Japan Ruling Party Backs Bank Bailout

Japan’s ruling party approved a $77-billion rescue package Tuesday for the country’s troubled banking system and followed up today with a surprise $15.5-billion income tax cut, providing the outline for the government’s biggest single effort to defuse Asia’s most worrisome financial crisis.

Analysts and investors said the plan doesn’t go far enough to salvage Japan’s fragile financial system, and may only prolong the life of mismanaged banks at taxpayers’ expense.

But the unexpected, one-time tax cut cheered investors who had been looking for concrete measures to stimulate the economy, which has been dragged down into near-recession by a bad loans crisis and flagging domestic demand.

At midday today, Tokyo’s Nikkei-225 stock index was up 3.8% to 16,585. The yen strengthened dramatically, to 126.8 per dollar, versus 130.78 in New York trading on Tuesday.

In Washington, Treasury Secretary Robert E. Rubin said the bank rescue plan was “heading in the right direction,” but that it was “a little early” for the United States “to have an evaluation of it.”

There was no immediate reaction to the proposed tax cut. But the Clinton administration has been urging steps to spur demand by Japanese consumers.

Officials of the International Monetary Fund lauded the bank plan as a preliminary confidence builder for Japan, and as an example for other Asian governments that need to “get their house in order.”

Japan is a major lender in the region and could be the linchpin to Asia’s recovery--or collapse.

Tuesday’s bank rescue package must be approved by Parliament, where it faces political attack early next year. But as a compromise between the more progressive proposal by Prime Minister Ryutaro Hashimoto and a rival program, something like it is expected to be enacted.

The initial lack of enthusiasm for the package has been reflected on the stock market, where details have been leaking out for several days. Early today, stocks and the yen weakened before news of the income tax cut hit the markets.

Critics said the bailout falls short of the kind of “big bang” financial reforms promised by Hashimoto, which would have allowed weak banks to fail. Conservative opponent Seiroku Kajiyama would have used the emergency funds mainly to prop up failing banks in a return to the paternalistic “Japan Inc.” style that Hashimoto has pledged to dismantle.

The banking package, to be formally announced today, aims to protect depositors and provide a safety net for troubled banks with infusions of emergency cash. The centerpiece is nearly $77 billion in special bonds that can be cashed on demand by the Deposit Insurance Corp.

The bonds will be backed by government shares in Nippon Telegraph & Telephone Corp. and Japan Tobacco Inc., state-controlled firms that are being privatized.

As the package stands, the money from the bonds would be used to prevent the collapse of key banks, but also to reward healthy banks for rescuing sick ones by subsidizing their takeover. That suggests that the government would continue to have great discretion.

“The key question is: Who decides which banks get the money?” said Jesper Koll, vice president of JP Morgan Securities Asia Ltd. “So far the government has not been so good at picking winners.”

Along with the one-time income tax cut, the package includes other measures to stimulate the stagnant economy, including a 3% cut that drops corporate taxes to their lowest levels since the end of World War II, the halving of a securities transaction tax and a freeze on land taxes. Nearly $9 billion in low interest loans for small and medium sized businesses will be provided to tide them over an expected credit crunch.

Hashimoto said in a television address today, “I have said both at home and abroad that we will not let Japan trigger a worldwide depression. We decided a bold policy was needed.”

But analysts are not convinced that the Japanese government is doing all it can to resuscitate the economy.

“These plans are just a life-support system for a very sick patient,” said market analyst Shigeo Watanabe. “They are not a cure.”

Russell Jones, chief economist of Lehman Brothers Japan Inc., said it is “a move in the right direction, but it doesn’t really address the underlying problem of the economy--the billions of dollars worth of nonperforming assets.” The package provides few incentives to dispose of bad loans, he said.

Finance Ministry officials admit that Japan is loaded with at least $220 billion in bad private sector loans from when its “bubble” economy burst in 1991; private analysts say the real number is more than double that.

In theory, the problem loans would be covered by the $77 billion in bonds and by future banking profits. A sustained rise in Japan’s stock values would also have the effect of eliminating billions of dollars in bad debts. But skeptics abound.

“What Japan really needs is a full-scale bailout,” Jones said, citing such painful but ultimately successful financial cleanups as the U.S. savings and loan bailout in the 1980s.

But such sweeping measures are unlikely at this point in Japan, where officials were insisting that no bank would fail until last month when Hokkaido Takushoku, the 10th-largest bank, and Yamaichi Securities, the fourth-largest securities house, collapsed within 10 days of each other.

In the past month, four financial institutions have perished, and on Tuesday a real estate unit of Yamaichi declared bankruptcy. Investors fear that as falling stock and property prices erode the value of banks’ assets, there are more defaults to come.

The resulting confidence crisis in Japanese banks has been felt near and far. Foreign lenders are exacting a “Japan premium” to compensate for the perceived risk, making it more expensive for Japanese companies to raise capital than it is for their rivals.

Just as some consumers are losing confidence in their leaders to improve the economy, Hashimoto is struggling to maintain political power. Newspaper polls show that support for his cabinet has fallen to a record low of 35%, mostly because of his fiscal policies.

Meanwhile, bank customers are moving their money into international banks like U.S.-based Citibank, or large domestic institutions thought to be stable. The Bank of Tokyo-Mitsubishi Ltd. in particular has benefited from fears of other banks’ instability; it received $11.5 billion in deposits in November, an increase of 3.6%.

Daisuke Wakabayashi, a computer salesman, said he hustled his savings over to the Tokyo-Mitsubishi Bank when he heard bankruptcy rumors about the bank where he used to have his account.

“I thought, better safe than sorry,” he said, standing outside the plush bank lobby. “The politicians have never done anything in the past. I don’t think they can do anything special now to change the situation.”

Etsuko Kawase of The Times’ Tokyo bureau contributed to this report.

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