November 2001

Japan's financial structure per the IMF-mandated SNA statistical series shows strong intermediation notably with corporate sector borrowing at 2.0 times that of peer economies' corporate balance sheets and financial institution lending at 1.6 times. Lending has been on relationship and policy grounds, credit evaluation weak and collateral values untransparent.

Unsurprisingly post-War there have been several banking crises. These have been rolled forward by MoF until renewed high economic growth rates and moderately high inflation had resolved the situation. Information control and an accommodative monetary policy would keep a lid on the situation: with time but without undue social friction there would be recovery.

MoF had always protected bank profits for tax revenue reasons. "Smooth" pre-tax profits were agreed, credit costs squeezed and NPLs rolled forward. The external auditors were licensed by MoF, the corporate auditors appointed by bank senior management and the media gently directed via the press club system. Economic, social and budget dislocation were avoided.

True to form, the tried and proven therapy of roll-forward was applied without delay in 1991. However, in the absence of growth and inflation, the patient's condition assumed clear critical characteristics around 1995. The old growth and inflation had gone as demographics had changed. There was consternation and a MoF distancing policy was adopted from early 1996.

The spotlight is now entirely on BoJ monetary policy measures, the banks' own self assessment procedures, the external auditors' responsibilities and FSA regulation. There has been much heat generated but little light shed on the situation: the bureaucratised political process has reached a state of logjam. MoF remains ingeniously distanced to the point of invisibility.

According to generally informed opinion approximately one-third of loans have either crystallised as NPLs or would so crystallise in any ensuing banking crisis shake-out ie are contingently non-performing. However, in the ex-MoF/ex-Todai Law Department form over substance mindset, FSA is crystallisation over contingency and hence there is much confusion.

In the early 1990s NPLs were in the 10 to 20 GDP per cent range and over the 1990s the banks booked 15 GDP per cent of credit costs. Nevertheless, avalanche effects have led to NPLs of around 45 GDP per cent in the private sector and 25 GDP per cent in the public sector: Latin America two times over in the one country. Time has been bought expensively.

Recognition of the contingent NPL balances involves injection of additional public funds, nationalisation of the banks and public outcry. Using Sartrian terminology, the paralysed group, the established interests, is impotently serialised. The fighting group, Ishihara Koizumi Takenaka, has common individuality and is guiding the paralysed to accept the inevitable.

The deus ex machina is the IMF FSAP for Japan. There is currently argument over the FSAP Japan "modalities" and even an Establishment attempt at a home grown forestalling action. Nevertheless the IMF timetable has June 2002 as the launch deadline. MoF may exploit the discrediting of the FSA in its current form to restructure financial regulation to its advantage.

With the restructuring as a cover, an Interim Report would propose: 1. global standards for NPL recognition, 2. the Swedish BSA model for bank nationalisation and 3. US RTC experience for distressed asset disposal. The Final Report would give a clean bill of health around 2005/06. Involving no currency exposure, the crisis should be successfully contained.

Copyright 2001 by Analytica Japan - All Rights Reserved