Crisis hints at Tokyo 'meltdown'

STEPHEN VINES

Hong Kong and

PAUL WALLACE

The Japanese government has moved quickly to stem a loss of confidence following the first run on a large financial institution in many years. However, the episode could start a "very serious meltdown" which could lead the government to bring forward a blueprint being drawn up to rescue the beleaguered Japanese banking system, according to Noriko Hama of the Mitsubishi Research Institute in London.

Yesterday, the Cosmo Shinyo Kumiai, a credit union in Tokyo, suffered a run, with investors withdrawing an estimated 60bn, (pounds 426m) or 13 per cent of its deposits.

Having said over the weekend that it would support the ailing Cosmo with about 30bn, the government changed its mind as withdrawals mounted yesterday. It then ordered the union to cease trading. The governor of Tokyo, Yukio Aoshima, said that all depositors could withdraw funds up to 100m in cash and excluding term deposits that hadn't matured.

Although the credit union comes under the supervisory control of the Tokyo metropolitan authority, the Bank of Japan stepped in to support the bail-out for depositors.

The bank said that, with the Ministry of Finance, it would "take all necessary measures to protect bona fide depositors and to prevent disruption from spreading to other financial institutions".

An analyst in London who specialises in Japanese banking said "there are an awful lot more like Cosmo out there". The weakness of the credit union sector, which comprises nearly 400 institutions, comes principally from high exposure to Japan's falling property market. Although credit unions are far smaller than the big Japanese banks, they play a big role among small investors and were active participants in the property bubble during the Eighties.

They are generally regarded as the weakest part of the Japanese banking system, which the Ministry of Finance revealed last week to have bad debts of 50,000bn. According to a ministry spokesman, between a fifth and a third of those bad debts were not covered by collateral or reserves.

Nick Stamenkovic, an economist at DKB International, said the collapse of Cosmo "was the tip of the iceberg", highlighting "the vulnerability of the whole financial system". Noriko Hama pointed out that although the problems of Cosmo were occurring "at the periphery", there were serious problems at the nerve centreof the Japanese banking system - the 21 biggest banks.

The government is understood to be working on a comprehensive new plan to solve the bad debt problem, which is contributing to financial fragility and economic weakness.

Previous attempts, which hoped for a gradual convalescence of the banking system , are recognised to have failed.

Comment, page 15

Total bad loans

Total bad loans As percentage of loans

(Ybn)

21 major banks 34,981 9.14

Regional

and Regional II 11,213 6.11

Shinkin banks 2,397 3.50

Credit cooperatives 671 3.50

Agricultural sector 7,811 18.93

Others (excl. insurance) 859 3.86

Total 57,933 8.07

Source: IBCA

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