Japanese Lawmakers Approve Bank Bailout

After months of political wrangling, Japan’s parliament Friday approved a $520-billion bank bailout plan that is seen as a crucial step in countering the nation’s crippling financial crisis.

This second big deal of the week, which follows Monday’s passage of eight bills on how to handle insolvent institutions, represents the final piece of a legal structure designed to tackle deep-seated problems in a banking system staggering under the weight of an estimated $1 trillion in bad debt.

Friday’s legislative agreement by the parliament’s upper house paves the way for the government to inject up to $217 billion of taxpayer money into weak but viable banks and authorizes $303 billion more to buy the stock or guarantee the deposits of failed banks.

The first test of these new restructuring tools could involve the ailing Long-Term Credit Bank of Japan, which is struggling to survive amid bad loans and may ask the government to step in and take it over as early as next week, according to a source close to the situation. Although Sumitomo Trust & Banking Co. has proposed merging with Long-Term, that deal now appears to be in jeopardy.

Japanese stocks rallied to close at 13,280.54, up 285.17 points, or 2.2%.

Prime Minister Keizo Obuchi, suffering under record-low popularity ratings, called the measure a “solid basis for [financial] revitalization.”

Resolving Japan’s extensive financial problems and turning around the world’s second-largest economy are seen as key elements in stemming the global economic problems now threatening the United States.

But the legislation leaves some huge gaps. Japanese banks must voluntarily disclose their weak financial condition and ask for government help, a step many Western analysts believe institutions won’t take until they’re beyond repair. As such, no formal mechanism is in place to force a housecleaning of troubled, uncooperative banks.

In addition, as is often the case in Japan, the bureaucracy retains broad discretion to implement the rules. And bankers note that any capital injections will probably be used to pay off bad loans and not fuel new lending that might ease Japan’s credit crunch.

But Japan will remain under severe pressure from financial markets and trading allies to show results. “What’s crucial now is quick action,” a senior U.S. Treasury official said in Tokyo. “There are tools in place. What’s critical now is that they be used.”

Japan has shown a preference for avoiding the more confrontational framework adopted by the United States during its savings and loan crisis, under which bank managers were forced out and assets written down by fiat.

According to one financier with close ties to Tokai Bank, the doubling of bailout funds offered in the final week of negotiating was the political price for conducting the bailout in traditional Japanese government fashion--relatively gently with great discretion by insiders working in relative obscurity.

Still, the deal puts some serious funding in place--equivalent to 12% of Japan’s gross domestic product, or more than the size of the Australian economy--and promises to finally get the rescue process underway.

“This new bill is like a cane,” said Masaru Takagi, economic professor at Meiji University. “It doesn’t mean the banks don’t have to walk with their own feet. But if they fall, they have something to lean on.”

Reflecting just how politically sensitive the use of public bailout funds has been in Japan, the funding measures passed just 52 minutes before the close of the parliamentary session.

The main opposition Democratic Party of Japan ultimately refused to vote for the bills, arguing that their many loopholes and wobbly wording only encouraged more corruption and malfeasance. This left the ruling Liberal Democratic Party to forge a deal with three small opposition parties.

But the results also represent a victory for the old-guard LDP, which was able to split the opposition and blunt some very strong earlier calls for substantive reform.

Just how long it will be before Japan’s beleaguered financial system feels some relief remains to be seen. Some analysts say it could be as soon as three months. While bank reform is an important step, however, most stress that any real turnaround in Japan’s economy depends on massive fiscal stimulus measures beginning to work. “That’s the most important thing,” said Susumu Kato, chief economist at Barclays Capital.

Prime Minister Obuchi said details were still being worked out on $84 billion in additional fiscal spending and $59 billion in tax cuts.

Even before the ink dried on the bills, several analysts also said they expect the government will be forced to expand the $210-billion bailout--perhaps by a factor of two--given the size of the underlying bad loan problems.

Any wind-down of Japan’s troubled LTCB, meanwhile, is not expected to have a huge impact on the broader economy. The institution’s failure has been expected for months and its shares have recently fallen to as low as two and a half cents.

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Valerie Reitman and Etsuko Kawase in The Times’ Tokyo bureau contributed to this report.