For more than a decade, Japan’s financial authorities have been trying to treat the growing mountain of bad loans at Japan’s banks as a “kuroko” of the Japan economy.
In kabuki, a “kuroko” stagehand dressed in black from head to toe, who isn’t supposed to been seen, comes on stage to change props in the middle of a play. In the same fashion, the banks dressed up their nonperforming loans so they also would not been seen.
Even after Japan teetered on the brink of a financial collapse in 1997-98, officials such as Eisuke Sakakibara, vice international finance minister, insisted that the bad loan problem “had passed its peak” — the same phrase that Yasushi Mieno, governor of the Bank of Japan, used in 1994 to adjust the black robes on the kuroko of financial stage props. Most recently, Prime Minister Yoshiro Mori flew all the way to Davos, Switzerland, to tell the World Economic Forum that Japanese banks and corporations are now completing the cleanup of their balance sheets and would be flying high within a year or so.
In fact, banks were not carrying out “write-offs” of bad loans, as they claimed. Rather, they just set aside funds as reserves for many of their bad loans. The loans remained on the books, growing bigger each year that prices of collateral real estate plummeted.
Back in 1994, Takashi Hosomi, a former vice minister of finance for international affairs, now an adviser to the NSI Research Institute. described the kuroko operation by saying:
“Japanese are happy if problems are cured while they remain unaware of them existing. Basically, Japanese like being deceived. Right now, the authorities are busy deceiving them.”
At that time, the government was claiming that bad loans held by the banks amounted to only 13 trillion yen, but Hosomi estimated the actual sum was probably around 70 trillion yen. Today, the government claims that banks are carrying about 32 trillion yen in bad loans but nongovernment estimates still range up to 70 trillion yen.
Worse yet, neither the Japanese government nor average Japanese seem to realize how much damage the bad loans are inflicting upon the economy.
Instead of forcing banks to clear their books of the bad loans, the Bank of Japan since 1995 has virtually eliminated interest payments to savers to rescue the banks and their borrowers. If Japanese savers and investors were receiving just the ordinary 5 percent return that Americans banks paid through most of the 1990s, an extra 65 trillion yen would be flowing into the Japanese economy every year. That’s what a 5 percent yield would produce on the 1,300 trillion yen worth of personal assets that Japanese hold.
The sum, twice as large as the government’s estimate of the bad loans, is equal to about 13 percent of the Japanese economy. Clearly, cleaning up the banking mess — the core of Japan’s illness — would inject a great deal of vigor into the economy.
Procrastination and deception in the hope that public-works spending would refloat the economy have only exacerbated the problem.
Now, the recent plunge in prices on the Tokyo Stock Exchange and U.S. President George W. Bush’s prodding of Mori during their meeting in Washington March 19 has pulled the mask off the kuroko of bad loans — at least for a fleeting moment. Mori and Taro Aso, economic and fiscal policy minister, offered an amorphous mumble to Bush that they would do something.
To really clean up the bad loan mess, Richard Jerram, chief economist of ING Baring Securities (Japan) Ltd., says that Japan might have to spend 30 percent of the GDP. Up to 20 percent of the GDP would be handed over — as a gift — to replenish the banks’ capital and enable them to remove the bad loans from their balance sheets. As much as another 10 percent of the GDP would go to providing a safety net for victims of bankruptcies and unemployment. Even as a minimum, Jerram said 20 percent of the GDP would be needed for the two programs.
Jerram’s extremes range from 100 trillion yen to nearly 160 trillion yen. No leader capable of making decisions in such stratospheric dimensions is anywhere in sight.
The “good news,” Jerram says, is that Japan probably will avoid a crisis. His “bad news” is that there is no hope “for the banking sector to return to health any time soon.”
In May 1998, Robert Alan Feldman, chief economist of Morgan Stanley Dean Witter & Co., said that the Japanese people, rather than choosing to regain vitality by adopting reform that hurt specific segments of society, might opt for sluggishness by sharing the sacrifices throughout society. Looking at the lack of public debate over how the government has handled the bad loan issue, one cannot help but wonder if the Japanese people have already silently chosen sluggishness.
The upshot is that Bush is likely to get nothing more than another round of changing the stage props by a kuroko with a fresh set of black robes.
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