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Viability of Japanese Banks Cause for Concern - 2002-11-21

Japan, the world's second biggest economy, is seemingly trapped in a process of falling prices known as deflation. The country's major banks are carrying billions of dollars of bad loans from struggling companies that are unable to service their debts. There is deep worry about the viability of Japanese banks.

Simon Ogus is a long time observer of Japan. Based in Hong Kong, he runs an economic consulting firm, DSI Asia, that assesses the strengths and weaknesses of Asian economies. Mr. Ogus is deeply worried about Japan. "Clearly, they're in a hole and they're digging. The fact that banks are still sitting around with these nominal loans out there that are getting bigger in real terms all the time," he says. "And that more bad loans are entering the system all the time suggests that Japan needs a more radical approach."

Mr. Ogus says political resistance within Japan's ruling party caused the government's recent bank restructuring program to be significantly scaled back.

Frank Martin, a former commercial banker who heads the American Chamber of Commerce in Hong Kong, agrees that Japan's financial system requires radical restructuring. "I believe the Japanese banks have been sweeping their problems under the carpet for many, many years, for decades. This is not a new problem," he says. "They have not had the will to bite the bullet and identify these problem loans and write them off. They're going to have to do that." Mr. Martin, a Japanese speaker who lived in Tokyo for several years, says no resolution is yet in sight.

The bad loans exceed $400 billion. The stock prices of Japanese banks are falling as the market anticipates that some banks will fail.

Mr. Ogus of DSI says the Japanese economic landscape is littered with essentially bankrupt companies that are being kept alive through bank loans and government subsidies. These walking dead companies, he says, prolong Japan's economic misery. At the same time, Japan's budget deficit continues to grow along with the overall level of government indebtedness. "I characterize what is going on in Japan as inter-generational theft," says Mr. Ogus. "Basically, the older generation who is the electoral majority is in effect stealing from their children and grandchildren. Their intention is basically to die and leave the problem to the younger generation."

Japan's population is rapidly aging and it has a larger percentage of older people than any other industrial country.

Frank Martin of the American Chamber of Commerce thinks Japan will probably muddle through for several more years, avoiding an outright financial crisis. The country's large trade surplus means that at least for now Japan has the cash to continue to subsidize its failing enterprises.