US wakes up to severity of banks crisis Mar 16 Andrew Cornell in Tokyo

One only had to listen to the random stabs US commentators made at pronouncing Japanese bank names on the business television stations yesterday to realise that the Japanese banking system was not a staple of their daily diet of economic intelligence. Indeed, it is difficult to understand why it is now.

The proximate reasons are straightforward enough. Fitch IBCA, the US credit ratings agency that has a strong record on bank stocks, issued a warning on 19 Japanese banks.

"While Fitch realises that these problems have been confronting the banks for a number of years, the agency is increasingly concerned that the final resolution of their severe asset quality problems will be further delayed unless there is some form of government intervention or dramatic improvement in their operating environment," Fitch said.

When he was based in Tokyo in 1993, Fitch's Asian head, David Marshall, said essentially the same thing to this correspondent. It is not a new story.

What is new is that the Americans have realised the seriousness of the plague eating away at Japanese banks and the potential for contagion. They now see that the only global economy to rival their own faces banking problems worse than those that laid low the financial system in the 1980s.

And while the US banks and regulators acted rapidly to quarantine the cancerous loans, inject fresh capital and provide a nurturing environment whereby the banks could restore their health by buying government bonds and trading off the secure spread, Japan has done little, if any, of that.

The bad loans from a decade ago have not been written off; capital injections have not been sufficient; and the banks have only belatedly realised they can make easy money buying government bonds.

Japanese banks still lack the willingness to reform and restructure, and the Japanese Government lacks the fortitude to force it.

A spokesman for one of the banks named by Fitch yesterday complained to The Australia Financial Review a few weeks ago about a negative report on Japanese bank mergers. He said the mergers were in fact very successful. He then handed over two business cards, one with the name of the merged bank, and one with his old bank's name.

"We still have separate operations," he explained. And that's a year after the merger!

But sometimes bad news is good news, as Merrill Lynch America's David Bowers said on one of the US business channels yesterday.

"Nothing scares central bankers more than problems in the banking sector, and this may make the [US Federal Reserve] more aggressive," he said.

And now that the US has recognised the Japanese banking crisis, it will be harder to ignore.

http://afr.com/asia/2001/03/16/FFXRMRQBBKC.html

-- Martin Thompson (mthom1927@aol.com), March 15, 2001

Answers

I wonder if PNG is still around and if he could post some insight into the Japan situation.

-- PNG where are you? (PNGwhereareyou@PNGwhereareyou??.kom), March 16, 2001.

"... this may make the [US Federal Reserve] more aggressive." This is not so, per the analysis at: http://www.stratfor.com/home/giu/archive/031601.asp#Greenspan Hence, the economic cascade could get much worse for this reason.

Free article, available to Stratfor.com non-subscribers. (c) 2001 Strategic Forecasting LLC. (Stratfor.com) Fair use for commentary, research, and education only.

THE GLOBAL INTELLIGENCE UPDATE Greenspan: Stuck Between Japan and a Hard Place

Investors fear that the U.S. markets, which are at cycle lows, have a long way to go before bottoming out. If the economy is not in a recession, it is doing a good impression of one. The Federal Reserve, which has received much criticism for not cutting interest rates faster, seems prepared to let this continue. Federal Reserve Chairman Alan Greenspan is trying to space the cuts out as widely as he can; more widely than investors and financial analysts think is necessary to jumpstart the economy. To many, this makes no sense. But considered in terms of Japan - the world's second largest economy - Greenspan's strategy adds up: Another round of serious interest rate cuts might break apart the Japanese banking system. Greenspan sees that the Japanese economy is near its breaking point. He does not want it to crack and, if it does crack, Greenspan does not want the United States to be the catalyst. Japan's economy is so close to the edge it will not take much to nudge it over. As the United States cuts interest rates, money flows into countries with higher interest rates, weakening the U.S. dollar particularly in relation to European currencies. This makes American exports more competitive with Japanese exports in Europe. Simultaneously, the slowing U.S. economy will cut Japanese exports to the United States. While normally of little significance, a drop in cash flow due to declining exports could be the straw that breaks the camels back.

End Fair Use Excerpt

-- Robert Riggs (rxr.999@worldnet.att.net), March 17, 2001.