The Bloom Is off Japan's Big Banks

JUST three years ago, Japan's big banks were lenders to the world, flush with money from speculative markets in stocks and land.

But after nearly a 50 percent price drop in those markets, the banks are being hung out to dry for their excesses. Officials are telling them that taxpayers will not rescue them from a "debt overhang" that could run as high as $500 billion.

Not only is this wringing-out of bad loans and property deflation putting a squeeze on bank lending in the "post-bubble" Japanese economy, but the global economy may suffer as well. Japanese banks, which are among the largest in the world, have all but stopped recycling the country's immense trade surplus.

"This trend should not continue," says Mokato Ustumi, special adviser to Japan's Finance Ministry, who says he is "nervous" that Japan is no longer serving as global banker, especially to developing nations.

Analysts foresee a deep change in the Japan that emerges from this banking crisis. Japan's days as a fast-growing Asian economy could be over and it may settle into a Western-style "mature" economy with slower growth. Also, some sacred practices such as never laying off workers and not allowing a single bank to fail since World War II will be seriously challenged.

Japanese officials, in an unusual spirit of laissez-faire discipline, are willing to accept lower economic growth rates rather than bail out the financial system, according to Jesper Koll, chief economist at S. G. Warburg Securities.

Little consensus can be found in Tokyo financial circles about the amount of bad loans. Last month, the Finance Ministry estimated that bad loans at 21 major Japanese banks had nearly doubled in six months to more than $100 billion. Analysts say the figure is much higher, because banks can easily hide the extent of the problem.

"Bad loans will continue to increase, but the pace of the rise is falling," says Finance Minister Tsutomu Hata. "Considering their resources, the banks should be able to cope with it, although it will take them some time."

The loan losses are so high, according to Mr. Koll, that available capital is not enough to support existing loans, let alone permit any growth in lending.

Denied any government bailout, 30 financial institutions last month agreed to set up and fund a new company by January that will buy, at a big discount, their nonperforming real-estate loans. The company will try to sell the real estate. Healthier banks will, in effect, help the troubled ones.

While on paper the plan helps wipe bad debt off bank portfolios, the new firm may not be able to sell the properties at a price acceptable to the banks, which would have to take them back.

"This has never been done before. We won't know until we give it a try," says Tsuneo Wakai, chairman of the Federation of Bankers' Associations of Japan.

Mr. Wakai says the new company will rely on "appropriate market prices" set by outside analysts. To prevent the banks from colluding on setting sale prices, Japan's Fair Trade Commission plans to monitor the company. Many of the properties are in uneven lot sizes or undesirable locations, and could be difficult to sell. And once the company does start selling, prices could be so low that it may trigger a further fall in the market.

To add to the problems, Jap-anese banks must meet stiffer international standards on capital adequacy by next spring. Due to the steep fall of their stock holdings, banks could have trouble reaching the new capital-to-asset ratio requirements.

One sign of the banks' woes is that Moody's Investors Services Inc. lowered the credit rating of four trust banks in November. The agency stated it would have given even lower ratings if it were not for expectations in Japan that the government will be a "safety net" for banks.

No top Japanese official has recently talked of a bank bailout. "I don't think that Japanese taxpayers will be happy to see their money injected in any organization taking care of a post-bubble phenomenon," Mr. Utsumi says. Some of the blame, however, may eventually fall on government, which might then provide tax breaks to ailing banks.

"The Japanese financial system is only half deregulated," says Peter Tasker, a securities strategist and author of "The End of the Japanese Golden Age." "This smothers the responsibilities of investors to suffer from their mistakes."

Mr. Tasker says the current recession in Japan is fundamentally different from past ones, which were caused by the external shocks of oil-price rises and currency rate fluctuations. This one was caused by the government's inflationary measures of the late 1980s, he says. "The result is that the recession's epicenter is in real-estate assets and financial markets, not in the manufacturing industry."

"Because of the myth that banks will never go bankrupt in Japan, too many made risky loans," Tasker says. "The lack of self-accountability is the cause of the problem."

SOME analysts say the banks are trying to buy time, hoping the economy will perk up by next summer and raise property prices. Most forecasts for next year's economic growth rate vary from minus 2 percent to 4 percent. "There will be no recovery next year that you can call a recovery," Tasker says. "Weak banks will have to fold. The system needs some bankruptcies.... But will the Japanese system allow it to happen?"

When asked if banks were responsible for the lending binge, federation chief Wakai responds: "The banking industry is doing a lot of soul searching about this."