Japan Offers Plan to End Economic Woes; Yen Plunges

Japan on Thursday unveiled an eagerly awaited blueprint for solving its epic banking woes, a step considered vital to easing the Asian economic crisis, but the plan raised almost as many questions as it answered.

The response in overseas markets and government circles was cautious. The yen, after rallying for several days, promptly plunged against the dollar on the lack of details.

The government said it will set up a string of “bridge banks” that would step in to run each failed bank, sell off its bad loans to a government disposal agency and lend cash to healthy borrowers to tide them over. The process could take five years.

The program is modeled after the U.S. approach to resolving its massive savings and loan crisis in the 1980s.

The plan marks Japan’s latest effort to address a rising tide of international complaints, especially from the United States and China, that the country has done a poor job of tackling its economic troubles, especially its banking crisis. Japan’s recession and tumbling yen have endangered other world economies, notably those of its struggling Asian neighbors.

In addition to creating the bridge banks, the government vowed to get more aggressive about encouraging banks to write off their bad loans quickly, though it offered few proposals that would force institutions to comply.

The plan, approved by Prime Minister Ryutaro Hashimoto and members of the ruling Liberal Democratic Party, left numerous questions unanswered. No one knows how many bridge banks will be created, who will run them, or against what criteria new loans would be issued.

Some also questioned whether it will help or hurt the bank-reform effort by seemingly giving more power to bureaucrats rather than the free market. The banks face the task of resolving at least $600 billion worth of bad loans--perhaps, some analysts say, as much as $1 trillion.

“If there’s no significant restructuring, all the bad loans and the same employees will end up surviving under the protection of the country,” said Susumu Takahashi, chief of research at the Japan Research Institute Ltd.

The Clinton administration was muted in its response. A few hours after the Japanese announcement, U.S. Treasury Secretary Robert E. Rubin issued a statement welcoming Tokyo’s measures as “new and potentially significant” but warning that Japan must “move quickly to translate this approach into concrete actions.”

“Quick and decisive actions are essential to restore confidence,” the secretary said.

Japan acted as President Clinton, traveling in China, made some of his sharpest remarks on the need for Japan to clean up its banking system and stimulate its economy.

The cautious overseas response prompted the dollar to surge against the yen Thursday for the first time in four days, climbing as high as 141.92 from 137.90 Wednesday. In late New York trading, it stood at 140.83 yen and hovered at that level early today in Tokyo.

Japanese stocks, after rallying for nearly a week, also tumbled today. The Nikkei index fell 90.81 or 0.55%, to 16,380.77.

Japanese financial markets had strengthened on expectations that bridge banks would be established and that Sumitomo Trust & Banking will take over the ailing Long-Term Credit Bank of Japan, as was announced last Friday.

The benchmark Nikkei had gained 1,400 points since the merger news--the first time in three years that the flagging index has risen for seven straight days, including a 109-point jump Thursday to close at 16,472.

Despite Thursday’s rise, however, shares of all but two of Japan’s 19 major banks sank. “Sobriety is setting in after the euphoria of the last few days,” said J. Brian Waterhouse, banking analyst at HSBC Securities Japan Ltd. (Official confirmation of the bridge bank scheme came after the market’s close, though the Japanese media had reported many details earlier in the day.)

One key question about the proposal is funding. Japan previously approved $22 billion to protect depositors and stabilize the financial system. About $9.2 billion of that will go toward the bridge banks.

Officials said Thursday that they expect the sum to be adequate; one senior government official said the number of failures will probably be limited because the government expects mergers and other consolidations in the banking industry to take care of some problems.

Problem loans at Japanese banks are expected to exceed the $600 billion the institutions have disclosed so far. At the heart of the problem are loans based not on the ability of the borrower to make repayment but on collateral property values that have since tumbled.

The problem portfolio includes about $86 billion classified as essentially worthless debt that is likely to be sold off by a sort of government collection agency. Another group, known as Category 2 loans, includes about $464 billion of debt owed to the banks, some of which is healthy, some not, the banks say. It is these borrowers who are in the most jeopardy in a nationwide credit crunch, as banks attempt to reduce their asset base to cope with stricter capital-adequacy requirements.

“Our weak financial system and the accompanying credit crunch have weighed on the economy,” Finance Minister Hikaru Matsunaga said Thursday. “If this credit crunch can be eliminated, we hope to see a strong economic recovery.”

Under the bridge-bank plan, which Japan’s parliament is expected to approve in a special session later this month or in August, a recently formed government arm known as the Financial Supervisory Agency would appoint an administrator to take charge of failed banks and their assets. The financial administrator would attempt to transfer the failed bank’s business to a private bank, but if unsuccessful, would transfer it to a public bridge bank.

A special committee would review loans, sell unhealthy ones to the government collection agency and continue to make loans for up to five years to “sound borrowers.”

The bridge banks would transfer the assets and liabilities they take over from failed banks to other private banks within two years, with the possibility of up to three one-year extensions.

Under the plan, borrowers potentially would be protected longer than depositors. The government has agreed only to fully insure depositors through 2001, after which it will limit deposit insurance to about $75,000.

“It’s clear it’s not a panacea or magic bullet formula,” said analyst Waterhouse of the government’s plan. “Having started with the need for a simple plan, the structure is typically as complicated as it can possibly get with an endless, cat’s cradle of reporting lines.”

Etsuko Kawase of The Times’ Tokyo Bureau and Times staff writer Art Pine in Washington contributed to this report.

* THE JAPAN FACTOR: From China, the Clinton administration pressures Japan to keep its economic promises. D3

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ASIAN IMPACT: Jobless Rate Up

Asia’s problems are being linked to a rise in the U.S. jobless rate. Story, D1

June 1998: 4.5%