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WASHINGTON — Presaging the end to Japan’s convoy system of financial protection, Liberal Democratic Party Secretary General Koichi Kato warned Tuesday that more major financial institutions will probably go bankrupt as deregulation takes effect.

Following Kato’s speech in Tokyo at a forum sponsored by the Economic Strategy Institute, the key Nikkei average on the Tokyo Stock Exchange, dropped 470.43 points, or 3.02 percent, to end the morning session on the lowest level since Jan. 14. The index closed Wednesday at 15,243.84, down 357.26 points from Friday.

Kato described the 1997 collapses of Hokkaido Takushoku Bank and Yamaichi Securities Co. as “the first case where ships fell out of formation because they could not keep up with the rest of the fleet.” He said more dropouts could be expected as some of the “ships” get ahead of or fall behind the others in the future.

Kato said that fundamental reforms and not stopgap measures will be essential if the current economic stagnation is to be broken. Following the plunge in the market, however, Kato altered his previous remarks and told reporters he had only been referring to an economic certainty that some banks faced decline in the long term, and that there was no chance a big bank would go bankrupt in the near future.

Kato said Japan’s financial institutions will face direct competition from foreign firms at home as well as abroad as the nation’s so-called convoy approach disappears in the wake of sweeping deregulation measures.

“Because the government will stop intervening in the management of each bank, this is a change from which there will be no turning back. As I speak, Japanese banks are busy at work restructuring themselves.”

The relationships big firms enjoyed with banks were often deals cemented on an individual level during golf outings or other forms of entertainment, he said. Japanese banks, however, can no longer keep up this sort of lending, he said.

“The Big Bang will not just liberalize the financial sector; it will also drastically impact Japanese society as a whole,” he said.

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