BANKING : Japan Releases Detailed Report on Bad Loans

Responding to weakened confidence in Japan’s banking system both at home and abroad, the Finance Ministry on Tuesday released the most detailed accounting ever provided of the bad loans burdening the nation’s financial institutions.

“We cannot change people’s feelings immediately, but by repeating this kind of practice, we’d like to gradually resume our trust and our reputation among . . . not only the Japanese people but also people all over the world,” said Sei Nakai, deputy chief of the ministry’s Banking Bureau.

The numbers themselves--once adjusted for changes in accounting methods--contained few surprises for analysts who have followed Japan’s banking crisis. But Finance Ministry officials said that by releasing more details, they hope to convince financial markets that Japan is moving toward more open disclosure of its banks’ strengths and weaknesses.

Japanese banks are now carrying about $374 billion in bad loans, as calculated by Japanese definitions of non-performing and restructured loans, the ministry said as it reported the results of a detailed institution-by-institution investigation.

After taking account of other factors also listed by the ministry, the revised bad-loan figure remains little changed from a problem-loan estimate of $400 billion to $500 billion the ministry made this spring.

The figures released Tuesday were obtained from every deposit-taking institution in Japan, under threat of legal penalties should they provide false information, Nakai said.

The decision to gather information in this manner--which was stricter than usual in Japan--was partly prompted by the recent Daiwa Bank scandal, Nakai said. U.S. authorities have accused Daiwa management of covering up $1.1 billion in bond-trading losses at the bank’s New York branch.

“This time we asked all banks to submit a report to the Ministry of Finance,” Nakai explained. “If they submit a false record, they will be subject to our penalties. This kind of system we have never thought of [before]. Learning from the experience of the Daiwa Bank incident, we gradually changed our system.”

The new figures, however, may not have much immediate effect on the debate over the size of Japan’s bad-loan problems. Standard & Poor’s Corp., for example, last month put the total sum of bad loans at about $600 billion, after conducting its own investigation.

The issue is immensely complicated because, while everyone knows that land prices have fallen sharply--by half or more--since the bursting of Japan’s late-1980s speculative boom in real estate and stocks, no one can be sure what price land held as collateral for bad loans would bring if it is ever sold.

Based on comparisons provided by the ministry, the $374-billion figure would be about 10% higher if bad loans were defined by U.S. rules. The ministry’s number also does not include $29 billion in problem loans held by three institutions--two credit unions and a bank--that failed this summer. Nor does it include about $50 billion in loans by agricultural cooperatives to badly troubled housing finance companies.

This spring, the Finance Ministry said that out of a total of about $400 billion in problem loans, only about $100 billion to $150 billion would eventually need to be written off as losses, beyond the sums banks already had set aside for loan-loss provisions. More recently, however, government officials have indicated that estimate was too low.

The Finance Ministry formally revised that figure on Tuesday. It estimated that in addition to nearly $70 billion already set aside by financial institutions to write off bad loans, an additional $180 billion will ultimately be unrecoverable and need to be written off as losses. The remaining $124 billion, out of the current total of $374 billion in problem loans, is the projected value of collateral, primarily real estate, which backs the loans and could ultimately be recovered by the lenders.