Bank crisis hangs over U.S.-Japan talks


Japan's banking system is high on the business agenda for Bush and Koizumi

Geoff Hiscock
CNN Asia business editor

TOKYO, Japan (CNN) -- As U.S. President George W. Bush and Japanese Prime Minister Junichiro Koizumi hold talks in Tokyo, regional analysts warn that a full-scale banking crisis could engulf Japan in the next six weeks.

The grim prospect of banks collapsing under the weight of billions of dollars in bad loans is just one of a host of problems confronting Koizumi's administration, they say.

Analysts such as IFR Asia-Pacific's chief economist George Worthington warn that in the absence of a sense of urgency in Japan, Bush's visit alone will not solve the systemic flaws in Japan's banking system and its economy in general.

In research released Monday, Worthington said that while there had been much talk in Japan that a comprehensive plan for a bank bailout and recapitalization would be presented to Bush, any final measures "seem almost calculated to disappoint."

"Japan's genteel decline seems unlikely to be reversed by anything stemming from Bush's tour," he wrote.

Asia strategist Professor Keith Henry of Sophia University in Tokyo told CNN Monday that it was "very difficult" for a visiting leader to have any impact on the Japanese economy.

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At best, he said, the Bush visit would reinforce Koizumi's resolve to push ahead with his economic reform agenda in the face of tough political opposition.

Henry said Koizumi needed the visit to go flawlessly to "put some wind in his sails" so that he could better confront his opponents in getting his reform measures through the Diet (the Japanese parliament).

The measures Koizumi is likely to put to Bush include a 10 trillion yen ($75 billion) recapitalization of the banks, and up to 4 trillion yen ($30 billion) for the Banks' Shareholdings Purchase Corp., to buy shares from the banks in the first half of this year.

Injecting public funds into banks ahead of the March 31 end of the Japanese financial year would confirm the depth of the financial crisis.

In its February outlook for the region, economic analyst IMA Asia said growth in bad loans was accelerating -- up 10 percent between April and September 2001 -- and many banks "may now be technically insolvent."

It said it expected the Japanese government would rescue any of the big banks if they fell into trouble.

Fear of deflationary spiral

In addition to the banking malaise, the world's second largest economy faces problems that include lackluster consumer demand, a record jobless rate and the specter of an uncontrolled deflationary spiral.

Koizumi has already identified deflation as the big issue for Japan -- an assessment shared by Moody's Investors Service, which called deflation the "foremost challenge" when it said last week it would review for possible downgrade the Aa3 rating of yen-denominated domestic securities issued or guaranteed by the Japanese government.

The chief U.S. business lobby group in Tokyo, the American Chamber of Commerce, said Monday it was still hopeful Koizumi would act on reform.

The chamber's chairman, Robert Grondine, told CNN that Koizumi pushing through his reform agenda was essential to getting the Japanese economy moving ahead.

Complicated question

Grondine said the issue of a weaker yen was a "very complicated question."

While it helped Japanese exporters, beyond 140 yen to the dollar a weak yen was seen as having a negative impact on Japan because, among other things, it made the cost of oil more expensive.

He said Japan still had some "fabulously competitive" world-class companies such as Sony and Toyota. Its fundamental business problem was to make its second-tier companies more competitive.

According to the Nihon Keizai business daily, Koizumi's financial reform plan centers on five immediate steps -- more write-offs of bad loans, stabilization of the financial system, revitalization of the stock market, overcoming the banks' unwillingness to lend to small and medium companies, and an easier monetary policy from the central Bank of Japan.

Koizumi has also promised the government will not spend more to give the economy a quick boost.

Change 'not possible'

On Friday, Economics Minister Heizo Takenaka said the Council on Economic and Fiscal Policy had agreed the Financial Services Agency should make a special inspection of banks to assess their status.

The government would do whatever was necessary to solve the bad-debt problem, he said.

But regional economic observers such as IMA Asia's Richard Martin believe that substantial structural changes by the Koizumi administration are no longer possible in the current political climate.

Martin told CNN last week that Koizumi's window of opportunity had virtually gone. He said Japan would be better advised in this situation to put reform on hold, and aim instead for a recovery based on exchange rates, liquidity and a cap on budget spending.

But he said the downside of this approach was that it did not provide a long-term fix of the economy.