On April 1, the government’s limited deposit guarantee, known as the “payoff” system, took full effect as scheduled. So far, the measure hasn’t resulted in any visible disturbances, such as a major shift of funds out of bank accounts. Why?
One of the reasons is that the worst is over for the nonperforming loan problems at Japan’s major banks. The government’s target of halving by the end of March the ratio of bad loans to overall bank lendings from fiscal 2001 levels, when the outstanding amount of nonperforming loans stood at a peak of 43 trillion yen, has nearly been achieved.
One of the major banking groups has announced plans to repay all money injected by the government earlier than scheduled. The repayment of the public funds will free banks of state involvement in their management, including requirements on lending to small and medium-sized borrowers and limitations on their personnel costs. I think we can say that the major banks have finally pulled themselves out of their nonperforming loan woes and are beginning to look to the future.
The second reason is because the full deposit guarantee system has been lifted on a gradual basis — starting with products like time deposits in 2002 — and depositors have already taken steps to reduce the risk of bank failures by spreading their money to accounts at more than one institution. Small and medium-sized regional banks, meanwhile, have actively formed agreements and partnerships to reduce the deposit risks of each other’s clients.
Amid such a situation, the 70-day saga over Livedoor Co.’s attempt to take over Nippon Broadcasting System Inc. with support from a foreign financial institution directed the attention of politicians, financial authorities and the mass media away from indirect financing and toward direct financing, as well as the issue of broadcasting firms being indirectly controlled by foreign capital. As a result, the lifting of the ban on foreign firms taking control of Japanese companies through share swaps was postponed by a year.
Livedoor and the Fujisankei group have recently settled their dispute. However, the question of deposit guarantee leaves room for future uncertainties because efforts to revise the relevant financial laws are lagging.
First of all, there has been an inflow of funds into settlement accounts — which are exempt from the “payoff” limited guarantee system. Because of the “zero-interest rate” policy, there is effectively no gap in interest rates among the various types of bank accounts. But if interest rates start climbing, we must carefully watch how funds flow out of settlement accounts, which by rule do not carry any interest.
U.S. monetary authorities have already hiked their policy rates on six occasions since last year, and the prospect of higher interest rates looms, given the high prices of such manufacturing resources as crude oil. If the privatization of the postal services does not proceed as planned, the state-backed postal savings system may end up absorbing much of the potential outflow from settlement accounts, thereby causing further uncertainty for private-sector financial institutions.
Another phenomenon to watch is the increasing moves of depositors wary of the zero-interest-rate policy to shift funds into foreign currency-based deposits and investment trusts that offer higher yields.
The outstanding amount of foreign currency-denominated investment trusts jumped from 6 trillion yen at the end of March 2003 to 9.4 trillion yen last year, and to 13.6 trillion yen at the end of March. Losses may emerge from these investments, depending on the future course of overseas interest rates and developments in the currency markets.
There is also a risk the U.S. Congress may resort to retaliatory steps against China, such as raising import duties on Chinese products, for keeping the yuan “undervalued” by leaving it pegged to the dollar. Revaluation of the yuan will likely trigger appreciation of the yen, the currency of the world’s largest creditor. Japanese depositors should realize that they have to manage their funds on their own responsibility.
The third source of concern is that competitive conditions and regulations differ from one financial sector to another. The postal savings system is currently spared the burden of paying taxes and deposit insurance premiums. There are still uncertainties over the fate of the government’s postal privatization bills, but there is a strong likelihood that a major part of the current system will be preserved.
It would be hypocritical for the government to lift the full guarantee on deposits and urge depositors to take responsibility for their own money while at the same time preserving the state-backed postal savings system as is.
There are also some loopholes, including the exemption of settlement accounts at securities companies from the new limited guarantee system.
If Japan is to advocate the concepts of globalization and self-responsibility, it is essential to ensure a level playing field exists for all of the financial sectors.