New entity is planned to provide ailing firms with lifeline

The government is planning to create a body that would try to pump new life into struggling firms that could have their financing cut off if banks are forced to expedite the cleanup of their bad loans, government sources said Tuesday.

The plan was hatched in response to growing calls from bankers and lawmakers who are fearful that a get-tough policy espoused by banking czar Heizo Takenaka might force banks to get serious about their balance sheets and, in the process, shut off the yen spigot.

If the plan is approved by executives of the ruling coalition parties, it will be included in a package of economic steps that is due out by Thursday, according to the sources.

The new body is likely to be established either under the aegis of the Financial Services Agency or the Cabinet Secretariat and will seek ways to rehabilitate both the nation’s financial and business sectors, the sources said.

It will also cooperate with the Ministry of Land, Infrastructure and Transport and the Ministry of Economy, Trade and Industry, the sources said.

There were no details on how it would carry out its mission.

Finance Minister Masajuro Shiokawa said Tuesday morning that establishing the entity will help accelerate the disposal of bad loans.

Disposing of bad loans “will be promoted quickly and appropriately if a new administrative body is established,” Shiokawa said at a regular news conference.

Shiokawa added the body should be established separately from the state-run Resolution and Collection Corp.

“The RCC is not qualified to judge whether a company is viable or not,” Shiokawa said.

The possibility of creating the organization was raised in a series of meetings that Takenaka, financial services minister, held with bankers and legislators on Monday as he continued to sell them on his controversial proposals for disposing of nonperforming loans.

The focus of the dispute is stricter accounting rules that could result in major banks admitting that their capital bases are below 8 percent of outstanding loans, the minimum for banks that operate internationally.

In such a situation, the government would bail out the banks with taxpayers’ money and possibly nationalize some.

The proposed rules would limit the amount of tax credits on future earnings that banks can count as part of their current core capital, known as Tier 1, to 10 percent of Tier 1 capital. Analysts say these credits — which the banks receive if their borrowers make good on their loans, an increasingly risky proposition in Japan — consist of between 30 percent and 50 percent of banks’ equity capital.

Takenaka told the Diet on Tuesday that the government will consider ways to ease the pain on banks in terms of taxes if any limit is imposed on the amount of deferred tax assets that can be counted as core capital.

“I think some sort of step in connection with the tax system may be necessary,” he told a House of Representatives committee.

In the Diet committee, Senior State Secretary for Finance Takayoshi Taniguchi said that “a phased approach in alleviating the impact of the changes” should be taken if a 10 percent limit is imposed.

But Taniguchi expressed reluctance over requests from bankers to take steps such as expanding the tax-free disposal of nonperforming loans. The Finance Ministry is opposed to the measure, which would lead to a fall in tax revenues.

Lawmakers from the ruling Liberal Democratic Party, meanwhile, criticized both Takenaka and his proposals on cleaning up the banking system in a series of party meetings.

“The prime minister is leaving everything up to Mr. Takenaka, and Mr. Takenaka is leaving it all up to Mr. Takeshi Kimura,” said Seiichiro Murakami, the LDP’s acting secretary general. Kimura is a member of Takenaka’s team of financial experts discussing ways to dispose of bad loans.

Kimura, president of consulting firm KPMG Financial Inc. and a former Bank of Japan official, advocates the aggressive disposal of nonperforming loans.

“Japan’s economy is being stirred up by television commentators,” Murakami said, aiming a jab at Kimura’s frequent appearances as a TV commentator as well as Takenaka’s appearances on TV when he was a professor at Keio University.

Sadanori Yamanaka, a senior LDP member and a former minister of International Trade and Industry, said Takenaka’s recent comments “were truly inappropriate.”

“He is compiling measures after hearing opinions from people who are unthinkable from the viewpoint of the LDP,” Yamanaka said. “If the party is not unified, Japan’s finances and economy will become confused.”

The secretaries general and policy chiefs of the LDP and its two coalition partners — New Komeito and the New Conservative Party — met Tuesday with top executives of Japan’s four major banking groups to exchange views on the disposal of nonperforming loans.

“We talked about what the financial services minister and the banks discussed” in their three rounds of talks, LDP policy chief Taro Aso told reporters after the meeting.