Pressure Put on Japan to Rescue Banks

With grim-faced investors queuing up outside a failed brokerage Tuesday and the stock market beating a panicky retreat, public pressure mounted on the Japanese government to quell the wrath of the markets by rescuing the nation’s debt-laden banks.

“I came here today to pick up my money, but I couldn’t get in because there is such a crowd,” said Mayumi Kihata, 32, an office worker who was among about 150 people lined up outside one downtown branch of Yamaichi Securities Co., the nation’s fourth-largest brokerage firm.

Yamaichi announced Monday that it was shutting down with $24 billion in debts, the largest Japanese corporate failure since World War II. Despite government assurances that Yamaichi customers will be protected, some investors began lining up as early as 5 a.m. Tuesday to withdraw their money.

“I am worried about my other accounts in other banks,” Kihata said. “The government says they will guarantee our deposits, but if it spreads to other financial institutions, there’s a limit to the compensation.”

The battered Nikkei stock index fell 5.1% Tuesday to close down about 854 to 15,868, the second-worst point drop of this inauspicious market year. But today it ended the morning at 15,995, up about 128 points--despite a further dose of bad financial news.

A small regional bank that collapsed today became the third Japanese financial institution to go under this month. Unable to persuade creditors to continue financing its bad real estate loans, Tokuyo City Bank of Sendai told the Finance Ministry that it would close and hand over its business to several other banks.

Tokuyo’s demise is likely to increase the anxiety level in this nation of dedicated savers, some of whom are beginning to question whether the government will act quickly enough to prevent a crisis of confidence in the rich but cash-strapped Japanese finance industry--and how much it will cost Japanese taxpayers.

On Tuesday, financial industry stocks were especially hard hit, but fears that the real estate and construction industries could follow banks and securities firms into bankruptcy depressed the broader market, analysts said.

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“I wouldn’t be surprised if there is a meltdown soon,” said Susumu Takahashi, chief economist at the Japan Research Institute.

Takafusa Shioya, director general for economic coordination affairs at Japan’s Economic Planning Agency, described the situation as the “worst and most critical fiscal condition among the major economies in the world” and warned at a summit of Asian-Pacific leaders that Tokyo must make a “complete about-face” to “break out of the present economic impasse.”

At the summit, Japanese Prime Minister Ryutaro Hashimoto said he has no intention of bailing out individual banks but will safeguard the overall stability of the system.

Hashimoto said his country will no longer tolerate financial institutions--he specifically pointed to Yamaichi--that engage in illegal trading and then hide it from authorities. “We will not allow the rescue of Yamaichi,” he said. “Of course, the racketeering incident involving Yamaichi is not something that can be forgiven.”

Last summer, Yamaichi was entangled in a scandal over payoffs to sokaiya, the corporate racketeers who extort money in exchange for ensuring short and noncombative annual shareholder meetings.

Trading was halted on the Tokyo exchange Tuesday in shares of four Japanese banks after their prices plunged through their daily trading limits.

Today, Moody’s Investors Service announced it will review and possibly downgrade the credit ratings of five Japanese banks: Long-Term Credit Bank of Japan, Nippon Credit Bank, Mitsui Trust, Yasuda Trust & Banking Co. and Chuo Trust.

Opposition parties in the lower house of parliament mounted a no-confidence vote Tuesday against Finance Minister Hiroshi Mitsuzuka, faulting him for underestimating the severity of Japan’s bad-loan problem. But the ruling Liberal Democratic Party and its allies easily defeated the measure.

While President Clinton, at the meeting of Pacific Rim leaders in Vancouver, Canada, was urging Hashimoto to act to shore up the Japanese economy, back in Tokyo, financial analysts and leading newspapers were begging the government to move quickly.

“Use public funds to shore up the economy,” demanded Japan’s largest newspaper, the Yomiuri Shimbun, in the headline of an editorial published Tuesday. “Yamaichi’s collapse signifies the debacle, both in name and reality, of the ‘Japan Inc.’ system,” the paper said, adding, “Now is the time to act.”

But analysts emphasized that any taxpayer bailout would need to be aimed at depositors and should not coddle executives who had brought down their companies by mismanagement or illegality.

Kenneth Courtis, chief economist of Deutsche Bank-Asia, advocated sweeping corporate tax cuts as well as a major government-backed write-off of bad debts to jump-start the stalled Japanese economy. “Japan remains anchored to its Hoover-ite policies,” Courtis complained. “Deflation could jump across the Pacific if it is not contained.”

Some analysts have expressed concern about the exposure of Japanese financial institutions to the spreading financial tumult in Asia--fiscal calamities that already have swept Thailand, the Philippines, Indonesia and South Korea. Japanese banks hold an estimated 35% of the $110 billion in foreign debt owed by South Korea, which is seeking a bailout package from the International Monetary Fund of at least $20 billion.

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But others said Japan’s Korean problem is minor compared with its own domestic bad debts. “Asia is just another headache,” said Alicia Ogawa, managing director at Salomon Brothers Asia, arguing that the exposure “is not enough to compromise the position of the Japanese banks.”

Even the most sound Japanese banks now must pay a premium of 0.53% to borrow money in the European markets, a measure of investors’ fears that the banks’ bad debts may be much higher than the $220 billion [28 trillion yen at 127 yen to $1] officially reported by the Finance Ministry in March, Courtis said. That “Japan premium” is already eroding Japanese banks’ ability to compete with foreign rivals and will soon gut their profits, he said.

Meanwhile, a lack of information about the true dimensions of Japan’s hidden-debt woe is causing investors to assume the worst. Yamaichi Securities, for example, admitted Monday that it had hidden $2.1 billion in secret debt from Finance Ministry regulators, some of it in Cayman Islands offshore accounts. “Every time a financial institution goes bankrupt, its bad loans turn out to be so much more than was admitted,” said Eiji Yamamoto, professor of economics at Konan University in Kobe.

The Liberal Democratic Party, urged on by former Prime Minister Kiichi Miyazawa, is preparing an economic stimulus package for release in mid-December. But most analysts say much too little has been done to deal with the bad-debt problem since Japan’s “bubble economy” burst in the late 1980s in a real estate crash.

“The time for prevarication is past,” said Russell Jones, chief economist for Lehman Brothers Japan. “If we don’t get a substantive package, there’s the risk that the equities markets will make previous declines look very small.” Without a government bailout, the Nikkei could even swan-dive through the 10,000 mark, Jones said.

Ogawa, of Salomon Brothers, observed: “I’d be very surprised if we don’t have a plan within the next week or 10 days. I think there is a recognition that a ‘soft landing’ [for the banks] is impossible.”

In Vancouver, Shioya, the Economic Planning Agency director general, pointed out that Japan, while it has the world’s No. 2 economy, suffers from excess regulation that stifles growth and competitiveness, the loss of jobs to lower-cost countries, a mountain of bad debt and the demands of an aging population.

“Against the background of the structural problems the Japanese economy faces, the economic recovery is faltering and consumer and corporate confidence in the future of the Japanese economy is shrinking,” he said.

To get Japan back on the road to recovery and restore investor confidence, he noted, the Japanese government has agreed to a package of reforms that include: stabilizing the financial system; deregulating the telecommunications industry; speeding up the transition of agriculture land to other uses; creating more funding for small businesses; and restructuring the tax system.

But analysts in Tokyo said these reforms have not appeased the markets because they do not address the most severe problem: bad debt.

Observers fear Yamaichi’s closure will be followed by larger bank failures, since the financial system has been slow to unload debt from the collapse of real estate in the late 1980s.

In the past few weeks, Sanyo Securities Co. has sought bankruptcy protection, and Hokkaido Takushoku Bank has failed.

Japanese officials had worked late into the night Monday to assure the global markets that the government is prepared to use its ample resources to stop Yamaichi’s problems from spreading.

Haruhiko Kuroda, director general for international finance at the Japanese Finance Ministry, told reporters in Vancouver that Yamaichi has enough money to cover its current liabilities and that the Bank of Japan is committed to covering any future shortfalls. “In the case of any untoward eventuality, the depositors and investors must in the first place be protected,” he said.

And he insisted that Japan, with foreign reserves of $230 billion and foreign assets of $1 trillion, has plenty of resources to keep money flowing through its economy if investors and banks pull back.

“We have more than sufficient foreign reserves and foreign assets to deal with this liquidity situation,” he said.

Efron reported from Tokyo and Iritani from Vancouver.