Problem loans one-fifth of Japan's total

True reform is unlikely while Japan is in an election season

By CNN's Alex Frew McMillan

TOKYO, Japan (CNN) -- One of every five loans in Japan is a problem loan, new data suggests.

The opposition Democratic Party said Tuesday that Japan's banks have $1.2 trillion, or 151 trillion yen, in non-performing loans on their books.

It said it generated the number from data supplied by bank watchdog Financial Services Agency.

Banks have $566 billion, or 69.6 trillion yen, in problem loans to troubled borrowers that are likely recoverable, according to the party.

They are guaranteed by assets like bonds or a third party, such as a government agency or another creditor.

The FSA has not released that figure, which adds to total bad loans that are deemed unrecoverable. The FSA had pegged those bad loans at $662 billion, or 81.4 trillion yen.

Together, the nonperforming tally amounts to 22 percent of the 673 trillion yen of all loans made by Japan's banks.

A spokesman with the Financial Services Agency (FSA) said it could not confirm or deny the new figure.

A remarkable scale

Brian Waterhouse, bank analyst with HSBC in Tokyo, said the new figure was simply a different way of measuring the same issue.

"It all depends on what your definition of bad is," he said. Because the 69.6 trillion yen is recoverable, it does not necessarily mean the problem in Japan's financial sector is bigger than already predicted.

But the scale of the banking sector's troubles is still remarkable. Japan's banks added more bad loans, 3.6 trillion yen, for the first six months of last year than their total profits of 2.5 trillion yen for the whole year.

"The fact that one-fifth of total lending is to companies that have some sort of problem is an indication that the scale of the problem is something the government has yet to address," Waterhouse said.

The government has taken steps to address bank reform. In its economic-stimulus plan in early April, the government, led by the Liberal Democratic Party (LDP), said it would force Japan's banks to write off current bad loans by April 2003. The banks have until April 2004 to write off new bad loans.

But reformers say those steps do not go far enough. They believe Japan's economy will not rebound without deep-rooted structural changes for the whole industry.

Dealing with bad loans means the banks would force inefficient, unviable companies into bankruptcy. That would lead to higher unemployment, already at a record level.

Government ultimately may have to step in

Experts say the government will ultimately have to step in with financial backing. Some say the Deposit Insurance Corp. and its Resolution & Correction Corp. subsidiary, which buy bad loans and guarantee deposits, may need to step in.

But true bank reform is unlikely to come in an election season. The LDP votes on a new president April 24, followed by upper house elections in July.

"It requires some very tough decisions by the LDP and those decisions are not going to be popular with voters," Waterhouse said.

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