Japan Officially Admits to Huge Loan Burden

The Japanese government, accused for years of downplaying the woes of its banking industry, conceded Monday that the nation’s banks are burdened with more than $715 billion in troubled loans--nearly 15% of the banks’ total loans.

The Finance Ministry insisted that the worst of those loans--the ones considered nonperforming--are “much smaller than the market thinks.” But the total sums identified Monday are far larger than the government has previously acknowledged.

It is the government’s most extensive report yet on the magnitude of Japan’s banking crisis, which has the potential to dwarf the ongoing Asian financial crisis in its implications for the rest of the world. Moreover, the ongoing troubles in South Korea and Indonesia stand to worsen Japan’s banking predicament because of this country’s massive investments in the rest of Asia.

Monday’s report does not appear to signal a worsening of the situation, but rather a more credible analysis of the depth of the problem. Previously, the Finance Ministry has said the number of nonperforming loans to be $215 billion. Private analysts have estimated the total at as high as $800 billion.

Nonperforming or “bad” loans are those where payments are a certain number of months late, have stopped completely or have been informally restructured.

On Monday, the ministry said such loans total more than its previous estimate, but didn’t say by how much. Instead, it identified about $500 billion in additional loans as “substandard,” meaning they might result in losses.

The Finance Ministry announcement moves the government view closer to that of private analysts. But it still leaves a debate about how serious the problems are for the new category of “substandard” loans, with the government stressing that the great majority of these loans will be repaid.

In midday trading today on the Tokyo stock exchange, the 225-stock Nikkei index was up modestly, adding 53.84 points, or 0.4%, to 14,718. On Monday the index fell 330.66 points, or 2.2%, to close at 14,664.44, its lowest close since July 1995.

Sei Nakai, deputy director of the Finance Ministry’s banking bureau, disclosed the new loan estimates to reporters and securities analysts Monday evening. He also provided fresh details on a $231-billion financial system stabilization plan that he said will be introduced to parliament next Monday.

That plan would provide $131 billion to protect depositors of failed financial institutions and $100 billion to shore up solvent financial institutions to make them stronger, Nakai said. It would not be used to save insolvent banks, and does not conflict with Japan’s plans for a “Big Bang” deregulation of the Japanese financial system, he said.

Some private analysts expressed doubt that government funds could be used to help banking institutions without contradicting the free-market philosophy of Prime Minister Ryutaro Hashimoto’s five-year “Big Bang” plan.

Monday’s disclosure was regarded as an effort by the Finance Ministry to be more frank with the Japanese public and foreign investors. Greater candor about the banking problems may also help with public and legislative support for the bailout.

Nakai acknowledged that although a key purpose of last month’s announcement of the plan was to stabilize the Tokyo stock market, it failed to have a major effect as the market has continued to fall.

“I regret to say the market lost confidence in our ability--the government’s ability--to handle the crisis. We have to make more effort to regain confidence in our policy,” Nakai said.

Nakai said the estimate of “more than” $215 billion in bad loans includes about $88 billion in current outstanding bad loans, $92 billion that banks have already set aside for loan loss reserves, and rough estimates of the amount that banks expect to recover from collateral for the problem loans, he said.

In response to a question estimating the total bad loans at about $250 billion under the banks’ definitions, Nakai implied that figure might be roughly accurate but stressed that the ministry does not have enough statistics for him to give an estimate.

That would be about 5% of the banks’ $4.93 trillion in outstanding loans. That is more than double the 2.34% of loans by the U.S. savings and loan industry that were considered nonperforming at the end of 1990, near the bottom of that financial crisis.

Of the new category of $500 billion in “substandard” loans that the ministry does not consider to be “bad” or “nonperforming,” the Bank of Japan has estimated that if Japan were to suffer poor economic conditions over a three-year period, about 17% of those loans--or $85 billion worth--would need to be reclassified as bad loans, Nakai said.

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