Political revolt stalls Japanese bank plans

Reviewed By Hitoshi URABE

Article:
"Political revolt stalls Japanese bank plans"
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1033849202405&p=1012571727169
(by David Pilling in Tokyo) Financial Times

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The Tokyo Stock Exchange on October 23 ended a tad higher than the previous day, recovering in the afternoon from the huge dive during morning hours. While no one believes this is a sign of full-fledged recovery, views are mixed as to whether we have seen the lows for now, or it is only taking a breath before another plunge into the abyss. The cause of the dive in the morning was obvious. It was the postponement of anxiously awaited release of the report Mr Takenaka and his team was devising as a plan to cure the bad loan problem in Japan's banks.

When Mr Takenaka took over the job of Financial Institutions Minister from Mr Yanagisawa on the last day of September, people's receptions were mixed. Some welcomed it in the hope that the cleaning process of bad loans would be expedited, so that the money stuck with zombie institutions would be freed and could begun to flow into new promising industries. Others became worried that measures implemented in haste could lead to a hard landing, where many companies would be forced to become insolvent, as funds would be pulled out by the banks after the loans are scrutinized and designated as problematic by the authorities.

It became clear after a few days that people's concern toward the latter scenario to materialize was much stronger, as the stock market responded by a sharp drop in prices across the board, and for a number of times recording the lowest in decades. It was obvious was that a plan was needed to be formulated and publicized quickly to calm people's fears.

Mr Takenaka so formed a team, an unofficial advisory group consisting of scholars and professionals without having legislative or bureaucratic backgrounds. But the selection of the members, solely left to Mr Takenaka's will, aroused further concerns, especially as one of them was a strong proponent of a quick resolution through capital injection into the banks by utilizing public money.

Nevertheless, the panic in the market somewhat quieted down toward the announcement of the interim report by the team, which was scheduled to be October 22. Indeed, on the morning of 22nd, talking to reporters, Mr Takenaka said that the report would be publicized later in the day. But as the evening proceeded, it was announced that the report would be delayed, with the explanation that it would be released together with safety net measures such as those aimed at helping smaller businesses.

The real reason for the deferral, however, was because some members of the ruling Liberal Democratic Party opposed to the devised plan. There are a number of politicians who have been watching the efforts of Mr Takenaka and his team skeptically. Some, sharing views with many economists in the field, have been insisting it is the deflation that requires immediate attention, and tackling the bad loans first is like placing the carriage before the horse. Others opposed to the plan for a number of political causes, such as the fear of losing the powers over policy making in the financial field.

Mr Koizumi, being the Prime Minister, declared that he would fully support Mr Takenaka and his endeavors, and it was reported that an encouragement was expressed by U.S. Treasury Under Secretary for International Affairs John Taylor in saying that postponing the disposal of bad loans will incur more costs.

The leading bankers expressed their worries by saying that the plan is as if imposing a new set of rules in the middle of playing a ball game, such as from that of baseball to football. This comment was induced from a part of the plan where it proposes changes in the accounting method of banks, especially on the rules to record tax deferrals. The plan formulated by the team apparently suggests it to match that of U.S., which seems to be a legitimate at a first glance.

The rules on how tax deferrals are to be booked in U.S. are technically more stringent than that of Japan on the surface, such as the maximum amount allowed to be recorded in the shareholders equity section of the balance sheet in relation to other capital, or the projected term of the loss to materialize, a year in U.S. versus five years in Japan. But there are other factors. Just as an example, whereas it is largely up to the bank itself to write off a loan and charge it as a cost on the books in U.S., the tax authorities in Japan very rarely admits a write-off as a cost until it is legally established as defunct. This forces banks on most of the occasions to put up reserves on their books by charging it as a loss although it would not be admitted by tax authorities as a cost, resulting in paying taxes on the amount written-off and booking a relative amount as tax deferral. Accordingly, Japan's banks tend to hold large amounts of tax deferrals in respect to their counterparts in U.S.

Mr Koizumi has been, from the outset, noted as not necessarily knowledgeable in the field of Economics. He picked Mr Takenaka from outside the diet for one reason to show his determination that a decade of failed attempts to recover Japan's economy is not to be repeated. Perhaps such boldness is a virtue of Mr Koizumi, which so far seems to have worked well in such issues as his dealings with North Korea. But as often said, economy is a living creature, to which drastic measures in an attempt to cure a disease could cause other disorders in other parts of the body. It needs a full and tender care especially when the patient needs to go through a surgery, and to that extent it seems finally a consensus is being established among the people.