Japan Reports New Steps to Lift Economic Cloud

Japan’s ruling party, compelled to accelerate efforts to head off a worsening economic crisis, said Wednesday that it will triple the funding of a massive financial stabilization scheme to $231 billion. In addition, the nation’s Finance Ministry took steps that allow banks to make more loans that could spur the nation’s sagging economy.

Meanwhile, the growing openness of the Japanese financial system to foreign participation was reflected in newspaper reports today that the American stock brokerage firm Merrill Lynch & Co. will create a fully owned Japanese subsidiary that will seek to be a major player in Japanese retail brokerage services. Greater openness to foreign investment is seen as a key step to helping Japan overcome its financial woes.

While the new steps relieve pressures that had threatened to prompt scores of corporate failures and send the economy into a tailspin, they do not by themselves solve underlying problems--and critics say they mark serious backsliding on some aspects of planned banking reforms.

The Finance Ministry said Wednesday that it will postpone new rules that require banks operating domestically to carry more financial capital. The move encourages banks to make loans, and thus can ease a lack of credit that has threatened to trigger a growing wave of bankruptcies.

“The current condition is critical, and the credit crunch is much worse than expected,” Finance Minister Hiroshi Mitsuzuka said in announcing the postponement by one year of tougher capital-adequacy rules that were due to kick in April 1. “That’s why we took measures to cope with the situation. Rapidly worsening economic conditions have created a situation where firms which are not insolvent are on the verge of business failures.”

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The Liberal Democratic Party’s financial stabilization plan, which still needs parliamentary approval, would protect depositors and also allow the government to decide which of the country’s weakest financial institutions should be allowed to fail.

The new plan weakens the rigors of Prime Minister Ryutaro Hashimoto’s planned “Big Bang” financial reforms, which aim to throw Japan’s financial system open to much more free-market competition by 2001, analysts said. Even under the bailout plan, there could be progress toward the Big Bang goal of fewer but healthier banks. But the shakeout would not be as abrupt or as harsh as advocated by supporters of rapid reform.

“Many firms are going under, so the government has been forced to come up with more money,” said Tomohiro Furusawa, an analyst at Kokusai Securities Co. “Once again, weak financial institutions will be protected. . . . But this does not solve the problem of [bad] loans.”

The government has long promised depositors that their money is safe, but the legal framework and availability of funds to back up that guarantee have been lacking. Traditionally, the guarantee that deposits are safe was enforced through a “convoy system” under which the Finance Ministry directed a stronger institution to take over any bank that failed.

The Finance Ministry officially estimates bad loans at Japanese banks at $216 billion, but many private analysts say the real figure may be twice that much. Some banks may not be able to survive.

One of the goals of the Big Bang reforms, which are named after an earlier liberalization of London’s market, is to move to a formal and well-funded deposit insurance system more similar to that of the United States. Once such a system was in place, banks could be allowed to compete freely, with losers going bankrupt.

Japan already has a semi-governmental Deposit Insurance Corp., but it has been badly underfunded. The LDP now proposes to vastly increase its funding.

Under the plan, the Deposit Insurance Corp. would be able to take out up to $154 billion of government-guaranteed loans from the central Bank of Japan and other sources. It also would have access to funds from $77 billion in government bond issues.

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Of that total of $231 billion, $131 billion would be available to protect the depositors of institutions that were allowed to fail. This portion of the plan is in keeping with the spirit of Hashimoto’s Big Bang reforms and the views of domestic and foreign advocates of reform who say the Japanese financial system should become more free and competitive.

The remaining $100 billion could be used to support financial institutions through such means as government purchases of bank stocks. This money could go to weak banks that the government decided to help save and also to healthy firms that needed more capital after taking over troubled institutions.

Merrill Lynch’s planned expansion was reported in the Nikkei Shimbun newspaper, which said the securities firm will hire about 2,000 former employees of recently bankrupted Yamaichi Securities Co.

Merrill Lynch issued a statement today that the firm believes “this may be an appropriate time for us to seriously explore opportunities available in Japan.” If Merrill Lynch opens a new company here, it “may hire a number of employees” currently or formerly employed by Yamaichi and “would hope that many former Yamaichi clients will choose to open new accounts with the new company,” the statement said.

Tokyo stocks rallied in late trading Wednesday following a newspaper report about the financial stabilization plan. In early trading today, after formal announcement of the plan, and news that South Korea would receive emergency funds to help its ailing economy, the benchmark Nikkei index rose about 1%.

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