The failure within a fortnight of two life insurers, Japan's biggest corporate collapses since World War II, has revived acute fears about the stability of the financial system.
"Is the Japanese financial system falling into danger again? Yes, is the short answer," says Noriko Hama, director of research at the Mitsubishi Research Institute.
The collapse of Kyoei Life Insurance Co. last Friday and Chiyoda Mutual Life Insurance Co. on October 9 showed "unresolved problems are coming to the surface," she told AFP.
"As such, it is rather healthy but it has dangerous implications."
One by one, life insurers are succumbing to a monetary policy designed to help the banking sector first and foremost.
Rock-bottom Bank of Japan interest rates, while propping up other companies, have proved the last straw for six Japanese life insurers and one general insurer since 1997.
A decade of low interest rates has prevented many insurers from making enough money to pay guaranteed yields promised to their customers in the heady 1980s.
"That is costing the sector as a whole about $26 billion a year," says Goldman Sachs Asia vice chairman, Kenneth Courtis, pointing to the huge costs of the insurers' negative interest rate margins.
But Japan's long-ruling Liberal Democratic Party (LDP) "chose to sacrifice the life insurers, because a life insurer's failure was deemed less threatening than a bank's," Courtis said.
But by "buying time for the banks, you kill the insurance companies," he said.
The government in March last year ploughed 7.4 trillion yen ($69 billion) into 15 major banks to recapitulates them as they reeled from Japan's prolonged economic slump.
To understand what LDP politicians are up to, says Hama, you need to look beyond the banking sector and into the construction industry.
Forcing the banking sector to clean its balance sheet "would mean exposing the construction sector, a very important constituency for the LDP", said the Mitsubishi Research Institute director.
According to Courtis, the true picture is only emerging now as hundreds of billions of yen transferred to banks from taxpayers are spent in massive debt-forgiveness operations for contractors.
The priority given to banks reflected the conventional wisdom that a systemic risk can arise from a run on a bank but not on an insurance company.
"It was banks first, then insurance. But the insurance sector was in much bigger trouble than anticipated," said Naoto Odagiri, a financial sector analyst with BNP Paribas in Tokyo.
However, such government thinking may be proving dangerously complacent, said Hama.
"It is nonsense to assume that life insurance companies do not pose a systemic risk. They are financed by banks with which they have cross-shareholdings," she said.
Panic among Kyoei policyholders after Chiyoda went belly-up was looking very similar to a run on a bank, she added. Neither could one discount the impact of the failures on overall economic activity.
The LDP, Hama said, had allowed this "explosive" cocktail to develop through a failure to seize the reform mettle.
Japan's foreign partners better start worrying, she said. They had demonstrated a "grossly overrated optimism because the real economy looks as if it is out the woods."
The only solution to the growing mess embroiling Japan Inc., Hama said, "is for market forces to solve the problem."
She cited the Sogo Co. Ltd. department store failure in July, when a public outcry prevented a government bailout, as "an example of how these things are resolved in a more open manner."
The clean-up "will be painful and costly", she warned, but the alternative is "a systemic risk to the global financial system (if) there is a continuation of the cover-up and a dealing of the issues in the same old way."
"There is a real danger of things getting out of hand." — (AFP)
© Agence France Presse 2000
© 2000 Mena Report (www.menareport.com)