Japanese Banks Face Pressure to Ease Debts

Japan’s leading banks, after reporting record earnings this week, are under increasing pressure to take on greater responsibility for bailing out seven bankrupt mortgage companies.

In annual statements released Friday and Monday, the country’s 21 major banks reported a boom year, with net operating profits up as much as 150%, thanks largely to record low interest rates that slashed the cost of capital.

But most of the banks also recorded huge losses for the fiscal year ended March 31 because of the accelerated write-off of problem loans left over from the bursting of the stock and real estate bubbles in the early 1990s.

The banks said they are setting aside more than $100 billion this year to cover future loan losses. Bankers insist they cannot bear any more of the housing loan bailout costs without facing the wrath of their stockholders.

But leading Japanese politicians said the banks, which founded the troubled housing loan companies known as jusen, should increase their contribution to a government-engineered bailout that also includes $6.5 billion from taxpayers. Japan’s parliament is scheduled to resume debate on this issue today.

“We should seriously consider asking for greater cooperation [from banks] so that the burden on taxpayers will be minimized,” former Prime Minister Tomiichi Murayama, leader of the Social Democratic Party, told a news conference Saturday.

The political finger-pointing highlights the huge obstacles that still remain in Japan’s effort to shore up its debt-laden banking system. On Friday, the Finance Ministry estimated outstanding unretrievable loans at $324 billion, down from $356 billion six months ago. But many analysts believe the actual debt, of which the jusen problem is just a fraction, is much higher.

Bank observers estimate it will take several years for the leading banks, and even longer for the smaller ones, to work their way through their bad loans.

“They’re about 20% of the way through the bailout,” said Kenneth Courtis, senior economist at Deutsche Bank Capital Markets Asia Ltd. He estimates the real debt burden at $400 billion to $450 billion.

Analysts were heartened by the announcement that the leading banks intend to accelerate their write-offs of problem loans and are setting up a huge loan-loss reserve fund to cover future losses.

But Alicia Ogawa, a banking analyst at Salomon Bros. Asia, said the banks must move beyond an accounting solution or risk much greater problems in the future. She predicts several more banks will have to be rescued by stronger ones, which will dramatically increase their debt burden.

But the softness of the real estate market--prices have dropped more than 60%--is causing the banks to think twice about foreclosing on delinquent properties.

“This is not over until you get rid of the garbage, and there’s no sign of that happening,” Ogawa said.

As for earnings, Japanese banks enjoyed a record year largely because of the Bank of Japan’s decision to reduce the discount rate, the main benchmark lending rate, to 0.5%. That allowed them to borrow money at a low cost and lend it at a much higher rate, pocketing the difference.

But the days of cheap capital are not expected to last much longer. With Japan’s economy showing signs of a pickup, many believe Japan’s central bank will eventually be forced to raise interest rates to keep inflation in check. That would translate into a significant drop in bank earnings.

Those loans still on the books are also the toughest ones to get rid of, since many of them involve large, politically powerful clients or multiple lenders, or are tied to the yakuza, Japan’s organized crime syndicates.

Japanese authorities have finally begun to get tough with the high-fliers whose borrowing binge is at the heart of the banking crisis. On Monday, police raided the offices of Tokyo-based real estate agent Togensha, one of the major jusen borrowers, and arrested its president, Kichinosuke Sasaki. He is accused of falsifying papers to quash the auction of a piece of Togensha property.

Japanese banks are taking other steps to deflect public criticism, such as not paying bonuses to their executives this year, reducing executive pay by 10% to 25% and freezing wages for the general work force.