Japan's banks face tough deadline

Japan's banks will struggle to hit their deadline to write off bad loans

By Staff and wire reports

TOKYO, Japan -- Japanese banks are racking up new bad loans almost as fast as they scramble to write off existing ones.

That suggests they will struggle to meet a government-set deadline to write off bad loans over the next three years.

Japan's eight largest banking groups reported annual earnings last week. Financial Services Minister Hakuo Yanagisawa said Tuesday he was disappointed with what he saw.

"Banks have made some progress on the disposal of bad loans, but it appears there are a considerable number of new bad loans as well," he said. "It would have been better if more had been done."

Negatives reconfirmed

Together, the Japanese banks paid $34.4 billion (4.1 trillion yen) to cover bad loans last fiscal year, which ended in March.

That's positive, experts say, if banks start taking a more-realistic approach to Japan's biggest long-term problem.

But bad loans are only threatening to get worse, as Japan's economy turns down. All told, problem loans with Japan's biggest banks rose 1.5 percent to $148 billion (17.95 trillion yen) at the end of March.

The market wasn't ready for that nasty surprise. Though bank stocks were rallying Tuesday, many closed at lows for the year on Monday, when banks dropped 6.4 percent.

"I just reconfirm my feeling about the problems with Japanese banks," said Hironari Nozaki, Japan bank analyst at ABN Amro. Their earnings are not growing fast enough to offset problem loans, he said.

Mitsubishi Tokyo brings a chill

The main catalyst for the lost confidence was the Mitsubishi Tokyo Financial Group. Japan's No. 3 bank group said last week its nonperforming loans jumped 55 percent, to $37.2 billion (4.5 trillion yen) in March.

The bank is one of the country's strongest and most realistic. If its bad loans are growing that fast, market watchers reasoned, other banks likely face similar problems they haven't recognized.

Analysts are still trying to make sense of last week's numbers.

"It's not clear to what extent they [the writeoffs] reflected a more-accurate assessment of the bad debt problem or a continued deterioration of the bank business," said Walter Altherr, director of financial-services research for Credit Suisse First Boston in Japan.

It's likely both, he said. But most analysts see increasing problems for banks, particularly with a large amount of "gray-area" loans. Official loan classifications are close to useless, they say.

Government help likely needed

That leaves the banks in their chicken-and-egg conundrum. Experts hope they'll write off bad loans to help reforms and Japan's turnaround. But they need a turnaround before they can afford to write off loans.

The banks have historically forgiven debts rather than write them off. That keeps inefficient companies in business, experts say. Ultimately they will have to force them out of business if Japan is to deal with its inefficiency and overcapacity.

The government is keen to tackle reforms. It has set a two-year deadline for banks to write off their existing bad loans. They have three years to handle new bad loans.

The new data suggests banks will struggle to meet those deadlines. They typically sell stock to offset writeoffs, but a bad market makes that tough.

Experts say they require government help.

"No one can wave the magic wand and make this problem go away," said Jason Rogers, head of credit research at Barclays Capital. "It will take time, it will take money and it will take a period of pain," he said.

New prime minister Junichiro Koizumi has admitted reforms will lead to unemployment and bankruptcies. Other than pursuing the debt write-off plan, though, it's not clear what he plans to do.

The government says a bailout isn't necessary now. But there's a convincing case for injecting a large amount of public money, Rogers said, if the problem is going to be dealt with swiftly and decisively.

It is also highly unlikely.

"The more likely scenario is that it will be drawn out over two to three years using operating profits," Rogers said. "They'll try and muddle through the mess like they have tended to do in the past. Anyone expecting a rebound in profitability of the banks will be disappointed."

Reuters contributed to this report.

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