Japan Could Face Lender Bailout Too : Banks: Big institutions are holding, as collateral, property whose value has plunged. Many hope the government will step in to help them out.
When Takashi Kitaguchi, a 45-year-old businessman, paid over $1 million for his modest home in a suburb near Kyoto two years ago, he assumed that he had made a safe investment. After all, as far back as he could remember, land prices had never fallen.
Nine months later, however, builders were selling similar units in the same development for 40% less. A stunned Kitaguchi joined 14 other owners in the area to sue for a refund.
If individuals like Kitaguchi are thrown by the unexpected drop in Japanese real estate values, financial institutions and the government seem to be paralyzed.
Already reeling from a more than 50% drop in the value of stocks they own, financial institutions are holding as collateral billions of dollars of property whose value has fallen 40% to 70%--assets they can’t easily dispose of.
Suddenly, that bedrock of Japan’s industrial might, the financial system, is proving to be more like quicksand threatening to swallow a host of businesses.
Banks, attempting to shore up their balance sheets, are cutting back on lending and cutting salaries of some executives. But mostly, they are looking to government for a bailout.
“Banks are at the center of this economy,” says a harried manager in charge of the real estate division at a major bank. “If we fail, the whole system fails.”
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No one believes that the Japanese government will let any banks fail. But it has to move cautiously on a solution. Finance officials, once smug about avoiding the kind of costly bailout resulting from the United States’ savings and loan debacle, are now considering a corporation jointly funded by the state and private industry that would take over bad loans from banks and sell off land held as collateral.
But the corporation would need a big government subsidy to work. Some observers believe that the government won’t take the unpopular step of funding the bailout with tax funds.
Many individuals have also suffered from falling land prices, and a tax-funded bailout of banks would be seen as evidence that Japan was continuing to sacrifice the interests of individual consumers for the good of industry.
Kenneth Courtis, an economist at Deutsche Bank Capital Markets (Asia), believes that the government will borrow from the $1.2-trillion postal savings fund. The government-run savings institution is frequently used as a source of loans for public projects.
Either way, a bailout would be costly. The Nihon Keizai Shimbun, Japan’s major business daily, estimates that $300 billion or more of the $1.62 trillion in real estate and construction loans made by Japan’s financial institutions may no longer be paying interest.
Some of the loans may become recoverable as the economy improves, and some money will be earned when banks sell the property they hold as collateral. For now, banks are having trouble finding buyers for the property, even at sharply reduced prices.
“The land market has collapsed,” says Kazuo Sato, an executive at Mitsui Real Estate Development Co., the nation’s largest real estate company. Without any sense of where the real estate market is moving, says Sato, “it’s too risky to invest in real estate now.”
Meanwhile, financial institutions are busy shuffling assets and debts. To keep borrowers from going bankrupt, home-loan and other credit companies (or non-banks as they are called here) are extending more interest-free loans to keep customers afloat.
The major banks that have bankrolled the non-banks are, in turn, trying to bail them out by lowering the interest they charge. Nine banks, including Sanwa Bank, recently agreed to slash rates on their loans to Nippon Housing Loan to prop up the finance company. The company was on the brink of bankruptcy, with $19 billion in outstanding loans, 60% or more from real estate lending.
Some banks are unloading bad loans onto shell companies in an effort to make their books look better. And since they don’t want to record losses, even if the banks foreclose on land held as collateral, the land is seldom sold.
There may be a glimmer of light at the end of the tunnel. The government’s recently announced $87-billion financial package has helped stock prices recover and boosted confidence in financial institutions. Housing starts are showing a healthy recovery as a result of cheaper land and lower interest rates.
And while office rents have plunged in some areas, Tokyo’s occupancy rate is about 98%, compared to 80% or less in many major American cities, limiting the damage to the commercial rental market.
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Even so, the bad debts continue to put painful pressure on banks. “The rescue package prevented a meltdown of the financial system, but it could be years before the situation turns around,” says Graeme McDonald, an analyst at James Capel Pacific Ltd. who is one of the more optimistic observers of the scene here.
How did Japan get into this mess?
The story begins in 1986, when it boosted the value of the yen and simultaneously lowered interest rates in an effort to boost its domestic economy and ease its trade surplus with the rest of the world.
The economy boomed, and stock prices soared. Land was suddenly valued as a safe investment and as collateral on which to borrow for other investments. Banks were so eager to lend money, they sent salesmen to urge property owners to borrow off their land.
As demand for land rose, several factors kept land scarce and prices soaring. Between 1984 and 1990, the value of all real estate in Japan doubled to $18 trillion, several times the value of all real estate in the United States. In the big cities, prices had tripled in the space of a few years and land came to be viewed as a quick path to wealth.
Prices had climbed so quickly, housing costs became a major social problem. The average wage earner no longer had any hope of buying a condominium in his lifetime anywhere close to his job. Committees of scholars, politicians and government officials were established to address the problem.
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The scholars had hardly come up with their proposals to make home ownership more affordable when the pendulum swung in the other direction.
The Bank of Japan’s discount rate boosts beginning in late 1989 raised the cost of holding and developing land. A short time later, the Ministry of Finance ordered banks to stop lending money for real estate deals.
As money dried up, buyers disappeared and prices plummeted. Residential land in central Tokyo’s Meguro ward, which once went for $24,000 a square yard, is now worth less than half that. By the time Japan’s finance officials woke up, the damage was spreading beyond speculators to reputable banks and developers.
The silver lining is that for many Japanese, the current property slump provides their first opportunity to buy homes. The only properties selling today are priced under $400,000--within reach of the average wage earner.
