Japan’s Deposit Insurance Cap Adds to Weary Nation’s Financial Woes

For Yoshihisa Watanabe, a Buddhist priest from Gunma prefecture, the material world is looking a whole lot riskier these days.

On April 1, the government will limit its liability for certificates of deposit to $77,000 if the bank fails. A year later, it will apply the same cap to ordinary savings accounts. Japan currently offers full state protection of deposits.

“I’m so worried that I’m beside myself,” Watanabe said. “I’m responsible for our temple’s finances--several hundred thousands of dollars worth built up over many generations--and just don’t understand why the government has to do this now.”

Watanabe isn’t the only one. Corporate officers, local officials, association heads and rich individuals across Japan are questioning the logic even as they shift more money into gold, postal savings accounts, government bonds and other safe havens.

The United States capped federal deposit insurance at $100,000 per account in the 1970s without too much difficulty. Japan also maintained a $77,000 limit until the beginning of its “Big Bang” financial deregulation in mid-1996 when the government decided to provide an added degree of security.

What’s different now, however, is diminished confidence by the Japanese that their local bank or credit union will be around given the ballooning of bad debt.

Analysts warn that a botched deposit insurance transition could prompt a run on weaker banks or even trigger a financial crisis.

At a more fundamental level, the insurance cap represents one more sign--along with rising medical costs, a faltering pension system, higher unemployment and more corporate bankruptcies--that Japan’s cradle-to-grave social system is coming off its tracks.

“There’s a growing recognition nowadays that they must look out for themselves,” said Yoshimasa Nishimura, professor at Waseda University in Tokyo.

When the insurance cap was imposed on U.S. accounts, most people with more than $100,000 divided their savings into smaller chunks or rearranged it to better protect it. Japanese savers appear to be doing the same. Time deposit funds fell 4.8% in December, the largest decline since record keeping started in 1968. Ordinary accounts surged by 15.8%, according to the Bank of Japan.

What’s disconcerting for many consumers, however, is the lack of public information about the health of individual Japanese financial institutions, which can make it more difficult to judge them.

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It May Be Difficult to Slice Up Nest Eggs

Another key difference is the lack of financial alternatives in Japan. U.S. companies, municipalities and nonprofits can park funds in money market accounts, municipal bonds, mutual funds or other options.

In Japan, banks and post offices are the main show, with interest rates in this deflationary economy often less than 20 cents per $100 annually. Toshiba Corp., concerned about the insurance cap, recently has paid down some debt but still keeps $2.9 billion in local bank accounts.

The concentration of banks in Tokyo and Osaka also can make it difficult to cut those nest eggs into enough slices.

Only three financial institutions maintain branches near Watanabe’s Enkyo Temple. In theory, he could deposit money in Tokyo, but it’s important to support local financial institutions.

Archaic industry practices limit Internet transfers, check use and even ATM withdrawals at night or on weekends, denying the religious order access to its funds.

Financiers note a significant flow of funds into postal savings accounts, considered safer bets than banks. Although these accounts soon will see a $77,000 insurance cap, a so-called settlement account still will offer unlimited protection.

“The bankers and politicians scratch each other’s backs so I don’t trust banks anymore,” said Toshitaka Okamoto, a 39-year-old worker. “I’m keeping most of my money in the post office.”

In theory, as bankers and credit association managers lose the security of government bailouts, they’re more likely to handle capital prudently, reducing waste and mismanagement.

Local governments find themselves in a particular bind given the often huge sums in their accounts. Municipalities currently hold $153 billion in bank deposits nationwide, or $47 million on average per town. A seminar held by Shiga prefecture recently to educate bureaucrats on the changes was overwhelmed when 250 people showed up for 40 seats.

Outspoken Tokyo Gov. Shintaro Ishihara recently announced plans to publicly rate banks the capital city uses and to withdraw portions of its $9.2 billion in accounts from weaker players. The threat has turned heads in a culture in which clearly distinguishing winners from losers is considered bad form. “The Tokyo government has no intention of going down together with [collapsing] banks,” Ishihara told reporters last month.

The result of all this, analysts say, is that funds probably will be concentrated in large city banks and strong regional institutions, which already have more cash than they can lend.

Second-tier regional banks and credit unions have seen their deposits fall by 1.6% and 9.5%, respectively. In just one example, Nihon University recently announced plans to switch much of the $923 million it collects annually in tuition into four large banks from 30 smaller institutions it’s been using.

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Multiple Bank Failures Could Tax System

The deposit insurance system holds $115 billion, which some see as woefully inadequate should a few major institutions fail simultaneously. Forty-six small cooperatives failed last year as regulators stepped up their inspections.

Michiyasu Hirao, a director with the Mitsui Strategic Studies Institute, a think tank, sees less danger of a bank failure from individual depositors than by other banks withdrawing huge sums.

“That’s what the U.S. saw with Continental Illinois” in 1984, he said. Continental nearly collapsed under a mountain of bad loans and required a multibillion-dollar federal bailout.

Despite the growing fears of bank defaults, most analysts believe the Japanese government will pay off accounts no matter the size--although that’s yet to be tested.

“My gut feeling is the government won’t let depositors lose money,” said Brian Waterhouse, banking analyst with HSBC Securities. “Depositors are voters.”

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Gold Sales See Sharp Increase

Stockbrokers also hope the change will force notoriously risk-averse Japanese investors to put more of their $10.8 trillion in personal savings into equities and other more adventurous investments.

After several false dawns, however, most aren’t holding their breath. “At this stage, we can’t really see any sign of it,” said Garry Evans, HSBC Securities’ strategist.

Even generally safe corporate bond funds have been discredited after the bankruptcy of Enron Corp. and Japanese retailer Mycal Corp. In fact, there’s evidence investors are moving in the other direction, given a recent mini-gold rush and a sharp hike in government bond purchases.

Tanaka Precious Metal Jewelry Co. in Tokyo saw a fourfold jump in gold sales in January pegged in part to bank worries, with a few customers buying as many as 40 gold bars at $10,000 each.

During the first three weeks of December, Japanese overall bought 20 tons of the precious metal, a 54% jump from year-earlier levels, according to the World Gold Council.

Yuji Watanabe, a 66-year-old retired railway employee, who is not related to Yoshihisa Watanabe, emerged from Tanaka Precious Metal’s outlet in the upscale Ginza district mulling over a purchase.

“I’m terribly worried about the future given the state of Japan’s banking system,” he said. “I don’t want to lose my money after all the sweat and blood it took to save it.”

“Who would have imagined Japan would find itself in such bad shape now,” he said before heading off with a worried look.

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Hisako Ueno in The Times’ Tokyo bureau contributed to this report.