Half of Japan's credit unions in the red

By CNN's Alex Frew McMillan in Hong Kong

TOKYO, Japan -- Half of all credit unions in Japan have lost money in the last business year as they set aside money for bad loans, a report has said.

For the year through March, Japan's 241 credit unions lost a combined $785 million (94.1 billion yen). That is close to double the 49.1 billion they lost in fiscal 1999.

Around half of them ended the year in the red, the Nihon Keizai Shimbun reported Friday.

That's because Japan's bank watchdog, the Financial Services Agency (FSA), made them set aside more money to cover bad loans.

Japan watchers typically view problem loans at Japan's banks as the biggest business issue facing the world's second largest economy.

Its credit unions -- associations that make loans to affiliated groups like employees of a certain industry -- set aside 36.4 billion yen to provide for loans going bad in the future.

Losses from getting rid of bad loans hit 203.7 billion yen in the most recent business year, triple the combined operating profits of the credit unions.

The FSA has stepped up its inspections of the credit unions. The watchdog is trying to encourage Japanese financial institutions to deal with their problem debt.

But critics say the FSA is underestimating the issue and is keen to maintain the status quo, where Japanese banks trickle loans to sometimes inefficient companies.

That, some say, has led to something of a "persecution complex" at the FSA, which this week slapped ING Barings for errors the investment bank made in a bank analysts' report.

Goldman Sachs recently said the level of problem loans in Japan's banks could be as high as $1.9 trillion (237 trillion yen), or half Japan's gross domestic product.