View from Tokyo: Bad debts leave little for economy to bank on

The top 11 Japanese banks tried to put a brave face on their half-yearly results last week, but no one was comforted.

With an average fall of 22 per cent in profits, forecasts of further declines for the full fiscal year, mounting bad debts and no end to the general economic recession in sight, the blue suits in Marunouchi are not in the best of spirits.

The stock market chipped in with its own whimpering lament as the Nikkei 225 closed on Friday at 16,726, down 496 points on the day and a full 17 per cent since the beginning of October.

It was the first time since 5 March that the index had fallen below 17,000.

There are several reasons for concern at the banks' particular plight. First is the effective credit squeeze they are applying to the economy as a whole.

With their problem loans mounting, they are increasingly unwilling to lend to small and medium-sized businesses. According to figures released by the Bank of Japan on Friday, overall bank lending has increased by only 1.3 per cent from a year ago.

Second are the mounting bad loans themselves. Last week the 11 banks announced they were carrying a total of Y9,248bn ( pounds 57.8bn) in non-performing loans.

Even accepting these figures at face value, that represents a jump of 9.6 per cent compared with the bad loan figures reported last March. Reserves against bad loans, on the other hand, rose only 5.5 per cent to Y2,980bn ( pounds 18.6bn), showing that bad debts are increasing more quickly than the banks can deal with them.

However, banking analysts say the banks continue to under-report their bad loans - notably excluding liabilities of subsidiaries for which they are entirely responsible but are able to keep off their books.

The real bad debt figure for the 11 banks is estimated at anywhere between Y20,000bn and Y30,000bn, at least double what has so far been revealed.

And, with property prices continuing to fall in Tokyo and other major cities, there is no sign of light at the end of the tunnel. Much of the banks' bad loans were made to property speculators in the late Eighties.

CLEARING THE BOOKS

The ministry of finance, fully aware that the bad loans are constraining the banks' ability to lend new money, has been telling the banks that they should aim to clear their books within three years - by writedowns, restructurings, write-offs, whatever it takes.

Publicly, the banks say they can deal with the problem in three years. Privately, many are not so confident.

But the write-offs have begun - a total of Y996bn ( pounds 6.2bn) in the past six months. And, for the first time, big companies are starting to go bankrupt as banks pull the plug rather than maintain the old custom where the lead bank would bail out a troubled client with the bank's money and some of the bank's own managers on secondment.

The biggest bankruptcy since the war was announced last month, when the Muramoto construction company folded with Y590bn ( pounds 3.7bn) in debts. A host of smaller property developers or companies which set up subsidiaries to speculate in property are being liquidated across the country as the banks finally admit that the loans they have made will never be recoverable.

To cover this, the banks have been selling off equities they have been holding on their own books, and this has led to another problem - a game of diminishing returns.

The more stocks the banks sell, the more the market falls, lowering the value of their remaining shareholdings and depressing the entire market at the same time.

The government has been doing little of late to support the stock market, but one area where it is still committed to intervention is the labour market. With unemployment at 2.6 per cent and continuing to creep up, bureaucrats and ministers fear that Japan's social contract of guaranteed jobs for life in exchange for labour force obedience may be on the verge of breaking down.

Surveys show that a majority of companies are engaged in job-shedding programmes by early retirement, transfers to subsidiaries, non-renewal of temporary contracts.

Economists predict that by next year the unemployment rate will exceed the all-time high of 3.1 per cent reached in 1987. Already the ratio of job seekers to job offers has fallen to 0.69.

To counter this, the government is establishing new subsidies and expanding existing schemes to help companies keep their workforces. Companies which accept workers on a temporary basis from other firms will receive between 10 and 20 per cent of these workers' wages from the government.

CREATING NEW JOBS

Grants and low interest loans will be provided to companies undergoing restructuring if they refrain from laying off workers. And companies creating new jobs will also receive subsidies.

The finance ministry is going to be asked to earmark Y100bn ( pounds 625m) for the employment support measures which the government wants to begin as early as next January.

Domestic initiatives come easier than international initiatives. As the final deadline for the Gatt negotiations approaches Japan is still hedging on the rice import issue.

Although Tokyo, with its reliance on exports, stands to lose more than most if the Gatt talks break down, the government has shown no appetite for taking a leading role in the negotiations by confronting the politically sensitive rice issue at home.

Instead, Japan is waiting for the last possible moment to give in, allowing it to present the decision to allow rice imports as something forced on it by foreign pressure, so avoid taking he country's farmers.

At present all rice imports are banned, although ironically this year's rice harvest has been so bad that an exception has been made to bring in foreign rice to make up for the domestic shortfall.

Under the Gatt proposals all non-tariff barriers will be replaced by tariffs - with a view to their ultimate abolition - on agricultural goods.

But, while Japanese negotiators are expected to give in on rice in the coming fortnight, Tokyo appears to have negotiated a special exemption for itself in advance with the US, which other Gatt members will be pressured to accept.

Under this deal the introduction of tariffs will be postponed for six years, giving politicians a long breathing space to deal with the farm lobby.