Deadline to slip in Japan's bad-loan plan


Japan's banks are set to miss a deadline to write off their bad debts, set by Japan's bank watchdog

TOKYO, Japan (CNN) -- Japan's banks will not meet a deadline to write off their bad loans, according to financial sources.

The Financial Services Agency (FSA), Japan's bank watchdog, has directed its banks to tackle bad loans over the next three years. That would see them write off several hundreds of billions of yen in bad debts.

But three bodies are in a standoff on taking over the bad loans. Japan risked a financial crisis earlier this year, when its stock market tumbled and a rising number of companies began going out of business.

Banks are heavy investors in Japan's stock market. Because they own large stakes in many of their customers, they have a conflict of interest in dealing with their problem debts.

RCC saw bigger role

Prime Minister Junichiro Koizumi concedes a financial overhaul is a painful but necessary reform. So the administration has broadened the role of the Resolution and Collection Corp (RCC).

That government body buys bad loans from banks and attempts to recoup some of their value. Overseas investment banks have also proved willing to achieve the same end.

Economists from overseas investment banks often contend that Japan's banks have perpetuated the decade-long slump in Japan by trickling loans to companies that should be allowed to fail.

The FSA has added impetus to Koizumi's push by directing banks to strip their nonperforming loans from their balance sheets within three years.

But local credit-guarantee groups are now resisting the attempt to push the bad loans through to the RCC. That would hasten the collapse of many small companies and borrowers.

Three-way standoff

Japan's Small and Medium Enterprise Agency has entered the fray to protect small borrowers. It is tackling bank reform with the FSA and the RCC, who are in a three-way standoff over the debts.

Protecting the small companies is the exact opposite of writing off the debts, according to market sources.

At the level of the prefecture (Japan's equivalent of a state) many local guarantee associations are blocking the sale of debts to the RCC. They are concerned that will cause the collapse of many companies, leaving them with the bad debts.

Finance-industry sources now state that the standoff means the banks will miss their deadline to dispatch their bad loans.

Program not renewed

A three-year government program to guarantee bad loans ended in March 2001. Koizumi controversially opted not to renew it.

The program saw many companies obtain guarantees of up to 50 million yen (around $41,000) from local credit-guarantee bodies. They now risk not recouping any of their investment.

The companies were not required to put up any collateral that the credit groups could claim.

Japan's banks reported record losses last year. They were boosting their ability to tackle bad debts (full story).

The bad-loan saga saw Japan's currency weaken dramatically and undercut confidence in Japanese Government Bonds.

But the yen is much stronger on Monday, trading near 121 to the U.S. dollar, prompting the Bank of Japan to intervene to stem its rapid run of strength.