Dive in Nikkei leaves Japanese banks in crisis

The crisis threatening Japan's banking system deepened yesterday, with experts predicting the country's government might have to mount a rescue. And as one big American bank reported huge trading losses due to the recent financial market turmoil, Alan Greenspan said the US should be ready to help bail out Asia. Diane Coyle, Economics Editor, reports.

The fear that many of Japan's banks are near to collapse as a result of diving share prices has led to a ballooning in the so-called "Japan premium" in recent days. To borrow in the international interbank market, Japanese banks are having to pay up to three-eights of a percentage point more than American banks for money, it was reported in Tokyo yesterday.

The ratings agency IBCA announced that it was downgrading the already low ratings for three banks, Fuji, Industrial Bank of Japan and Sakura. Another three, Dai-Ichi Kangyo Bank, Sanwa and Sumitomo, were placed on a negative "rating watch".

David Marshall, IBCA's Asia-Pacific director, said: "The Japanese banks are extraordinarily weak." The risk that they would default was negligible thanks to Ministry of Finance guarantees, he said, but the low individual ratings assigned to the banks reflected their dismal financial condition.

"At some point the government would have to step in with an explicit guarantee of the banking system," Mr Marshall said.

The sharp fall in the Nikkei index, now approaching 15,000 compared with 21,000 in July when the Asian turmoil started, is the source of the banks' solvency problems. Many have invested two or three times their share capital in the stock market, so a 20 per cent fall in the Nikkei translates into a 40 per cent or bigger drop in their own capital. A level of 15,000 for the index is extremely worrying, while 14,000 is crisis-level. "It is a problem for absolutely all of them," said IBCA's Mr Marshall.

The widespread concern about the system's fragility was reflected in the increased premium being demanded of Japanese banks borrowing funds in currencies other than yen yesterday. Some were being charged 38 basis points above the 5.875 per cent interbank rate paid by big American or European banks. Stephen Lewis, of London Bond Broking, said: "This is a very clear guide to what banks in the market really think about whether there is systemic risk in Japan."

The Japan premium first appeared in 1995 when the scale of the banks' bad property loans emerged. It re-opened last week and has increased sharply this week.

Alan Greenspan, the Federal Reserve Board chairman, indicated yesterday that America should stand ready to stabilise the Asian financial crisis. Having already helped by not raising US interest rates on Wednesday, despite clear signs of an overheating domestic economy, he said: "It is in the interest of the United States and other nations around the world to encourage appropriate policy adjustments and, where required, provide temporary financial assistance."

The Fed chairman's comments came as Chase Manhattan reported a $160m (pounds 94m) before-tax trading loss in October. It said this was due to "unusually volatile and adverse" conditions, especially in emerging markets. Chase has a big presence in Latin America. Mr Greenspan also warned yesterday that the US economy would be affected by the turmoil in Japan and South- east Asia. He said: "To date the direct impact of these developments on the US economy has been modest, but it can be expected not to be negligible."

Heavy buying by Japanese pension funds helped prop up the Nikkei yesterday. It ended just 7 points lower at 15,427.27, but had plummeted to as low as 15,083.22 earlier. Further declines are expected.

Hong Kong staged a slight recovery, the Hang Seng index rising 113 points to 9,720.78.

Shares in London and New York were little changed yesterday. The FTSE 100 fell 9 points to 4711, while the Dow Jones was 26 points up at 7,427.35 by midday.