Japanese banks’ performance for the first half of the current fiscal year delivers a disquieting message: They are still saddled with a large number of problem loans. For years, they have been saying that the worst is over — and it is true that the danger of a financial meltdown no longer exists. But the banks’ reports for the April-September period show that they continue to suffer in the wake of the collapse of the economic bubble a decade ago.
The bad-debt problem remains a thorn in the side of restructuring Japanese banks. Although they are trying hard to remove it, they are not making as much headway as they would like, partly for reasons beyond their control. To restore real stability to the banking system and to get Japan’s economy back on its feet, the remaining debt overhang must be cleared.
In the past decade, the economy has been mired in its worst slump since the end of World War II. It all started with widespread crashes in the stock and property markets in 1990, when the speculative binge of the late 1980s — the money game fueled by the blind faith that land prices had nowhere to go but up — came to an abrupt end. That left banks with mountains of sour loans.
The bad-debt crisis stunted the growth of banks as well as brokerages. The credit crunch that ensued slowed the economy, driving many businesses into bankruptcy. Unemployment hit an all-time high and, with consumers keeping their wallets closed, the economy slipped deeper into recession. A deflationary spiral — an endless decline in prices — became a real threat.
In the meantime, the government pumped tens of trillions of yen into the system; but with private demand in the doldrums, the slump continued, with no visible signs of a sustainable recovery in sight. Thus the 1990s has proved a “lost decade” for Japan’s economy, particularly for its financial institutions. It was the worst — and the most disgraceful — period in the postwar history of Japanese banking. As such, it left enormous lessons for the banks — and for the nation was a whole.
Until the bubble burst, every Japanese believed, or was led to believe, that the real-estate boom, and the banks that had generously financed it, would never collapse. What transpired, however, shattered that myth, and with it the public’s long-standing confidence in the banks. Their lack of discipline, the people realized, had sown the seeds of trouble not only for themselves but for the entire economy.
The banks received special treatment from the government, however, because, it was explained, a wave of bank runs would destroy the financial system and send the economy into a tailspin. A massive dose of public money was injected into the top banks to help them clean up the mess. Nevertheless, some banks still failed, coming under government control while a search was made for private rescuers. Others continued to restructure on their own, with financial regulators keeping a close watch.
According to the interim reports released late last month, 16 top banks, including major city banks and trust banks, had more than 17 trillion yen in nonperforming loans at the end of September. That exceeds earlier estimates by some 1.6 trillion yen. Several reasons are cited for this, including the failure of the department-store chain Sogo and life-insurance companies and the continuing drop in land prices.
The banks point out, correctly, that the amount of dud loans has decreased sharply in the past few years. But if the crisis is already behind them, there is no assurance that the remaining bad debts — averaging more than 1 trillion yen for each of the 16 banks — will shrink steadily and disappear. The road is still full of potholes — the lingering slump in the stock market, debt-ridden construction companies that would fail without financial support, and the slow pace of economic recovery, to name just a few examples. Most banks have yet to pay off the emergency aid they received from the government.
Quick debt disposal is also essential to meet the mounting competition in the banking sector. Banks and brokerages here are pushing mergers and alliances to keep abreast of the global trend for M&As and tieups. The debt woes, however, are putting a damper on their efforts to re-establish their position in the arena of international banking.
It is unfortunate that Japanese banks are still struggling with negative legacies from the bubble. More than 30 years ago, when Japan’s economy was coming to the end of double-digit growth, bankers used to say that “sound banking” was their mission — that it was the best way to win the enduring confidence of both depositors and borrowers. Such words are rarely heard today.
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