BOJ GOES SOFT IN REPORT

Banks told to beef up loan-loss provisions

The Bank of Japan on Friday released an unusual report urging major banks to beef up their loan-loss provisions and calling on the government to consider injecting public money into banks that become undercapitalized as a result.

In the report, titled “Basic View on the Bad-Loan Problem,” the BOJ said the earnings banks have set aside to cover losses on delinquent or worthless loans may not be adequate. But the central bank refrained from saying how much more the BOJ believes banks’ loan-loss reserves should be, taking much of the sting out of a report that many at the central bank had hoped would serve as impetus for banking sector reform.

Instead, by offering another example of the BOJ giving in, the report indicates the enormous strength of vested interests that stand between knowing what needs to be done and actually doing it.

“We hope to encourage major banks to look for ways to more accurately calculate the current value of their loans,” said Takahiro Mitani, executive director at the BOJ. “We believe that more effort should be put into setting aside adequate provisions, to speed up bad-loan disposal.”

The report’s observations on inadequate loan-loss reserves are based on the BOJ’s inspections and on the simple fact that banks seem always to suffer hefty additional losses when they sell their loan assets, he said.

Mitani refrained from elaborating on how much of a shortage it foresaw in banks’ loan-loss reserves if banks used a method that the BOJ put forward in July as a way to calculate asset values. Mitani said that different calculations and methodologies lead to different results, and all numbers were open to controversy.

Media reports say that as much as 10 trillion yen in additional reserves are necessary to head off losses from quickly souring loans.

One senior BOJ official said that the report had been watered down out of fears of “causing offense” to the Financial Services Agency, as well as free falls in the stock market during the week that saw the benchmark Nikkei 225-stock average briefly reach below the critical 8,400 line.

Many analysts believe that many major banks’ capital-to-asset ratio — a measure of a bank’s ability to sustain sudden losses — would dip below the 8 percent level required to continue international operations.

Ultimately, the report, the BOJ’s first formal summary of its policy toward bad loans, ended up as a rehash of what the BOJ has been saying for years.

“Despite progress in reducing their bad loans, banks have not been able to garner market trust, in the face of newly arising bad loans and falling stock prices,” said BOJ Gov. Masaru Hayami. “We hope that this report contributes to the financial regulators’ and others’ efforts to deal with the bad loan problem.”

The BOJ is badgered by calls for further monetary easing — short-term interest rates are already at zero — every time banks are due to report interim or annual earnings. And each time, the BOJ counters by saying that further credit easing alone won’t work while the banking system remains impaired by bad debts.

The report could have broken free of this cycle by taking the opportunity to go on the offensive.

But at a time when Financial Services Agency officials are facing increased pressure from Financial Services Minister Heizo Takenaka and his task force, which is considering changing rules by which banks calculate capital, a few central bankers thought it would be best not to antagonize the FSA by releasing specific data, a BOJ senior official said.

Still, some analysts said the BOJ may be able to work its influence behind the scenes, by wielding their plan to buy up 2 trillion yen in overburdened banks’ slumping shareholdings.

“The BOJ has gained more leverage with their stock-buying plan, compared to their counterparts at the FSA,” said Hideo Kumano, senior economist at Dai-ichi Life Research Institute. “They can threaten not to buy up stocks at a critical juncture if a bank doesn’t follow its suggestions.”

More importantly, the report buys time, some said.

“The only measures that the BOJ has left that could have a significant effect on markets would be to adopt an inflation target or buy up large amounts of Japanese government bonds outright,” said Akio Makabe, senior economist at Mizuho Research Institute. “It wants to keep those measures up its sleeve for as long as possible.”

Stabilization plan

The Bank of Japan said Friday it plans to spend 2 trillion yen until the end of next September to buy shareholdings of troubled commercial banks in a bid to stabilize the financial system.

The purchases, slated to start by the end of the calendar year, will be made from banks whose holdings exceed their core capital.

It is estimated that a little more than 10 banks fall into this category.

If the BOJ does not reach the 2 trillion yen limit by the end of September, it will continue buying stocks until the end of September 2004, it said.

The plan was unveiled amid growing pressure on the BOJ to further ease credit; short-term interest rates are already at zero.

In the guidelines, the BOJ said it will only buy shares of companies with at least a triple-B investment ranking or equivalent and that it will limit its purchases to 5 percent of the issued shares of any single company.