Yanagisawa-san, how good to be back. Heat wave or no, I caught the first flight I could when word came of that weird, upsetting speech you delivered at the Foreign Correspondents' Club a few days ago. I knew the bumpy times couldn't be far off.
I mean, there you were: It's two days before the Group of Eight summit in Genoa, 10 days before national elections in Japan, and Hakuo Yanagisawa, minister of financial services and a man pegged as a reformist savior just a few years ago, is telling a roomful of reporters that "presently we don't have a financial crisis in the offing." We can let the banks dispose of bad debts out of operating profit, you say, and reports to the contrary -- the many reports to the contrary -- are "extreme and exaggerated." Then comes the number everyone is waiting for -- right at the end, as if you have to choke it out. What's the value of the non-performing loans in the banking system, someone asks from the back of the room. "NPLs held by the 15 major banks are in the amount of ?18 trillion (US$146 billion)," you reply sanguinely. End of luncheon.
And you find "the mistrusting factor" in the media frustrating? You find it "difficult to accept" that there are doubts in the market? My dear Yanagisawa, you ought to gauge the level of doubt in Washington these days.
PHOTO: AFP
Anyway, doubts in the market is putting it mildly. Banking stocks led the Nikkei 225 to its lowest level since January 1985 after you spoke. That's 16 years ago, Yanagisawa-san -- before the Plaza Accord, before the bubble, and all the rest of it. As to the bounce afterward, on the expectation that a 22 percent drop in bank stocks this year would force you to take the debt problem seriously, people see what they want to see, don't they? And they don't hear what they don't want to hear.
For my money, you are right about the doubters now: There shouldn't be any. Read properly, your speech amounts to a statement of government policy. If there is no crisis, it follows that there is no drastic action to take. For all the talk of a new bank plan, neither Prime Minister Junichiro Koizumi nor any of his ministers is likely to have anything new to say after the July 29 elections -- only a new way of saying the same thing, perhaps.
Being a graduate of the Tokyo Law faculty, you were careful to put out a number that was technically correct. You counted the very worst of the very worst of the loans extended by the 15 largest commercial banks. And you were right: There's ?18 trillion of them. It's also true that the first few steps up Everest are no more difficult than walking to the corner market.
Forgive me for saying so, Yanagisawa-san, but in the circumstances your presentation seems grossly irresponsible. Bad debt numbers bounce around this town like pachinko balls; everyone's got a set of them. But yours is surely among the most meaningless.
And so we must enter briefly upon the business of counting.
There are many people here who are clever with a calculator -- the doubters, you call them -- and altogether they paint an interesting picture.
Remember back in April, when the opposition Democratic Party forced the Financial Services Agency to admit that the true count of troubled loans came to ?151 trillion? Of course you do, since your speech was, among other things, a veiled political attack on the Democrats. Anyway, the core of the issue is what you count, as the Democrats made clear. And that's where almost everyone differs from you.
Stephen Church, the Tokyo representative of Analytica Japan, a financial research consultancy, puts net bad loans in the broad banking system at ?190 trillion as of March. And that includes a highly conservative estimate of NPLs in the public sector based on a narrow definition of public banking -- a subject no one, including yourself, ever goes near.
Church's number is 38 percent of gross domestic product, compared with about 6.5 percent in the Swedish crisis of a decade ago and about 3 percent in the US savings-and-loan crisis. You want to be compared with the US at this point, but your problems more closely resemble Latin America's.
"Disinformation and near-zero interest rates are keeping a lid on the situation," Church says. "No one has rolled forward a major banking crisis like this -- it's a first in financial history. And as far as one can tell from Yanagisawa, they're going to continue rolling it forward." Over at Goldman Sachs -- they used to be in the covered warrants market -- a managing director named David Atkinson has just produced an extraordinary report called Totally Rethinking Japanese Asset Quality. I like the title, and what's inside delivers on the promise. Atkinson led a team that spent months developing bottom-up profit-to-debt ratios for the 2,823 non- financial companies listed on the Tokyo exchange. So far as I can see, it's among the most reliable assessments of the debt situation we now have.
Did you know that the average Japanese corporation is servicing its debt at 2.2 percent? It's important, because with rates so low a lot of companies that can't possibly repay their principal go into the books as sound. So they're on the watch list, which you don't seem to worry much about, when, anywhere else, they would be bankrupt or in the bankruptcy risk category.
It's not a question of fudging or fiddling at the banks; it's a question of faulty hurdles.
Changes everything. So does deflation, because we're in this odd situation where real rates are higher than nominal rates.
Since deflation reduces a company's actual ability to repay its debt, Atkinson stripped it out by measuring operating profit as a proportion of liabilities. Though companies may have other sources of income, it's a reasonable way of judging true health or illness.
Anyway, you've heard Atkinson's numbers, perhaps: total NPLs of ?237 trillion, a considerable bump upward from the figure wrung from the FSA last spring. Even more interesting is what happens within the loan categories: Atkinson's "bankrupt" and "bankruptcy risk" loans swell to ?170 trillion; your figure is ?24 trillion. His "watch" list shrinks to ?66 trillion; yours is not quite twice that.
As to that ?18 trillion in bad loans at the largest banks, there is a message in the number, and it shouldn't be missed. The stated plan now, made much of when it was announced in March, is to dispose of those NPLs within three years. But that's the time that ordinarily elapses between the recognition of a risky loan and the disposal of it. So as I read it, you've taken the long way around to indicate that the plan is indeed to do nothing.
Now you don't see it, now you do -- it's that sort of thing.
And that is what I mean by irresponsible: Japan can redefine what's worth worrying about any way it wishes, but it doesn't alter anything. "While there's a new government policy," as Atkinson puts it, "there's not a new economic reality." In view of the true numbers, the way to a new economic reality would seem to be glaringly evident, though it will involve a lot more than the banks' operating profit: Break the cycle of asset deflation by way of aggressive debt monetization. It may not appeal to the supply-siders, but it's the cure for the disease Atkinson so well measures.
I will watch the elections this Sunday with great interest, Yanagisawa-san, as I am sure you will. But I'll be under no illusions as to what a victory for the governing Liberal Democrats will mean for the future of the debt problem.
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