Bank of Japan governor Toshi-hiko Fukui said yesterday that Japan could suffer a financial crisis "at any time" unless its shaky banking sector is fixed.
The warning came after the bank downgraded its assessment of the economy for the first time in six months on fears about the impact of SARS, a weak dollar and risks at home after the government decided to bail out a major bank.
"If appropriate solutions to the problems of financial institutions are not carried out, we have to say Japan faces a situation where a so-called financial crisis could be triggered at any time," Fukui said.
"Financial institutions are making efforts to overcome the bad-loan issue and at the same time are seeking to create more highly profitable systems to strengthen their health," Fukui told a parliamentary committee.
"Against this background, we have to say that financial institutions still face difficult hurdles to overcome," Fukui noted, adding that this meant their fundamentals remained weak.
The government has instructed banks to halve the ratio of bad loans on their books -- cited as a root cause of Japan's economic slump -- by March 2005. Lenders must also evaluate their assets using stricter standards, which have eroded their capital base.
Japan's fifth largest bank, Resona Holding Inc, on Saturday was forced to ask for help after admitting its capital adequacy ratio had fallen below required levels of 4 percent.
Economic and Financial Affairs Minister Heizo Takenaka said the government may end up paying Japanese Yen 2.3 trillion (US$19.7 billion) to bail out Resona Bank, the group's core banking unit.