Man Without Qualities

Tuesday, November 11, 2003

Japan. Again, Japan. II

As has turned out to be the case repeatedly in Japan, even the limited but over-publicized "reforms" have much less to them than meets the eye. As noted previously, the biggest banking "reforms" supposedly relate to recognition and treatment of bad loans. But then there's this:

Japan's largest banks have granted some of the country's most troubled companies debt forgiveness packages worth over ¥4,000bn ($37bn) since the beginning of 2002, calling into question their public pledges to get tough with struggling borrowers.

Debt forgiveness has allowed the banks to make sizeable reductions in non-performing loans, which dropped 27 per cent in fiscal 2002, in response to orders from the Financial Services Agency, the regulator, to reduce bad loans by half by March 2005.

But critics say the packages have slowed structural reform by subsidising weak companies at the expense of stronger competitors and are a sign that relationship banking continues to thrive in Japan.

Most of the debt forgiveness has centred on the least efficient sectors of the economy, which include companies such as Daikyo and Fujita in real estate and construction, Seibu Department Stores in retailing and Orient Corp in consumer finance.

"Clearly, debt forgiveness has become easy and politically palatable. Traditional banking relationships have weakened, but even though they have weakened they are still very strong," said Jason Rogers, a director at Barclays.

The ¥4,000bn debt forgiveness - calculated from public announcements, media reports and from the banks themselves - is approximately double the ¥2,000bn in new capital raised by the banks over the past year to shore up their balance sheets. "The new capital has not been used for positive purposes but to write off bad loans or for debt forgiveness," said Naoko Nemoto, financial institutions analyst for Standard & Poor's, the credit rating agency. ....

[S]preads on speculative grade credit [have] shrunk, indicating that the market believed big corporate issuers would be bailed out via the banking system. "It amounts to the quasi-socialisation of credit risk." ...

The ¥4,000bn figure is likely to be much larger after considering loans to small and medium enterprises - which make up the bulk of bank lending.

What a mess.

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