in 1998.
As Japanese public opinion toward North Korea hardens and the U.S. steps up its post-Sept. 11 push to crack down on terrorists and their sources of funding, Tokyo is under growing pressure to act. Any suspicious chogin accounts uncovered in the bad-loan cleanup will be turned over to the Resolution and Collection Corp., the government body in charge of getting bad assets off banks' books. They will either written off or resold to investors, says Financial Services Minister Hakuo Yanagisawa.