Leasing Firm’s $17.9-Billion Bankruptcy Jolts Japan

Japan Leasing Corp. became this economically troubled nation’s largest postwar bankruptcy when it filed for protection from creditors Sunday night, sending shock waves through an already battered financial system.

The company, which listed total liabilities of 2.4 trillion yen, or about $17.9 billion, was established in 1963 to lease airplanes, ships, farm and construction equipment and has a staff of 1,300. It leaves in its wake debts to several shaky financial institutions, including its affiliate, the Long-Term Credit Bank of Japan.

Analysts said the bankruptcy underscores the high price of Japan’s policy delays and the interrelated nature of the nation’s financial crisis.

“This is by no means the end; it’s probably just the beginning,” said Russell Jones, chief economist with Lehman Bros. Japan. “It’s an indication of the underlying fragility.”

Japan Leasing’s problems were known, and the bankruptcy was not unexpected. But it came much sooner than government planners had hoped and puts additional pressure on parliament to pass a long-awaited bank restructuring package.

Japan’s ruling Liberal Democratic Party and the political opposition reached a general bailout package this weekend, but some specifics are still being hammered out and the deal appears to leave some sensitive issues vague or unresolved.

According to the Nikkei Business Daily, the proposed deal allows the government to take over troubled banks by acquiring their shares. If another bank is willing to merge with the troubled institution, the government could then sell or give its stake to the acquiring bank along with additional capital to shore up the new entity.

On a second sticking point, financial system oversight, the two sides reached a muddied compromise that grants authority to an independent government body but leaves some power with the Ministry of Finance.

Still unresolved, however, is what to do with troubled but viable banks. Furthermore, the system depends on banks to voluntarily declare themselves insolvent, a move most would probably resist until the end. “They’re definitely trying to cobble something together,” said Andrew Shipley, economist with Schroders (Japan). “But we still need an overriding framework.”

Japan Leasing’s collapse raises concerns about two other heavily indebted affiliates of the troubled LTCB, analysts said.

Junji Ota, an analyst with Okasan Research Institute, said the Japan Leasing bankruptcy could begin a painful but important process of distinguishing better financial institutions from the truly insolvent.

Shigeo Watanabe, an independent economist, said the biggest fallout from the bankruptcy could land in Japan’s deeply troubled agricultural sector, which some analysts say is at least as debt-ridden as banking.

The two issues of taxpayer bailouts and bank oversight, which have held up a legislative bailout package, reflect the disagreement between the opposition parties and the long-dominant LDP. The Liberal Democrats seek to use taxpayer money to maintain confidence in large financial institutions, while the opposition wants shareholders and bankers to bear most of the burdens.

Etsuko Kawase in the Tokyo bureau contributed to this report.

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