Fitch fears insolvency among banks

Realistic measures to deal with the bad-loan problems at the nation’s banks may leave some of the major lenders — already undercapitalized — practically insolvent, Fitch Ratings said in a report released Thursday.

Fitch also said “pure” core capital adequacy ratios, which exclude the effect of deferred tax receivables and taxpayer money that must eventually be repaid, are already negative at most of the major banks.

While the international rating agency welcomed recent moves by the government to review its policy stance toward the banking sector, it warns that more “muddling through” may result in negative rating actions for the Japanese banking sector.

“Recent announcements by Prime Minister Junichiro Koizumi’s Cabinet and the Bank of Japan provide some basis for optimism that real reform may be in the offing,” Fitch said. “However, it must be kept in mind that ‘hard landing’ reform efforts will be resisted by conservative politicians, much of the bureaucracy and many financial institutions.”

The statement was referring to the BOJ’s recent announcement that it may purchase shares held by banks as well as Koizumi’s Sept. 30 Cabinet reshuffle, in which Financial Services Minister Hakuo Yanagisawa was replaced with economics minister Heizo Takenaka.

Takenaka has repeated that the Japanese banking system is severely hobbled and may require another taxpayer-funded bailout.

Fitch said if the forces that are resistant to genuine reform succeed in slowing down change to the plodding pace of the first 18 months of the Koizumi administration, the ultimate costs to the banks and the economy will be far greater than if action is carried out resolutely.

“Given the need for immediate remedial policy action, a continuation of the piecemeal ‘muddle through’ approach of recent years would likely result in Fitch taking negative rating actions on Japan’s banking sector,” the agency said.