The "Japan Premium" has returned, spelling bad news for Japanese banks as the international lending markets wise up to their failure to tackle the crippling legacy of the bubble economy. Since the start of this year, the premium charged to Japanese banks seeking funds in the London interbank market has risen by up to 20 basis points, or 0.2 percent, over the interest rate offered to their stronger foreign rivals. It is still far from reaching the extra 100 basis points that Japanese banks were charged by foreign counterparts at the height of the 1997-98 Asian financial crisis.
But "what's important is not so much the level, as the reappearance itself," says an executive with a major Australian bank in Tokyo. The return of the surcharge represents a vote of no confidence in the Japanese banking community, and its efforts to shake off the effects of the bubble economy collapse a decade ago through a wave of mega-mergers.
One recent transaction shows that Japanese banking leaders have learned little from their extravagant lending of the 1980s, which has left them with a mountain of bad debt and loss-making property investments. A short-term credit line of 1,200 billion yen ($10.3 billion) extended by Japanese banks to NTT DoCoMo Inc. on January 5, to help the mobile telephone giant fund an overseas buying spree, was priced at just one basis point over the London Interbank Offering Rate (LIBOR).
Major banks borrow at the LIBOR, the reference point for international transactions, to refinance their own operations. So the DoCoMo credit line gave the Japanese lending consortium, led by Bank of Tokyo-Mitsubishi Ltd., practically zero return on its investment.
"It's dumping, financed by the Japanese taxpayer," protested a European bank executive, referring to the 7,500 billion yen that the Japanese government shelled out in March 1999 to recapitalize 15 leading banks. That bailout, foreign bankers complain, has left Japanese banks awash with cash which they cannot offload to debt-ridden domestic companies, and which they are therefore dumping on the foreign market at absurd rates of interest. The absurdities do not end there.
The three partners of the Mizuho Financial Group — Dai-Ichi Kangyo Bank Ltd., Fuji Bank Ltd. and Industrial Bank of Japan Ltd. —are competing among themselves to offer rock-bottom lending with zero margins of profit. "We think they're jostling among themselves to see who can get the upper hand in the (Mizuho) merger," said another foreign banker.
For Benn Steil, an economist on the US Council on Foreign Relations, the Mizuho alliance is indicative of the banking merger craze in Japan: "Bank mergers: three times zero equals zero," he commented at a recent symposium. Steil was also scathing about the levels of non-performing loans (NPLs) that 136 Japanese banks reported to the Financial Services Agency (FSA) last week.
The banks, despite their well-publicized efforts to reduce their vast debt, said their NPLs had risen to 63.9 trillion yen by last September, up from 63.4 trillion yen six months earlier. The government has stressed that reducing the banks' NPLs is key to restoring the health of the world's second-biggest economy. But analysts say the banks are seriously miscalculating the true level by defining bad loans too narrowly.
"According to certain estimates, problem loans in the books of the banks may be as high as 75 trillion yen," said Steil. "If it is the case, it's even worse than where we were five years ago, before the banks were recapitalized. The situation may be getting worse."
Corporate bankruptcies are running at record highs and the slump on the Tokyo stock market is destroying banks' unrealized gains on their vast equity holdings, setting the stage for a new financial crisis when the fiscal year ends on March 31. That is when emergency laws that allowed the 1999 recapitalization expire. Last month, the Bank of Japan guaranteed liquidity to the banks in a bid to ward off any fresh panic.
"The FSA will somewhat relax the supervisory policy toward the end of March, otherwise they may be criticized that they triggered the crisis," said an official in a Japanese research centre. If all else fails, says the equity strategist at a US investment bank, Japan's government may have no option but to launch a "de facto nationalization of the major banks" to prevent the economy imploding. "The stock market has the capacity to pose a very big political problem," he warned.—(AFP)
© Agence France Presse 2000
© 2001 Mena Report (www.menareport.com)
