Who's afraid of the big bad loan? Not me

Two men hold Japan's future in their hands. One of them must turn the economic pain into gain
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The Independent Online

When Japan's wildly popular Prime Minister, Junichiro Koizumi, turned up at a recent Tokyo press conference, he was given a rock-star reception. Housewives begged for autographs, businessmen wore T-shirts bearing his face, children waved flags.

When Hakuo Yanagisawa, the nation's minister for financial affairs, appeared at London's Dorchester Hotel last Monday, he was greeted with a similar scene. Flash bulbs exploded, cameras snapped furiously and small girls shrieked with delight. Unfortunately, none of it was for him.

Mr Yanagisawa's entrance happened to coincide with Nicole Kidman's exit on her way to the Moulin Rouge premiere. It wasn't exactly part of the embassy's schedule but Mr Yanagisawa didn't seem to mind and is no stranger to the glare of public scrutiny.

It is crunch time for the Japanese economy, and everything now comes down to what the new prime minister and his financial affairs minister do and say over the next three weeks. "Japan is going to seem like a woman giving birth to a child. A lot of speculation, a lot of pain, but something new and good at the end," says Mr Yanagisawa in an exclusive interview with the Independent on Sunday.

For 10 years, a rickety Japanese structure of bad loans, widespread corruption, market decline and bankruptcies has been papered over with government money and a measure of blind optimism. But those days are over. The bad debt problem has swollen to staggering levels, the cherished Japanese concept of "jobs-for-life" has disintegrated, and the need for reform has finally outweighed the country's innate distaste for change.

It has become a battle for Japan's economic survival and everyone knows that the reform has to start with the financial system. Japan is, by some way, the world's largest creditor nation and most of those bubble-era loans were extended by the banks. If wider change in Japan is to come, it has to rest on a banking system that has got the worst of its problems behind it.

That was the thinking that gave Mr Yanagisawa his position earlier this year. The ministry – the Financial Services Agency (FSA) – was an offshoot of the unwieldy old Ministry of Finance (MoF), and Mr Yanagisawa immediately emerged as an exciting new figure to push forward with the necessary changes as its new head. When Mr Koizumi was elected two months later, his new broom activities swept away more or less everyone except for Mr Yanagisawa.

Part of what makes Mr Yanagisawa stand out is his fierce criticism of what has happened before now. Asked why Japan's problems were not identified and addressed 10 years ago, he shakes his head sadly. "After the bubble burst in 1990, people really believed that the Japanese economy would start growing again. There would be bankruptcies and bad debts, but with a growing economy, these would be absorbed.

"Another problem was that the process of inspecting the banks was bad, especially viewed from today's standards. The MOF just looked at the banks' capital and assets, and let the auditors investigate the loans. The MOF never looked at the state of the balance sheet reserves and how much was needed to cope with the bad debt problem. That was the root of so much trouble."

When he started at the FSA, Mr Yanagisawa shared Mr Koizumi's talent for creating a stir. Outwardly, Mr Yanagisawa looked classic Old Guard – even down to graduating from the same Tokyo University law department that bred countless Liberal Democrat cabinet ministers before him. Days into the job, however, he controversially announced that the bad loan problem would be solved in two to three years via a series of sweeping write-offs. But while both men have the reputation of firebrands, they are not peas in a pod.

"He obviously trusts me and we get along," says the opera-loving Mr Yanagisawa of Mr Koizumi, who is a well known Elvis Presley fan. "I have a lot of sympathy with him as a politician but he is pretty unique in his attempts to show off his individualism."

Mr Yanagisawa's visit last week to the UK and US have revealed that the duo have got a mammoth task ahead of them. Just before his visit, he made a presentation that the market interpreted as a reverse on his previous hard-line stance. It seemed it would now take seven years to remove half the bad debts, rather than three to remove them all.

When asked about this, he is apologetic: "In my recent presentation, there was a model that showed various projections about when the bad loan problem would be sorted out. People just assumed that those seven years mentioned would be how long it would take. There was just an unfortunate misunderstanding. What I honestly think is that if we work hard for three years and make an intensive effort, the problem will be well on the way to being solved."

Mr Yanagisawa may have a problem convincing people that this does not represent a climb-down. Mr Koizumi has no interest in backing a strategy that will take nearly a decade to reach fruition.

What is more critical over the next few weeks is whether the government will announce plans to use public money to help the banks. To western analysts it's a simple equation: if the government pours cash into the banks, faith in Japan is restored. If it doesn't, everyone loses confidence, Japan crashes and takes its debtor nations down with it.

"I don't think public money will be needed," says Mr Yanagisawa. "Between 1997 and 1998, the banks were twice given public funding, and it didn't work. The factor you have to look at in all this is capital adequacy ratio (CAR). At the moment, according to the banks' accounting, CAR stands at 11.7 per cent. If they continue to write off bad debts, this will head down towards the 8 per cent minimum allowed by the international banking standards. It will get close to that threshold, but I really don't think it is possible that it will cross it, so public money will not be called upon. The banks are not going to write of that quantity of bad loans."

It is not a line that the analysts agree with. The FSA is responsible for the government estimates of total bad debts – or Non-Performing Loans (NPLs) – and has come up with the eye-popping figure of 150 trillion yen (£860bn). Just two weeks ago, however, David Atkinson, the chief Japan analyst at Goldman Sachs and a drinking buddy of Mr Koizumi, put the figure at over 230 trillion.

"It's informative and interesting for us to see this," says Mr Yanagisawa carefully, "There are many ways of looking at Japan's finances, but foreign analysts are particularly sceptical about the bad loan figures. Analysts just use a different set of data, and go about dissecting it in a different way. That said, we are open to market theorists, and we are turning our ears to this sort of research."

One crucial aspect of solving the banks problem is judging how much the Japanese public will put up with. Mr Koizumi's huge approval ratings, and Mr Yanagisawa's ability to talk big on write-offs will only last so long. They are in those positions because the public has so far only heard talk, and it sounds encouraging. Unfortunately, as soon as reform gets underway, the pain will be great. Two weeks ago, Japan discovered to its horror that unemployment – at 5 per cent – had hit a post-war high. Worst-case scenarios if the reforms get through suggest that could climb as high as 14 per cent.

"My concern is not how much the public can put up with, but how much reform we can push through and how quickly it can be carried out," says Mr Yanagisawa. "The public has been putting up in silence for 10 years with low interest rates and other difficulties. One view says they can't take any more. Another view says they have put up this long so can take another year or two of pain."

Mr Yanagisawa's visit to the UK did not end in triumph. He had come here to sell the story of Japan's imminent recovery, and once again his visit became immersed in politics. Before he left, he announced Japan's staunch opposition to letting International Monetary Fund (IMF) inspectors come in to review the banks. By his interview at the Dorchester he was wavering, and by the time he hit New York, the IMF were going to be allowed in. The markets are pretty sure that the inspectors are going to find things a lot worse than Mr Yanagisawa is letting on.

But two climb-downs, three record lows for the market, and a chance encounter with Nicole Kidman still makes a pretty good week for a Japanese finance minister.

Fact file

Hakuo Yanagisawa was born 1935 in Shizuoka, Japan, and was educated at Tokyo University Law Faculty. Big opera buff.

* Entered politics after career as a diplomat. Elected to House of Representatives 1980, moved into the Ministry of Agriculture and Forestry, then chairman of the House Education Committee.

* Became secretary-general of the ruling Liberal Democratic Party in 1995, Chairman of the Financial Reconstruction Committee in 2000.

* Became Minister for Financial Affairs in 2001.

Japan's miseries:

* World's second biggest economy. GDP growth is now down to 1.6 per cent, and economists believe it could sink to 0.6 per cent in 2002. Of a population of 126 million, 3.4 million are unemployed.

* When the bubble burst in December 1989, the Nikkei 225 stock index stood at 38,915 points. Last week it had lost over 70 per cent of that value, standing at 10,500 points and a 17-year low.

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