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Bank plan receives lukewarm review
By Alex Frew McMillan
TOKYO, Japan (CNN) -- Japan's plan to fix its troubled banks received a less than flattering welcome on Thursday. Analysts faulted it for lacking specifics and failing to set deadlines for the banks to tackle more than $400 billion in bad loans. "Japan's anti-deflation package does not represent a bold new direction. It is more the case of keeping Japan Inc. alive," BCA Research wrote in its report Japan: More of the Same. Most impartial observers criticized Prime Minister Junichiro Koizumi and Financial Services Minister Heizo Takenaka for backing down on the key points of their reform plan. "Overall, with the plan having been noticeably compromised in certain areas and the timing of implementation now unclear ... it is indicative of the government's never-ending gradualist approach," J.P. Morgan economist Ryo Hino stated in a report. Takenaka put out the bank plan on Wednesday evening, as part of a broader package to fight deflation that also includes measures to prop up jobs and small businesses. (Full story) Tokyo-based chief economist for UBS Warburg, Hiromichi Shirakawa, told CNN on Thursday morning that the plan meant that the possibility of Japan's big banks being nationalized had declined. He said it was clear the focus from now would be on stricter provisioning. Shirakawa said Takenaka, the plan's architect, had been forced to compromise and was unlikely to come back with a tougher package. Takenaka: 'A good start'The bank plans were delayed for a week. Takenaka's original draft called for tough action and set deadlines for a harsher assessment of bad debts. But they met with staunch and surprisingly open criticism from much of the ruling Liberal Democratic Party's leadership. The compromise plan released late Wednesday gives few specifics, though Takenaka defended it as the first step. "This is said to be a retreat. But I think it is a good start," he said.
On the issue of deferred-tax assets, the report did not stipulate a target for the banks to keep. Leaks suggested the original draft set a limit of 10 percent of total assets, which would have cut heavily into capital reserves. The new plan called merely for examining the issue further and also set no timeline for tackling the tax credits. Many have criticized them for padding banks' capital levels. Likewise, the package calls for a tougher tack on measuring nonperforming loans. But it doesn't stipulate how to do that or set any deadlines. The plan does call for adopting U.S.-style accounting rules. The government also pledged to simplify using public money to bail out troubled banks, a step toward nationalizing the weakest ones. One surprising clause calls for establishing something tentatively called an "industrial revitalization entity" as part of the Deposit Insurance Corp. The entity would buy bad loans and oversee management of the ones with a chance of revival. Not up to its billingBut the plan did not live up to its billing, which touted it as a major step on the path to reform. Brian Waterhouse, bank analyst with HSBC Securities, told CNN that few of the initial plans made it into the final version. Credit-rating agency Fitch called the report a "damp squib" that would have little effect. "There are no numbers, there are very few deadlines and not an awful lot of ownership of these plans, and so it is a disappointment," Brian Coulton, head of Fitch's sovereign ratings, told Reuters. Bank stocks are breathing easier on Thursday going into afternoon trade. UFJ Holdings, the weakest of the Big Four, ended the morning with a 5.71 percent jump to 185,000 yen. Mizuho Holdings, which has also sold off heavily in the runup to the plan's release, gained 5.14 percent to 184,000 yen. Yen set to weakenThe yen is trading steady at 122.71 to the U.S. dollar, having gained ahead of the tougher stance on the chance of reform. But experts see it giving ground now that the bank plan failed to deliver substantive change. "The yen will continue to be held hostage to the worsening business cycle, stay short the yen," BCA Research urged. The Bank of Japan did its part to support the economy while the government moves ahead with reforms. On Wednesday, it raised the amount of Japanese government bonds it buys every month by 20 percent, to 1.2 trillion yen. It also increased its target for current-account deposits to between 15 and 20 trillion yen, up from 10 to 15 trillion yen. Interest rates are almost at zero in Japan, leaving the central bank few options to boost the economy. So Wednesday's moves were seen as gestures of help but not that substantial. The central bank pushed the government to act on the banks last month, when it said it would start buying stock from troubled banks. That program starts taking applications Thursday and will likely begin sometime in November. The BOJ put out its semi-annual report on Japan's economy on Thursday. It said a swift resolution of Japan's nonperforming loan problem is "indispensable" if the country is to return to economic growth.
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