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April 5, 2001 Tokyo Fails to Come Up With a Plan on Bank Crisis

By STEPHANIE STROM TOKYO, April 4 — Disappointing widespread expectations, Japan's coalition government failed to produce a plan today to address lingering problems in the banking system and give a lift to the economy, which is sliding toward recession.

"We could not reach agreement on some issues," said Taro Aso, the minister in charge of economic and fiscal policy.

The main snag involved a proposal to set up a fund to buy some of the 39 trillion yen ($311 billion) in stocks held by Japanese banks. The plan, meant to spare the banks further losses on their stock portfolios without having the shares dumped on the open market and hammering prices, has drawn fire from some politicians, who oppose using public money to underpin stock prices.

The government did manage to push through one component of the hoped-for package today, perhaps in response to pressure from the United States, which is newly concerned about the weight of nonperforming loans hanging over the banks.

Mr. Aso said that within two years Japan's 16 major banks would be required to clear 12.7 trillion yen of their worst loans from their books — those to borrowers in bankruptcy proceedings or on the verge of insolvency. Banks in Japan have been notoriously slow to write off bad loans, even when there is little or no chance they will be repaid.

But the categories of loans covered by the measure accounted for only about one-third of the bad loans reported by the government as of last September. The measure ignores the much larger category called gray loans, which (on paper, at least) are somewhat less severely troubled, though the debts of bankrupt borrowers like Sogo and Tokyo Life Insurance are included.

"Nonetheless, it's better than nothing," said Yasuhisa Shiozaki, a member of Parliament and former Bank of Japan official. "And setting a time frame for disposal of these loans is a big step forward."

Political considerations were clearly at work. Regional banks are exempted from the write-off requirements, a concession to the small and midsize companies that borrow from them. Applying the measure to regional banks "would have had a very negative effect on the small businesses in local areas, which are big political supporters," said Masaaki Kanno, chief economist at J. P. Morgan in Tokyo. "So they limited it to the big banks."

Though it is labeled an emergency rescue plan for the gasping economy, the main purpose of the package of proposals debated by the governing coalition is to bandage the banking sector before September, when banks' books will have to reflect the true market value of their stock portfolios for the first time.

Banks carried on their balance sheets holdings of stock that they valued at 39.1 trillion yen at the end of December, and Japanese regulators allow them to count 45 percent of that figure in their capital bases, which determine how much they may lend. That arrangement can leave the banks' financial stability at the market's mercy. So when the Nikkei 225 index slumped by 13 percent earlier this year (it has since retraced most of the loss), the government started hunting for a way to get the shares off the banks' books before September.

The plan on the table, creating a fund to buy the shares with money supplied by the banks and a government guarantee against losses, has proved highly controversial. Politicians said today that Shizuka Kamei, the ruling party's policy chief, is pushing for passage of the plan before the party chooses a new president to replace Prime Minister Yoshiro Mori, a move expected later this month or early in May. The ruling party's president automatically becomes prime minister.

But Hakuo Yanagisawa, the financial services minister and a frustrated reformer, has resisted. He is concerned about committing public money to the fund, and he worries that it may become another vehicle for "price-keeping operations," in which the government uses public entities to prop up the stock market. Unlike South Korea, which announced a plan today to pour public pension money into its stock market, the Japanese government officially swore off such operations a few years ago, though there are signs that it has quietly resumed the habit.

Anxious to put a lid on Japan's mounting public debt, the Ministry of Finance is loath to agree either to cut taxes or to supply tax money to the stock-purchase program. And the Ministry of Economy, Industry and Trade, now official Japan's leading advocate of far-reaching corporate restructuring, worries that progress will be impeded if a government-run fund owns 2 to 3 percent of all stocks.

The ministries and Mr. Yanagisawa want to hold off discussing the stock fund plan until summer. They managed to postpone a decision for the moment. But maybe not much longer: Mr. Shiozaki, who also wants to move slowly, thinks it may be adopted as soon as Friday.

Copyright 2001 The New York Times Company

http://www.nytimes.com/2001/04/05/business/05YEN.html?pagewanted=print

-- Martin Thompson (mthom1927@aol.com), April 05, 2001