Japanese stocks rally despite collapse of country's tenth biggest bank

During a remarkable day in Tokyo yesterday, the stock exchange scored one of its biggest ever gains, just hours after seemingly catastrophic news: the long-awaited collapse of the country's tenth biggest bank. Richard Lloyd Parry reports from Tokyo.

The Nikkei average of 225 leading shares rose by 1,200 points or 8 per cent, to close at 16,283, the fourth largest percentage increase in its history. Remarkably, yesterday's rise followed the morning announcement that Hokkaido Takushoku Bank was to become the first Japanese commercial bank to ever to go out of business.

On Friday, after a traumatic month which saw currencies and stock markets plunge around Asia, the Nikkei index had sunk below the 15,000 barrier, and yesterday's unexpected surge appeared to reflect confidence that after years of irresolution, the problem of bad debts in Japan's banking system was finally being addressed. Hiroshi Mitsuzuka, the Finance Minister, announced yesterday that the Bank of Japan would provide special loans to cover withdrawals by Hokkaido Takushoku depositors, and hinted that public funds may also be drawn upon. The bank's non-performing loans will be bought out by the Deposit Insurance Corporation, a government- backed fund.

This combination of support for individual depositors coupled with a willingness to let an unhealthy bank go under appears to have reassured the markets that the government is serious about financial reform while keeping casualties to a minimum. "Today's step underscores that the authorities are prepared to let capitalism work," said Jesper Koll, the chief economist of J P Morgan in Japan. "The previous Japan doctrine of `too small to fail' has been abandoned and full-blown consolidation is now under way".

Until two years ago, Japanese financial institutions operated in a highly regulated and protected environment under the wing of the powerful Ministry of Finance, which has traditionally propped up ailing banks. Recently however, in an attempt to recover from a lingering slump, the Japanese government has promised to open up the financial markets to new competition and become less tolerant of lame ducks. Since 1995 three regional banks and several credit unions have gone under. Hokkaido Takushoko (also known as Hokutaku) is the first of the 20 big "city" banks to fall, and analysts in Tokyo predicted yesterday that it would not be the last.

Japanese banks declared problem loans worth 27.9 trillion yen (pounds 132bn) at the end of March, but independent reckonings put the true total much higher. Serious problems could arise if the liabilities of busted banks exceed the capacity of the Deposit Insurance Corporation, which was set up to protect depositors and maintain confidence. Yesterday, the US deputy treasury secretary, Lawrence Summer, urged the government to use public money to bail out lenders. But the use of public funds to save ill-managed institutions has proved disastrously unpopular in the past, and the political risks are high.

Hokkaido Takushoku, based in Sapporo on the northern island of Hokkaido, was known to have been ailing for months, and in August, it closed most of its overseas operations. Last month it postponed a planned merger with another Hokkaido-based bank after disagreements over how to handle its burden of bad debts, which were known to total 935bn at the end of March.

"In addition to lower credit ratings and weak stock prices, which reflected recent worries about the creditworthiness of our bank, the recent collapse of financial firms has made it increasingly difficult for us to raise money in the short-term money market," the bank said in a statement yesterday. "We had to reach a judgement that we would not be able to continue our operations."

The failure will no doubt mean an increase in the so-called "Japan premium", the mark up on borrowing which Japanese banks face on the international market. Yesterday morning, three-month Eurodollar loans in the interbank money market in London were costing Japanese institutions 0.46 per cent higher than European and US banks.

In Hokkaido, the day-to- day operations of Hokutaku will be taken over by North Pacific Bank. Among the victims of the failure will be a tie- up with Barclays Bank which agreed last June jointly to develop new financial products with Hokutaku.

Hamish McRae, page 23