Deposit insurance delay raises market concerns


After two months of toying with ideas of how to put off deposit insurance reforms without appearing to do so, the government has made a final decision on the matter.

The new limited deposit insurance system, scheduled to take effect April 1, will be postponed for two years.

The delay, announced Monday, comes as a belated admission that the banking system remains in critical condition. But it is unlikely to ward off bank failures or depositor flight.

Instead, Prime Minister Junichiro Koizumi’s easy back-tracking on his pledge to push forward on the deposit insurance issue has heightened market fears of his commitment to reform.

Economists blame overly optimistic assessments of banks’ bad loans and short-sighted policies for the second extension.

Banks encouraged this view, promising each year that the worst was over and that they could start making profits the following year.

In December 1999, ruling party leaders said the state would continue to fully guarantee all deposits until April 2002, a year later than scheduled. The protection on cash accounts was later extended to April 2003.

But as the latest deadline approaches, banks are, if anything, in worse shape.

Deferred taxes make up roughly 50 percent of the nation’s 13 biggest banks’ combined core capital of 17 trillion yen. Unrealized equity losses at the end of September stood at between 3 trillion yen and 4 trillion yen. And most of the banks still hold public funds from injections in 1998 and 1999, which they must return at some point.

Banks are in no shape to shoulder bad loan disposal, says Financial Services Minister Heizo Takenaka.

Amid applause from Liberal Democratic Party bigwigs, he helped convince Koizumi to continue protecting demand deposits until April 2005, when they will be subject to a 10 million yen cap per depositor per bank.

By then, banks will have disposed of 15.5 trillion yen of their worst loans, the administration has pledged, and will be on the road to recovery.

But the second postponement, coming without explanation on why promised reforms failed to materialize, raises doubts that a bank cleanup will make any more progress by 2005. The postponement of deposit insurance reform is one indication showing policy makers are willing to back-track, critics said.

“It’s a familiar pattern,” said a Bank of Japan senior official on condition of anonymity. “First comes hard talk for reform, then come the first signs of pain, like stock price falls and talk of bank collapses. Then come measures to lessen the pain, the tough talk fades, and we’re left with more delays.”

Stock markets are plunging to 19-year lows, hitting banks’ huge equity portfolios. Koizumi can now be seen easing resistance toward government spending, before massive political pressure to compile a supplementary budget for the fiscal year to March to soothe the pain of a promised bank cleanup.

That in turn could send Japanese government bond prices reeling, damaging banks’ ballooning bond portfolios, say economists. It could further lend weight to market perception of the Koizumi administration as all show and politics and no real policy content.

“Koizumi is interested in narrow political aims and is prepared to play presentational games despite the severity of the current situation,” said Alexander Kinmont, managing director of equity strategy at Nikko Salomon Smith Barney Ltd.

Takenaka will talk the talk, Kinmont said, but the end result will be higher expectations to be dashed in the not-so-distant future.

In any case, the benefits of postponing deposit reform are purely political, said some economists.

“It makes little difference to the economy. It won’t prevent a crisis, and it won’t prevent account flight,” since time deposits remain at risk, said Hideo Kumano, senior economist at Dai-ichi Life Research Institute. “We’re looking at a series of half-baked measures and indecisiveness that could leave the Japanese economy in shambles.”