View from Tokyo: Japan draws a line in the sand

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The Independent Online
GEORGE BUSH did it with Saddam Hussein in the desert. Now Tsutomu Hata, Japan's finance minister, has done it with the country's financial system in Tokyo. A line has been drawn in the sand.

Last week's emergency press conference given by Mr Hata after the Tokyo stock market plunged to a six-and-a-half year low - with the Nikkei 225 stock average at 14,309 - followed by yesterday's larger than expected supplementary budget, have finally injected some confidence into the market. It closed yesterday at just a shade under 18,000 as the government announced details of a supplementary budget worth some Y10,000bn ( pounds 41bn) in the form of tax cuts, help for banks and public works projects.

As economists point out, the immediate impact of the supplementary budget on Japan's real economy will be minimal. But as far as the stock market is concerned, the Ministry of Finance has drawn its line in the sand at 15,000 for the Nikkei.

'It has become clear that the government's attack on asset price inflation is over,' said Jesper Koll, economist for SG Warburg in Tokyo. 'Now they are beginning to step in a completely different direction.'

Up to now, the Ministry of Finance and the Bank of Japan had seemed conspicuously out of step with private economists in their views on Japan's asset deflation and its effects on the health of financial institutions. Rumours of impending bankruptcies and huge unadmitted bad property loans were circulating in the stock market, depressing prices. At the same time the falling value in share portfolios was forcing banks to sell more stocks, contributing to a vicious circle. But the official government position was that this was just part of the 'adjustment phase' after the deflation of the economic bubble of the late Eighties.

All this has changed now. Of yesterday's supplementary budget, one third is dedicated to supporting the financial system. 'A meltdown (in the financial system) has been avoided,' Mr Koll said. At least for the time being.

The heart of the banks' problems is the huge amount of money they have lent to speculators in the past five years for property or even stock purchasing. Many of these loans were secured with property as collateral, which at the time seemed a rock- solid guarantee as property prices continued to rise. Now that the property market has gone into decline along with the stock market and the economy as a whole, banks are left with a lot of bad loans, and, where these loans have defaulted, with the original property collateral.

The Ministry of Finance (MoF) finally admitted to itself that the overall Japanese economy was not going to recover quickly enough to allow the banks to absorb all their bad loans naturally. So with the help of the Industrial Bank of Japan and Mitsubishi Bank a plan was devised to set up a new finance company, which would buy up the property the banks had inherited from non-performing loans but whose value had fallen since the original loans were made.

At the same time the government is going to allow the banks greater leniency in writing off bad loans against taxes. These moves followed an intensive series of visits by MoF officials to banks earlier this month to take a long, hard look at the real extent of the banks' bad debts. MoF had previously been saying that bad debts of the large commercial banks amounted to Y8,000bn, but economists had estimated the real figure was four or five times as high.

After their reassessment of the banks' health, one MoF official commented wryly: 'We don't have to nationalise the banking system - yet.' Their minister, Mr Hata, admitted in public that the banking system was facing its worst crisis since the Second World War.

However, there are still many uncertainties in the scheme to dig the banks out of their black hole. First, a mechanism has to be worked out to determine which properties have to be bought from which banks, and at what price. Second, there is the problem of what to do with these properties. The government's supplementary budget yesterday made money available for the purchase of land for public works projects. But many of the properties held as dud collateral by the banks are small urban plots that could not possibly be used for the roads and bridges foreseen by the government.

By far the biggest problem, however, is who is to pay for this property-absorbing magic vacuum cleaner. The government, for the time being, is reluctant to commit public money to the plan. The banks themselves would need some very attractive tax advantages to invest their own money in the property purchasing scheme, otherwise they would just be digging another hole for themselves to fall into.

But after taking a battering over the past few months, banks' share prices are enjoying a reprieve after the sudden U-turn from MoF. Things are different, however, in the broader economic picture.

Officially, Japan's gross national product for the current fiscal year is still predicted to grow at 3.5 per cent. For months economists have been saying that figure is too optimistic. Even after yesterday's fiscal package, Mr Koll estimates GNP growth at 1.5 per cent this year - with a slow recovery stretching into the next fiscal year. 'The downward momentum of corporate profits, consumer spending and capital expenditure is continuing, and is unlikely to be reversed before next summer,' he said.

These dark economic clouds will continue to hang over all attempts to help the banks and stop another fall in the stock market. The ministry may have drawn its line in the sand, but as Mr Bush discovered in another context, action had to follow words to defend this line.

(Photograph omitted)