Japan Moves to Double Bank Bailout Fund

Japan’s Parliament passed key elements of long-sought bank reform legislation Monday and appeared poised to approve an unexpectedly generous bailout for banks that would double the size of the total bank cleanup to about $513 billion.

The developments after monthsof halting steps by Japan’s political leaders sent stock markets soaring in Asia, Europe and the United States.

Much of the whopping sum--which exceeds Australia’s GDP and is more than five times the cost of the U.S. savings and loan cleanup--would be used to prop up weak but still solvent banks.

Still, many observers, accustomed to months of official inaction, were skeptical that the plan will work, because many banks are said to be reluctant to accept capital injections in return for greater government control and scrutiny.

“The politicians are attempting to impress with the size of the fund, and the banks are trying to take a minimum amount of money, so it is potentially doomed to failure,” said J. Brian Waterhouse, banking analyst at HSBC Securities in Tokyo.

But the passage of several key pieces of legislation and the ratcheting up of the size of the rescue package suggested the breaking of a logjam in Parliament that had persisted for months.

Japanese newspapers today put the size of the bailout to be acted on this week at 60 trillion yen, double the 30 trillion yen approved in March. At current exchange rates, the bailout would thus exceed half a trillion dollars.

The parties are widely expected to agree on those or similar terms, and the bill is considered nearly certain to pass.

Rescuing Japan’s banks and stimulating the nation’s economy are seen as critical to reining in the economic contagion that has swept much of world and is now lapping at U.S. shores.

Plunging property and securities values have left many of Japan’s banks--among the world’s largest financial institutions--with a mountain of bad loans and dangerously low capital reserves. As a result, fresh bank credit--the major source of business expansion in Japan--has withered, exacerbating the country’s economic morass.

Japan has been under heavy pressure from its allies to clean up the mess, shore up its sputtering economic engine and help rescue the rest of Asia from the financial doldrums.

Toward that end, the Parliament’s powerful upper house on Monday gave the go-ahead to eight measures for handling banks that have actually failed; the measures were approved by the lower house on Oct. 2. But the budget for the total plan and decisions about how funds will be injected into still viable banks are expected to be put before legislators today.

Prime Minister Keizo Obuchi huddled with opposition party members Monday to iron out details of how much capital would be injected into the banks.

The laws passed Monday enable the government to liquidate or nationalize failed banks, or establish temporary “bridge banks” that continue to supply loans to healthy borrowers.

They also call for setting up a regulatory structure with more teeth that more closely resembles the U.S.’ Resolution Trust Corp., which handled the S&L; cleanup.

The laws strengthen the much ballyhooed “Total Plan,” introduced by the ruling Liberal Democratic Party over the summer and substantially retooled by the opposition.

The apparent break in Japan’s legislative bottleneck sent markets surging by more than 5% in Frankfurt, Paris and Hong Kong. In Tokyo, the Nikkei index rose 675.04 points, or 5.24%, to finish at 13,555.01.

On Wall Street, the Dow Jones industrial average rose 101.95 points to 8,001.47 after peaking at midday with a gain of 185 points.

The size of Tokyo’s latest bailout package reflects an acknowledgment that the banking crisis is far more serious than earlier believed.

Many observers have long figured that Japanese banks’ public disclosures vastly understate their true bad loan picture. On paper, the banks look far healthier than they really are because they haven’t written off their bad or marginally performing loans. In addition, the value of assets such as securities has plunged along with the skidding Japanese stock market.

And it’s getting worse.

“Since the Economic Planning Agency announced a minus 1.8% [national] growth rate a while ago, now Kasumigaseki [the section of Tokyo that houses the government] has to admit things were way worse than they said they were,” said Hiroshi Sakurai, analyst at Kankaku Research Institute in Tokyo.

In March, the Parliament had approved a bank bailout package worth 30 trillion yen. It included about 17 trillion yen--currently $145 billion--for recapitalizing sickly banks and 13 trillion yen--$111 billion--for protecting depositors.

But after spending last weekend haggling, the ruling LDP on Monday agreed to endorse the opposition plan to boost the latter recapitalization figure to 25 trillion yen, or $214 billion, Japanese newspapers reported. An additional 18 trillion yen, or $154 billion, will go toward nationalizing or creating bridge-banks for failed banks. The previously approved sums for depositor protection will remain the same.

Once finalized, the increased budget is expected to be formally adopted by Thursday, the last day of a special legislative session dubbed the “Bad Loan Parliament.”

*

U.S. RALLY: The Dow surged back above the 8,000 level. C1