The Times November 14,
Japan poised to nationalise bank
From Anatole Kaletsky in Tokyo
AT LEAST one of Japan’s “big four” banks is likely to be forcibly nationalised next month, in a move that will cost shareholders billions of pounds. The nationalisation will probably be precipitated by a “symbolic” bankruptcy of one of Japan’s 30 most indebted companies before the end of the year.
These stark predictions were made yesterday by Hiroshi Okuda, chairman of the Keidanren, the powerful Japanese industrial association, which includes the main banks among its members. Mr Okuda, who is also chairman of Toyota, the world’s second largest carmaker, suggested that the controversial move will follow from the much tougher accounting standards, introduced on October 30.
Mr Okuda seemed relaxed about the prospects of a large-scale bank failure and expressed confidence that the Government would be able to cope with the consequences without damaging the Japanese economic recovery, which was confirmed by firmer than expected GDP figures published yesterday.
Mr Okuda, whose organisation has been closely involved in the Government’s contingency plans for a financial crisis, said the Prime Minister, Junichiro Koizumi, was now “strongly supporting” major reform of the banking system.
Under reform plans published last month, Japanese banks would be forced to make much more stringent provisions than in the past for non-performing loans (NPLs) to insolvent and struggling borrowers.
The total value of NPLs in the Japanese banking system is generally thought to be at least Y50 trillion ($400 billion). If the losses resulting from these new provisions reduced a bank’s capital to below the level mandated by the Bank for International Settlements (BIS), the Government would inject new capital and take control. This process would amount to a forced nationalisation, wiping out or massively diluting existing shareholders.
Mr Okuda said that all of Japan’s “big four” banks would survive the reform process, but the question was “whether they will be privately owned or nationalised”. He added ominously that “of the four major banks two are very solid, but two are fragile”.
While Mr Okuda refused to identify the banks in these two groups, analysts are virtually unanimous that the two “solid” banks are Mitsubishi Tokyo Financial and Sumitomo Mitsui, while the two weaker institutions are UFJ Holdings and Mizuho Holdings, the world’s biggest bank in terms of assets.
Asked to explain why the banking crunch could come as early as next month, Mr Okuda explained that the rigorous new credit assessment regime could quickly drive one or more big borrowers into bankruptcy and this would threaten their bank lenders.
Financial Times Nov 14, 2002
Business chief warns of
Japanese banks' frailty
By John Thornhill, Asia Editor, and David Ibison in Tokyo
Hiroshi Okuda, chairman of the Japanese Business Federation, which lobbies government on behalf of industry, warned yesterday that two of Japan's four largest banks would be in a "fragile" state if the so-called Takenaka plan was strictly implemented.
Mr Okuda said measures proposed by Heizo Takenaka, minister for the economy and financial services, to resolve Japan's banking crisis meant some of the big four could breach an 8 per cent capital adequacy ratio limit set by the Bank for International Settlements.
"If I am blunt, two [banks] are very solid but the other two are fragile," he said.
Mr Okuda did not name the banks, but private sector analysts have previously singled out Mizuho, the largest bank in the world in terms of assets, and UFJ, Japan's fourth-largest bank, as the weakest of the large lenders.
Mr Okuda's comments will serve as another blunt reminder to the banks that they must take urgent action to avert a breach of the BIS limit if they are to stand any chance of avoiding an injection of public funds and partial nationalisation.
Under the Takenaka plan, this would involve a rapid move to offload a sizeable number of bad loans to either the Resolution and Collection Corporation or a new body, tentatively called the Industrial Reconstruction Corporation.
Senior bankers at the four largest banks have sought to water down Mr Takenaka's proposals, and at one point threatened to sue him if they were implemented. However, they are under unprecedented pressure from the office of Junichiro Koizumi, the prime minister, to resolve the bad loan issue.
Standard & Poor's, the credit rating agency, yesterday downgraded its equity investment ratings on all four banks, Mizuho, MTFG, UFJ and SMBC, rating UFJ and Mizuho the lowest. It said the more aggressive approach towards bad loans promised by the Financial Services Agency, and other aspects of the Takenaka plan, indicated all four would report losses in fiscal 2002.
Mr Okuda, who is also the chairman of Toyota Motor, the world's third-largest carmaker, did not play down the impact of the banking reforms on the broader economy, hinting that something significant - such as the bankruptcy of a large company - could happen as early as next month.
He added that the country should expect "a great number of small and medium-sized enterprises [to] go bankrupt [and] a lot of unemployed people", but that "Japan is naturally anticipating such consequences and is judiciously preparing a safety net".
The debate over the size of any safety net - which would be financed by an extra budget - intensified yesterday after Masajuro Shiokawa, finance minister, said he expected a tax shortfall of between Y2,700bn (?22.33bn) and Y2,800bn this year.
A budget committee meeting on Monday next week is set to discuss the size of the additional spending package.
* The Japanese economy extended its recovery from its worst post-war recession in the third quarter, writes Mariko Sanchanta in Tokyo, but data released yesterday revealed that the rebound was losing momentum amid a slowdown in exports. The news prompted the stock market to fall to a 19-year low and government bonds to rally to four-year highs.
Gross domestic product in the July-September quarter grew 0.7 per cent in real terms and 3 per cent on an annualised basis, exceeding economists' forecasts. The government also upwardly revised first and second-quarter GDP figures, extending Japan's expansion to three consecutive quarters.
But the sustainability of the Japan's recovery - thus far supported largely by external demand - was thrown into doubt yesterday, as exports made a negative contribution to GDP for the first time in a year.
銀行国有化発言 「奥田氏が明言」 英紙、会見詳報掲載 当初記事
The Times December 03,
Why 'my' Japanese crash may be pivotal
Economic View by Anatole Kaletsky
LAST month I had the strange experience of causing a one-man stock market crash. The world’s biggest bank by assets, Mizuho Holdings, lost 15 per cent of its value in a single hour and the Nikkei average fell 5 per cent to its lowest level in two decades, in response to an article which I wrote in that morning’s Times.
Although this curious event happened two weeks ago and the falls in the Tokyo stock market have now been completely reversed, some surprising conclusions may possibly be drawn from it about the state of the world’s second biggest economy and financial market ー and prospects in the year ahead.
The article in question reported an interview with Hiroshi Okuda, the chairman of Toyota and of the Keidanren, the Japanese industrialists’ association. Mr Okuda, speaking to five British journalists armed with radio recorders and a TV camera, unexpectedly decided to think aloud about the probability that one of Japan’s biggest banks would be nationalised. This comment seemed to contradict the widespread view in Tokyo that the four major banks were “too big to fail” and investors dumped the shares of two “fragile” banks, generally agreed to be Mizuho and UFJ.
Although the Times story seemed to have the greatest market impact in Tokyo, an almost identical account appeared in The Guardian and the interview was recorded by the BBC World Service and Channel 4 News.
The Keidanren quickly issued a denial, stating that Mr Okuda had never spoken “a word on nationalisation of the four major banks” and adding that his comments had been misreported and misunderstood. Let me therefore report precisely what Mr Okuda said.
He started by answering a question about the banking reforms recently introduced by Hazeo Takenaka, the Financial Services Minister. Were foreign investors justified in thinking that genuine reforms would require the failure of one of the major banks? “I myself believe that these four major banks will survive,” Mr Okuda answered. “But are you asking whether they would be privately owned or nationalised?” He then explained, without further prompting, that two of these big four banks were “very solid”, but the other two were “fragile”. He added: “As we see the progression of the Takenaka reform scheme in December, the possible consequence that you alluded to may be seen.”
Asked whether this meant major banks would be nationalised, he answered: “Some banks may not be able to meet international standards for capital adequacy by the end of this year. Perhaps in the next few months or so it will become clear which banks are not able to meet the 8 per cent capital level. The Government will then have to put in capital and the banks will be nationalised.”
Finally, pressed on the reason why these dramatic events could occur as soon as the year-end, he took the trouble to spell out a detailed scenario, involving “symbolic” bankruptcies of some of the “so-called precarious companies” on “the list of 30 companies or the list of 51 companies being circulated” around Japan. Such bankruptcies would lead to “a very difficult situation for the management of the big banks” by the end of the year.
What conclusions can be drawn from this strange dialogue? The first and most surprising one is that the Japanese stock market may finally have hit a solid bottom last month.
When panic selling of the kind seen last month can be triggered by a newspaper story reporting nothing more than the comments of a private individual, however senior, the chances are that the market is near a selling climax. Investors in Japan may finally have reached the capitulation point that marks the end of nearly every bear market.
The only other time that I was personally involved in a similar situation was almost exactly two years ago, when Wim Duisenberg, the President of the European Central Bank, unaccountably reflected out loud, in an interview which he himself insisted should be “on the record”, about the futility of efforts to support the euro through intervention.
The euro fell almost 3 per cent in a few hours after this story was published. Some of the world’s biggest currency traders told me later that they had decided to liquidate their longstanding euro positions that morning.
The next day, the euro fell another 2 per cent to 82.50 ー and that turned out to be the currency’s record low. It seems quite possible that something similar may have happened to Japanese equities ー including even Japanese bank shares ー last month.
My second conclusion was that Mr Okuda, along with other Japanese industrialists who have hinted at similar impatience with the banks’ reforms, may not have been entirely surprised by the market reaction. Japan is in a state of civil war over the fate of the Takenaka financial reform plan and all the contending parties in this struggle are willing to deploy whatever weapons may come to hand.
Maybe some of Japan’s top industrialists are finally losing patience with the way that a small group of banks and insolvent “zombie” companies have hijacked the Japanese political system and sabotaged the economy.
Dividing lines are certainly clearer than ever before between all the “opposing forces” involved in Japan’s endlessly complex struggle: reformers versus reactionaries; Bank of Japan (BoJ) versus Ministry of Finance; industrialists versus bankers; small businesses versus big ones; successful cash-rich companies (such as Toyota) versus borrowers sinking ever deeper into debt.
While it is impossible to understand, much less to predict, how all these forces will interact, several practical conclusions can be made after a visit to Japan:
Every intelligent observer in Tokyo now agrees that Japan’s crisis must be treated with a properly balanced combination of macroeconomic and structural policies.
The BoJ would seriously consider a massive further monetary expansion and a huge increase in its government bond purchases if the Ministry of Finance would agree to cut taxes and nationalise one or more of the major banks. That is the good news. The bad news is that most of the actors who must co-ordinate their actionsー the BoJ, the politicians, the private bankers and the feuding departments of the Ministry of Finance ー seem hardly to be on speaking terms.
Since each institution’s actions depend on decisions made by the others, paralysis ensues. Even if we knew how or when the reform process might be triggered, it would be impossible to describe the exact denouement, any more than one can predict the deployment of pieces at the end of a chess game by observing the first few moves.
The Takenaka financial reform plan is by no means dead, as many Western analysts suggest, but neither is it likely to be as revolutionary as originally hoped.
Mr Takenaka, and maybe even Mr Okuda, may genuinely want to liquidate problem borrowers and nationalise some of the banks, but the Japanese establishment has not yet accepted that this must happen.
What mainly constrains the reform process is not the power of the banks but the fear of bringing down small companies, small retailers and construction and distribution companies, which provide the bedrock political support to the Liberal Democratic Party.
Everybody, including even the radical reformers in the financial services agency and the BoJ, seems to have accepted that small companies will have to continue enjoying protection and subsidised lending for many years to come.
Whatever happens in the financial markets and banking system, Japan’s real economy is now enjoying a decent cyclical recovery and this will probably continue for the next year or two.
This was confirmed by the strong GDP figures published last month. Most large Japanese companies, (as long as they do not belong in the four ugly sectors of retailing, distribution, property and construction) are solvent and have no problems raising finance. Their inventories are low and many have enjoyed surprisingly strong domestic demand.
Japanese growth is now led by consumption, not exports and there is every reason to expect this pattern to continue. Consumers have long since given up on the stock market and are showing an increasing propensity to spend. There is no reason why bank reform should make them panic, especially if small firms, which are the really big employers, continue to enjoy government support.
What does all this imply for the Japanese economy and financial markets? This is where rational analysis breaks down. Even if the real economy continues to grow, as it probably will, the stock market could still collapse in the event of some big financial failures.
In the long term, the balance of risks and rewards in Japan is definitely biased to the upside.
But in the long run, we’re all dead ー and investors in Japan know this better than anyone else.