Pressure builds on Japan's banks

Investors worry about problem loans at Japan's "Big Four," including Mizuho, the largest bank in the world by assets

By CNN's Alex Frew McMillan in Hong Kong

TOKYO, Japan -- Japan's beaten-up banks faced a new assault Tuesday.

Their stocks sagged after two rating agencies said they were cutting prospects that were not looking good in the first place.

Many experts see the huge amount of bad debts hobbling Japan's banks as the country's biggest business problem.

Overseas investors are getting increasingly suspicious that the banks are running up bad debts faster than they can write them off.

An extra jolt

Those fears were given an extra jolt of adrenalin late Monday. After trading ended, both Fitch and Moody's Investors Services said they were reducing their ratings a notch on Japan's biggest banks.

Fitch cut its rating on Japan's four biggest banking groups, as well as eight other banks. The agency said it did not think the banks were doing enough to address their problem debts.

Meantime, the banks keep trying to reform. Sumitomo Mitsui Banking Corp., Japan's second-largest bank group, said on Tuesday it would step up its attempts to restructure.

The bank aims to trim costs by $807 million (100 billion yen). It will cut 4,900 jobs by March 2004, 600 more than it originally planned.

Stocks down 2 percent to 4 percent

But a slumping stock market hurts the efforts of banks like Sumitomo. Japan's banks have large stock holdings that keep declining in value.

Fitch cited that, along with mounting bad loans, as the reasons for its downgrade, which included Mizuho Holdings, the world's biggest bank by assets, as well as Mitsubishi Tokyo Financial Group and UFJ Holdings, the rest of the "Big Four."

The downgrade sent their stocks crashing across the board, with the big banks giving up between 2 percent and 4 percent by early Tuesday afternoon.

Japan's maverick Prime Minister Junichiro Koizumi promises to force banks to write off their current bad debts over the next two to three years.

Officially, Japan's bank watchdog Financial Services Agency pegs Japan's bad loans at $95 billion (11.7 trillion yen) as of March.

Experts say even that won't be possible without help from the government. And a bailout would not be popular with the public, after an injection of cash in the late '90s failed to work.

Goldman: bad debts up to half of GDP

But overseas investors worry about an even bigger amount of "gray zone" loans that might turn bad. Goldman Sachs has said that total bad loans in Japan could amount to $1.9 trillion (237 trillion yen) -- half Japan's gross domestic product.

Japanese regulators say they are not downplaying the problem or covering up bad loans. The FSA vows to up its oversight, including inspecting 10 banks over the next two months.

An FSA official called Monday's ratings downgrades "regrettable" and said the agencies are misunderstanding the banks' problems.

Koizumi will preview his preliminary budget for fiscal 2002 on Friday. He promises to curb Japan's government spending.

The wildly popular leader will also unwrap plans to revamp the way Japan's 77 state-run corporations work, probably pushing for many to be privatized.

But such reforms mean little against the backdrop of Japan's banking crisis, according to Richard Jerram, chief Japan economist at ING Barings.

"Everybody is waiting to look at what they're going to do about the banks, and everything else doesn't matter that much," Jerram told CNN.

Economists expect Japan's recession to become official when the country unveils its next quarterly gross domestic product figures, for the June quarter, on September 7.

Banks and a current recession are the country's biggest challenges, he feels. Most other reforms sound good on the surface but achieve little, he said.

"If you're not going to do anything about either of those, to be honest it's a deckchairs on the Titanic type of situation," Jerram said on Monday.

Reuters contributed to this report.