Japan Bank Stocks Rise on Limited Reform Outlook

Japanese banks, mired in bad loans that by some estimates have grown to $1 trillion, saw their stocks jump in value Thursday, reflecting investors’ belief that Japan’s new leaders will spare the banks the radical restructuring that critics say they need.

“The market expects a soft landing for banks,” said Garry Evans, strategist with HSBC Securities here. “The problem is, if the landing is too soft, you land in a bog.”

Perhaps it was the market’s way of welcoming Keizo Obuchi, 61, who was elected prime minister by the parliament Thursday as expected, and his new finance minister, Kiichi Miyazawa.

Obuchi also named a new Cabinet made up largely of loyalists from his Liberal Democratic Party. But all eyes are on Miyazawa, who as finance minister some consider to be more crucial to Japan’s future than Obuchi.

Miyazawa, a 78-year-old former foreign, finance, trade and prime minister, is under enormous pressure to deliver an economic turnaround.

Japan is in one of its worst recessions in the postwar period, caught amid growing diplomatic pressure to end its policy paralysis before the downturn seriously undermines the U.S. and global economies.

Obuchi has pledged to clean up the banking mess. One of Miyazawa’s first tasks will be to guide legislation through parliament aimed at restructuring government finance agencies and creating a new state-run “bridge” bank to secure funds for healthy borrowers of failed banks.

The fact that Miyazawa helped craft many of the bank cleanup proposals under the administration of recently resigned Prime Minister Ryutaro Hashimoto helps explain why bank shareholders bet Thursday that he would not go beyond the somewhat limited restructuring terms previously outlined. The prospect of limited restructuring pain pushed bank shares up by as much as 3%.

“Miyazawa is too soft,” said Chang Yi, an analyst with Kokusai Securities Co. “He won’t be able to take bold measures such as forcing weak city banks to go bankrupt.”

Major Japanese banks have admitted to the equivalent of $620 billion in bad or questionable loans, although some independent analysts put the actual figure closer to $1 trillion.

Miyazawa will also have to push through Obuchi’s pledged tax cuts of $42.25 billion and a $70-billion economic stimulus plan.

Still unanswered in all this is whether the enormous sums and tortuous planning can reignite a spending spree at the nation’s struggling department stores, fruit stands and sushi bars far from the government ministries.

On that front, as on many others, the ruling LDP faces some serious skeptics. “I’m not interested in the new Cabinet or who the prime minister is because it doesn’t really change society or the economic situation,” said Mari Goto, a 45-year-old waitress in Tokyo. “I think Miyazawa was picked because nobody else wants to do it.”

Even analysts question whether yet another Japanese stimulus package, the latest in a long string of moves to throw money at the problem, will have much impact.

More spending may yield few dividends because Japan’s economic pipes are clogged by companies with too many workers, firms with too many machines and industries with too much capacity, analysts said.

“Government spending or tax deductions are not enough to compensate for the shortage of demand,” said Kenji Mizutani, chairman of Tokai Research & Consulting Inc. “It won’t make much difference.”

Also unknown is how patient global markets will be before they demand results, putting further downward pressure on Japanese currency and equity markets. Kathy Matsui, chief strategist with Goldman Sachs Japan, gives the new government a two- to three-month honeymoon.

“They’ve got to do something soon,” she said.

Obuchi was named prime minister after gaining approval of the lower house of parliament, winning 268 votes of the 497 ballots cast. But in a sign of the political difficulties he faces, the opposition-dominated upper house backed Democratic Party leader Naoto Kan, considered Japan’s most popular politician, as prime minister. The lower house has the power to overrule the upper house in the selection of prime minister, and Obuchi was declared the winner after the two chambers failed to come up with a compromise.

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Etsuko Kawase in Tokyo contributed to this report.