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The latest financial reports from Japan’s major commercial banks tell more of the same story: The huge overhang of nonperforming loans continues to block a return to health. To be sure, banks made a profit in their main lines of business in the first six months of fiscal 2002, as they did in previous periods. However, that was mainly the result of rock-bottom interest rates. The business profit is paltry compared to the mountain of bad loans.

Now the banks are getting more serious about addressing their bad-debt woes. With the government pushing for faster debt cleanup, it is likely that the rules for loan and capital assessment will be tightened. Banks will likely receive less tax credit for their capital than they do now. They will have to put aside more loan-loss reserves. Certainly, all this will increase the pressure for bank reform.

To clear these new hurdles, the banks must restructure their operations and find new business opportunities. They would do well to emulate manufacturers who have been doing essentially the same thing over the years — getting leaner while tapping new demand. Of course, banks are different from manufacturers, but they cannot restore the confidence of investors and depositors unless they, too, make serious efforts to survive.

That is the message of the interim reports. The message itself is not new: Bankers have stressed the need for reform time and again. What is new is that they are now trying to match their rhetoric with action. In fact, all four banking groups are now poised to take new steps to improve their conditions. The impression is that bankers are changing their “elitist mentality” — the notion that banks are “special” — and coming down to earth.

Symbolic of that change are moves by the Mizuho Financial Group to cut basic pay across the board, not just overtime and bonuses. That is something new. Bank employees are said to be the most highly paid of Japanese workers, yet banks have long resisted public pressure for pay cuts. One dubious explanation for this has been that extensive wage cuts would create a perception that banks are in trouble and undermine their credit standing. The high wage level was also defended on the grounds that banks must bear risks in the market economy, such as debt defaults.

One executive was once quoted as saying that public cries for pay cuts stemmed from “jealousy” in a society where uniformity is respected. The remark seemed to reflect a sense of privilege among top bankers. That self-righteous feeling, it can be said, dulled their sense of crisis. If the Mizuho initiative is followed by other groups, it will be a strong sign that the banks share a real understanding of the gravity of their situation.

In another sign of voluntary reform, UFJ Holdings Inc. is planning to transfer about 1 trillion yen in bad loans to a separate company that will help rehabilitate heavily indebted but potentially viable small clients. The idea is twofold: improving the group’s financial status and concentrating survival expertise and knowhow in a specialized entity.

If this formula succeeds, it will not only open new vistas of possibility for distressed clients but also help promote consulting as part of the bank’s business. However, the program will be regarded as a flop if it ends up as a convenient device for cutting off delinquent borrowers. The important thing is to return to the basics of banking by getting rid of bad debts as soon as possible.

Bolstering capital bases is essential for bad-debt disposal. However, if experience is any guide, measures being considered by a number of banks are not likely to provide a fundamental solution. One wonders whether bankers are again looking to economic stimulus measures — an extra spending budget is now in the works — as the way out of the bad-debt quagmire. Such a dependent attitude will further erode confidence in the banks.

Initiative is the key word for the debt-burdened banks. Basically, they need to improve profitability to dispel the gloom surrounding them. Profit can be increased, for example, by developing new loan demand, including from consumers. Charging higher fees on transactions looks like an expediency in view of the near-zero interest rates.

Bankers face two nightmares: a continuing fall in bank shares and the possibility of bank nationalization. If they want to stave off these disasters, they must solve their problems for themselves in ways that convince investors and depositors. Without such efforts, bank stocks may well remain in a deep freeze, while the specter of nationalization will continue to haunt weak banks.

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