Japan’s Banking Industry Woes Fan Anger at Home : Finance: Daiwa fiasco and other troubles fuel public resentment. Plan to use taxpayer money to help the ailing industry may suffer.

Yoshiko Hiramatsu, a Yokohama housewife, isn’t directly affected by a scandal over $1.2 billion of hidden losses from improper bond trading by the U.S. operations of Daiwa Bank. But she’s still plenty angry about the Daiwa fiasco.

“I don’t have an account at Daiwa, but if I had one I would have closed it, because what they did is too irresponsible,” Hiramatsu said. “I wonder what kind of supervision they’ve been doing . . . [and] I wonder if other banks might have similar problems.”

Hiramatsu’s views reflect a growing tide of public resentment in Japan of the country’s troubled banking system and serious doubts about the ability of the Finance Ministry to regulate it.

Though authorities insist the Daiwa case is an aberration, public dismay over the bank’s ineffective system of internal controls could undermine the government’s proposal to use taxpayer funds to restore Japan’s banking system to health.

“Lots of companies and organizations go bankrupt,” said Hiroko Mizuhara, secretary general of the Consumers Union of Japan. “Why should we help only the banks? Why should they get preferential treatment? The banks really have money. Their managers are rich.”

A headline Wednesday in the popular evening tabloid Gendai declared, “Japan is Too Soft on Financial Institutions. This is Shown by the Daiwa Bank Incident.”

Meanwhile, the once-sterling international reputation of Japanese financial institutions is taking a beating. Indeed, foreign investors have been bailing out. Daiwa bank shares have fallen for nine straight days, tumbling 7% on Wednesday while Japanese bank prices overall fell 1.6%, mostly because foreigners sold shares.

“In general, foreigners are getting very nervous about the banks,” said Simon Hurst, a trader at Baring Securities Co.

Particularly damaging have been the bank’s admission of cover-ups by employees and the decision by Japan’s Finance Ministry to delay telling U.S. regulators about Daiwa’s troubles for six weeks after it first learned in early August that there might be a huge problem.

Resentment of such behavior forms a major obstacle to the use of taxpayer funds to restore health to Japan’s banks, which are burdened by at least $500 billion in bad loans.

No one in Japan is suggesting that taxpayer money be given directly to the country’s major banks, which are expected to eventually write off their bad loans out of operating profits.

But if public funds are used to smooth the liquidation or restructuring of Japan’s most troubled credit unions and housing finance corporations--an idea under active consideration by the Finance Ministry--the effect would be to spare big banks additional losses because they are owed money by those failing institutions.

Advocates of such a step say it is the quickest route to restoring health to the financial system and Japan’s overall economy, which is mired in its fourth year of near-zero growth.

Now, however, the Daiwa case “will make it difficult for the government to use public funds,” predicted Kenichi Omae, a management consultant and former director of McKinsey & Co. Japan, who now heads the political organization Reform of Heisei.

“For them to use public funds to rescue mismanaged companies--there is resistance,” said Omae, a prominent critic of the Finance Ministry. “The Americans used taxpayers’ money to bail out the people [by financing deposit insurance during the U.S. savings and loan crisis]. Japan tries to rescue not the depositors, but to rescue the financial institutions. The situation is very different.”

Even Japan’s bankers see the Daiwa case having a ripple effect.

Hideo Okuma, a spokesman for Mitsubishi Bank, said that in general, “the case of Daiwa will not affect the other banks’ bad loan problems.” But Okuma said he thinks Daiwa’s problems could have “a bad effect” on the Finance Ministry’s attempt to solve the broader banking problems.

Another banking industry official, who spoke on condition he not be identified by name or institution, said the Daiwa case clearly has hurt other Japanese banks, both at home and overseas.

In New York, where the unauthorized Daiwa trading took place, a top U.S.-based executive of a Mitsubishi Bank unit said Wednesday that Japanese banks are taking a close look at their procedures for overseeing securities trading in the expectation that U.S. banking regulators will be especially harsh in annual audits of the Japanese bank branches.

The Japanese banker speaking anonymously said the Daiwa case shows that both the Finance Ministry and individual banks must improve their capability to investigate and supervise overseas operations.

“I believe most Japanese banks have a very strict scheme of checking and supervising in the trading field and the lending field,” he said. “But there might be a mistake even if they have a strict scheme, so they should check again. The Daiwa problem is a good textbook case for other banks.”

Hilary MacGregor and Chiaki Kitada of The Times’ Tokyo bureau contributed to this report.