Another Tremor in Japan

Anguished men and women pushed against the tellers’ counters, waving documents, shouting, pleading. The news photo could have been taken in a failed American S&L; in the late 1980s or at a collapsed Midwestern bank in the 1930s. But it was taken Wednesday at the Kizu Credit Cooperative in Osaka. Another brick had crumbled in the teetering tower of the Japanese banking system.

As panicky depositors tried to get their money out of Kizu Credit and Hyogo Bank in Kobe, the government stepped in, shuttering the institutions and vowing that no one would lose their savings. The Hyogo collapse was the first closure of a Japanese commercial bank since the immediate postwar period, nearly 50 years ago.

Government and banking officials tried immediately to stamp out the latest flare-up in a banking crisis that has smoldered since bad real estate loans burst the so-called Bubble Economy in the late 1980s. “Fear will not spread,” commanded Yasuo Matsushita, the Bank of Japan governor, as if words alone could be a cure.

Kizu and Hyogo do not appear to be isolated failures. Many Japanese banks and credit unions are in trouble, and most of it goes back to the Bubble. The banking system is hamstrung by at least $500 billion in non-performing loans, many of them backed by real estate whose value has plunged. The big banks may be OK, their problem loans limited to about 10% of total loans, but the position of many smaller institutions is dire. It is in these smaller firms that Japan’s average citizens--the voters, it should be added--keep their accounts.

The government’s immediate solution was to throw money at the problem. Regulators took over the two institutions, told depositors that they would get their money back, that their accounts were covered by the Japanese version of the U.S. Federal Deposit Insurance Corp. and that any shortfall in an account would be covered by tax revenues if necessary. The words were meant to reassure, but following the American solution--using tax money to bail out thrifts and banks that blew their funds in the real estate market--gave ordinary Japanese and economists alike an itchy feeling about where it all would end.

The key question is whether collapse of the little banks will spread to the top, the 21 Japanese banks deemed major players, many of which have American branches and play major roles in international finance. The big banks may have to help bail out the small institutions, at least those worth saving. Meanwhile, retired Japanese with small savings accounts must be persuaded that the salvage effort will not result in a raid on government-backed pension funds.

The international implications were obvious. Just the closing of the two relatively provincial banks far south of Tokyo was enough to trigger a jump from the yen to the dollar on the Tokyo markets. The Japanese government must play an open hand to win back the confidence of the markets--and the people.