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Japanese Bank Debts Threaten Economy, Warns Central Bank - 2003-05-21


Japan's central bank governor is warning that the country needs to clean up its debt-ridden banking sector to avoid a financial crisis.

Bank of Japan governor Toshihiko Fukui told a parliamentary committee that the country could be plunged into a financial crisis at any time, unless something is done about its ailing financial institutions.

His comments come a few days after the government bailed out Japan's fifth-largest bank, which no longer met capital adequacy standards. The country's banks have been nearly buried by massive unpaid loans during the past several years, a problem that has made it difficult for the economy to grow steadily.

The central bank also this week loosened monetary policy further, to make sure there is enough cash in the banking system to avoid problems.

Mr. Fukui says he does not see immediate signs of a crisis, but that because banks are so weak, problems could easily spread.

Jesper Koll, chief economist for Merrill Lynch Japan, thinks Mr. Fukui's comments are too little and too late to do much to help the banking system.

"Most importantly, he also did not bring anything new to the table in terms of proactive proposals on how to counter a banking crisis from actually unfolding," explained Mr. Koll. "So you know, unfortunately, here we are getting a little bit of Japanese policy makers yet again alerting us to a potential problem but not accepting responsibility, not doing anything about it."

Mr. Fukui's testimony follows the Bank of Japan's decision to cut its assessment of the economy for the first time since last November.

The central bank, in its report for the month of May, says economic activity remains flat, but uncertainty about the economy's future has increased due to the impact of SARS, a fragile U.S. economy, and volatile domestic financial markets.

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