After years of sweeping the nation’s bad loans under the rug, the Finance Ministry has come out in the open to declare that Japan’s banking problem is serious, but manageable.
That was the upshot of an unprecedented appearance Thursday at the Foreign Correspondents Club of Japan by Yoshimasa Nishimura, the ministry’s banking bureau chief. However, the new candor was spurred at least in part by new worries of dwindling international confidence in Japan.
Nishimura scored foreign journalists for what he called “very exaggerated reporting” that he said suggested Japan’s financial system was about to collapse.
“If misunderstanding continues, the financial system could suffer damage. So I ask you to dispel your misunderstanding,” Nishimura told a standing-room-only luncheon crowd.
In late July, Finance Ministry officials called in about 60 foreign bankers and market analysts to assure them that the ministry would not allow any of Japan’s large banks to collapse. But Nishimura’s remarks were the first made in an open forum to assuage foreign fears of a financial meltdown.
They came in the aftermath of rumblings of concern over Japan’s banking problem that emerged for the first time in Washington.
On July 26, a senior U.S. government official in Washington warned that Japan’s bad loans could eventually dampen the global economy. The official also noted that the bad loans represent 8% to 9% of Japan’s gross domestic product. That would be about three times more than the bad loans in the savings and loan debacle in the United States in the early 1990s, which came to 3% of GDP.
In a dispatch from Washington, the Asahi newspaper identified Treasury Secretary Robert E. Rubin as urging the Bank of Japan to take measures “the quicker, the better.”
Nishimura declared that his ministry will fix a “broad outline” by October for measures to dispose of all bad loans, the value of which he estimated at more than $444 billion.
The measures would be drastic, he said, but should not be viewed as a sign of deepening trouble. Rather, “you should regard them as positive efforts to reorganize and restore the functions of the Japanese financial system,” he advised correspondents.
“It is common sense to think of disposing of the problem loans in 10 years, but we intend to do it in five years,” he added.
Taxpayer money will be needed to bail out small credit unions and financial institutions run by farmers’ and fishermen’s cooperatives, he said. Most of the rest of Japan’s financial institutions, he predicted, will be able to get back on their feet without government money, although special tax and budget measures will be needed to resuscitate a commercial real estate market in which transactions have come to a halt.
Nishimura refused to answer a question as to why financial authorities had kept secret the full extent of the bad debt problem until recently. He said only that a decision was made to announce the estimate of $444 billion in bad loans because of a need to “seek the understanding of the general public” for measures the Finance Ministry plans to adopt.
Even that estimate, he acknowledged, was made on the basis of Japanese standards that define bad loans more narrowly than does the United States. Asked what the estimate would be if American standards were applied, he gave no straightforward reply.
And, he added, even by Japanese standards, “depending on your definition,” the bad loan figure could be $505.6 billion. “But it wouldn’t be 60 trillion yen [$667 billion] or 80 trillion yen [$889 billion] as some foreign reports say.”
“Please believe us. The figure is 40 trillion yen,” or $444 billion, he said.
Nishimura’s protestations notwithstanding, Kenneth S. Courtis, strategist and chief economist for Deutsche Bank Capital Markets, estimated the bad debts amount to at least $722 billion.
Moreover, whereas Nishimura cited Japan’s stagnant economy as a reason the banks were not disposing of their bad loans, Courtis cited the bank problem as a reason the economy continues to stagger along with virtually no growth for a fourth straight year.
Worries intensified July 31 as panicky credit union depositors withdrew more than $700 million in the first run on a bank in Japan since 1927, forcing financial authorities to mobilize funds to meet the customers’ demands.
That incident spurred critics to note that dwindling faith in officials’ pronouncements could threaten the Finance Ministry’s leisurely schedule to come up with its proposals by October and enact legislation to enforce them by the end of the year.