Sayonara to Japan’s broke banks

IT might be wise to pour yourself a stiff whisky before we ponder the parlous plight of Japan. The Japanese banking system is broke. Bad debts on the books are conservatively put at 43 trillion yen, or $640 billion in our money. Add on mere “problem” loans, and the figure probably exceeds the combined stock market value of every bank in the country. Knees are knocking in Tokyo’s Otemachi financial district.

This is crunch week. The government must throw the banks another multi-trillion yen lifeline to head off a deepening financial crisis. If it does not, George W Bush, who is due in Tokyo on Monday, is expected to give prime minister Junichiro Koizumi a big serve for mucking up the global economic recovery.

Six months ago we thought Mr Koizumi, instantly recognisable by his coiffure, had been handed a clear mandate for radical reform by the majority of 127 million Japanese. The 59-year-old handsome, divorced, charisma-on-wheels had a 74 per cent approval rating. Now it seems this was based on his passion for rock ’n roll and the traditional kabuki dance, and his penchant for grabbing karaoke microphones. It turns out Koizumi is close to innumerate. Reportedly, a couple of bright boys from the economics wing of the Diet had to be called in to explain to him that his three-year plan to sort out bank debt was a joke.

The chronic problems stem from the decade-long inability of the banks to collect the debts of the corporate mates they meet every weekend on the golf course. They carried them, on the assumption that something would turn up. It didn’t. There have been three head-to-tail recessions. Despite interest rates so low they are scarcely visible, demand for loans has fallen for 49 months in a row. As a Bank of Japan official pointed out recently, with the overnight call rate at 0.001 per cent, the profit on a 10 billion yen loan would be Y278 – not enough to buy a cup of coffee.

Consumer prices have been falling for three years. Deflation is a killer. It is a corrosive destroyer of earnings, assets and credit. It has the capacity to turn mere recession into prolonged slump, pushing up unemployment, and creating deep falls in production and consumer spending. That is what is happening in Japan. Unemployment has climbed to a post-war high of 5.6 per cent. Industrial production fell 8 per cent in 2001 – the worst setback since 1975.

The stock market has dropped to an 18-year low. Japan now only accounts for 15 per cent of total world share capitalisation, down from a peak of more than 46 per cent.

The Nikkei 225 index is trading below the Dow Jones for the first time since 1954.

A still weaker yen appears to be the only shot left in the locker. In recent months the currency has slithered from 115 to the US dollar to 134. This has caused squeals of protest from competing exporters like the Philippines, South Korea and Hong Kong. Ominously, China has said that a deliberate depreciation of the yen could prompt a devaluation of the yuan in response. Australia does not compete with the Japanese for markets, instead we sell them natural gas and coal to heat homes and offices, and iron ore to feed steel mills.

But a round of competitive currency devaluations in Asia is an almost unthinkably scary scenario that would hit us hard.

The next few weeks are critical for Japanese banks. On April 1 the blanket government guarantee on time deposits will be scrapped. Any further deterioration in confidence could lead to a run on one or more institutions. The medicine that must be administered includes forcing the banks to recognise all bad loans, followed by nationalisation of the most crippled. The Bank of Japan must print more money to fight deflation. And the government has to reallocate spending away from pork barrel public works and firmly grasp the nettle of reform.

Junichiro Koizumi professes to be an admirer of Winston Churchill. He should know that this is the time when all he has to offer is blood, sweat and tears.

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