The collapse of heavily indebted Japan Leasing Corp. will aggravate Japan’s credit crunch, the nation’s top economic planner said Tuesday.
“It is inevitable that financial institutions with outstanding credit will incur losses,” Taichi Sakaiya, director general of the Economic Planning Agency, told a news conference. “There will be some financial institutions whose ability to lend money will decline.”
With debts of 2.18 trillion yen, Japan Leasing, an affiliate of the ailing Long-Term Credit Bank of Japan, filed for court protection from creditors Sunday under the Corporate Rehabilitation Law.
Creditor financial institutions are reportedly expected to lose an estimated 1.3 trillion yen because of Japan Leasing’s collapse. When a bank incurs a large loss, it often cuts the bank’s capital-adequacy ratio, as the bank has to use its internal reserves to cover the loss. A lower capital-adequacy ratio hits the bank’s ability to lend.
Sakaiya said if the Bank of Japan lowered the reserve requirement ratio for banks it “would exert a favorable effect on the economy, although its stimulatory effects may be small.” The reserve requirement, a monetary policy tool of the central bank, is a legal obligation for banks to deposit certain prescribed percentages of their time and liquid deposits at the central bank.
But the failure of Japan Leasing is not a big source of concern, according to Finance Minister Kiichi Miyazawa.
At a regular news conference Tuesday, Miyazawa indicated that the bills being prepared to stabilize the financial system should help mitigate the negative impact from the Japan Leasing failure.
He also said the bankruptcy was not unexpected because the government recently decided not to let the LTCB waive its claim on 520 billion yen in loans to three of its nonbank affiliates, including Japan Leasing.
The government had initially intended to pump public funds into the LTCB after the bank wrote off the massive bad loans to the affiliates. The plan had been heavily criticized by the opposition parties because it would have effectively saved the nonbanks with public money.
In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.