Koizumi Supports Plan to Clean Up Japanese Banks’ Bad-Loan Problem

Prime Minister Junichiro Koizumi on Tuesday endorsed a contentious plan to clean up the nation’s banks, giving a major boost to his embattled financial services minister, who has met with fierce opposition to his get-tough approach on Japan’s bad-loan problem.

Heizo Takenaka, who became the country’s chief banking regulator just one month ago, was forced to delay releasing the draft of his widely anticipated bad-loan plan last week after fierce objections from ruling party lawmakers.

“I approved [Takenaka’s] basic policy,” Koizumi said after meeting with Takenaka. Koizumi, who has just returned from an economic forum with other leaders held in Mexico, added, “I instructed that final coordinations be made with the ruling parties in line with Takenaka’s plan.”

Takenaka told reporters he and the reformist minister stood “firmly on common ground with regard to accelerating the disposal of nonperforming loans.”

Koizumi’s support comes in the nick of time for Takenaka, who is set to release his proposal today.

The plan is expected to urge stricter accounting rules on how banks calculate their capital, but it is still unclear when such reforms would be implemented.

The original draft plan would have reportedly slapped banks with a new rule toughening accounting requirements on deferred-tax assets -- the right to reduce future tax payments for current loan losses.

But banks, some of which would face bankruptcy if the rules were tightened, have protested that it would amount to changing the rules mid-game.

Japan’s biggest lenders relied on deferred-tax assets for almost half of their top-tier capital as of March 31, according to a central bank report earlier this year.

Takenaka told Koizumi he may postpone such measures or introduce them gradually, according to Japan’s NHK-TV.

Japan’s banks are weighed down by about $336 billion in nonperforming loans, equaling about 8% of the nation’s gross domestic product. Analysts say they impede growth by keeping banks from lending to new borrowers and creating doubts about Japan’s financial system.

Finance Minister Masajuro Shiokawa, other economic ministers and Bank of Japan Gov. Masaru Hayami on Monday discussed plans to ease the pain of possible corporate failures due to bad-loan disposals by the nation’s banks. These include measures to encourage companies to hire new workers and to help small businesses borrow.

The government may need to allocate funds for a new institution that would aid still-viable companies, Shiokawa said. Someone from the private sector should head the institution, he said, adding that it should be separate from the Resolution and Collection Corp., Japan’s bad-loan buying body.

But any new government spending would force Koizumi to break his pledge to limit new government bond sales this fiscal year to $243 billion. Japan already labors under a heavy public debt load.