Japan Banks’ Money Costs Rise as Loan Fears Worsen

Japan’s long-troubled banking system is causing renewed concern in foreign financial circles, where skepticism about this country’s hundreds of billions of dollars in bad loans is driving down the value of Japanese stocks and the yen.

A plunge in the Nikkei-225 index to a 28-month low came as a top Finance Ministry bureaucrat publicly noted Wednesday that the “Japan premium”--the extra amount that foreign banks charge Japanese banks to borrow on overseas markets--has risen sharply in recent weeks.

The Nikkei’s downward spiral accelerated as foreign investors unloaded banking and high-tech stocks, helping to drive the Nikkei down 433.06 points, or 2.73%, to close Wednesday at 15,434.17, its lowest since July 6, 1995. The Nikkei tumbled 2% more in early trading today.

The weak economy and concerns over Japan’s financial system were also reflected in a weakening of the yen, as the dollar rose to 125.89 yen Wednesday.

The worrisome financial news prompted Liberal Democratic Party officials to informally release more proposals Wednesday for how to stimulate the economy without undercutting Prime Minister Ryutaro Hashimoto’s long-term goal of reducing fiscal deficits. Typical was a suggestion that the government pledge to speed up the planned construction of a nationwide fiber-optic cable network.

But the ruling party’s stimulus proposals will have only limited impact unless the problems of the financial sector are cleared up, said Mamoru Yamaguchi, an analyst at Nikko Research Center.

“The future of Japan’s economy is so unclear that the government must come up with policies that can prevent foreign investors from fleeing,” Yamaguchi said.

While Japan’s own economic uncertainty has intensified with the “Asian flu,” the contagious devaluation of currencies that has struck most of Asia, the immediate concern here was the rise in the so-called Japan premium.

That surcharge on borrowing is based primarily on worries about the massive bad loans burdening Japanese banks, now officially estimated at about $240 billion. The premium hit a record high of 0.5% in October 1995.

With stronger economic growth in 1996 and banks’ write-offs of some of the bad loans, the premium virtually disappeared by last summer, falling to 0.05%.

But in recent weeks, it has climbed to about 0.18%, Haruhiko Kuroda, director of the Finance Ministry’s International Finance Bureau, told a parliamentary committee Wednesday.

Banks that borrow money on global markets turn around and immediately lend it out again, so a higher premium cuts profitability.

Stock prices are linked to banks’ stability because banks’ unrealized profits on holdings of stock in other companies provide a ready source of cash if needed to deal with bad loans.

As stock values fall, however, that buffer starts to disappear. Analysts say the Nikkei index is now near the level where some banks no longer have unrealized profits.

In a vicious circle, that drives down the value of bank shares and the overall market, leading to further losses.

“The 15,000 [Nikkei] level is already alarming to many banks,” said Harumi Ichiki, an analyst at Sumitomo Life Research Institute. “I would say some of the middle-level commercial banks are losing their latent profits.”

The sell-off Wednesday in banking shares was triggered by these kinds of concerns, which were exacerbated by the bankruptcy last week of Sanyo Securities Co. That failure was taken as an indication that authorities are increasingly willing to allow financial institutions to go belly-up.

Also placing pressure on banks was an announcement Tuesday by London-based IBCA Ltd., a key European rating agency, that it plans to further lower the individual ratings of financial strength for Japanese banks, which “are already relatively low by international standards.”

IBCA added that the chances of any of Japan’s major banks defaulting on loans remains “extremely low, thanks to the strong implicit support from the Finance Ministry.”

But concerns are great enough that the world’s other major banks are determined to extract the “Japan premium” from even the strongest Japanese banks.

For example, Bank of Tokyo Mitsubishi on Tuesday had to pay 6% for three-month U.S. dollar London Interbank Offered Rate borrowing, while the rate for Citibank was just 5.81%. That spread of 0.19% makes Tokyo Mitsubishi less competitive in world markets.

Times researcher Etsuko Kawase in Tokyo contributed to this report.

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Summer Fall

Japan’s Nikkei-225 index has lost 25% of its value since summer began. Weekly closes and latest:

Wednesday: 15,214.99

Source: Bloomberg News