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IMF gets ready to sort out Japan's economy

If Tom Cruise is looking for a plot for the third installment of his Mission: Impossible series, he might consider coming to Japan.

Last year's Mission: Impossible 2 had Cruise playing a member of an elite group called the Impossible Mission Force, or IMF. His character chased bad guys looking to infect the world with a deadly virus. As the plot unfolded, much investigating and snooping of secret files took place.

Here in Tokyo, meanwhile, it's the real International Monetary Fund (IMF), we're looking out for. It's poised to descend on the city with its own elite sleuths. Their mission isn't to save mankind, but the global economy from rogue elements in Japan who might be hiding the magnitude of the nation's bad loan problem. The task seems no less impossible than the ones Cruise's team manages to pull off on the big screen.

That's especially true when you consider Tokyo already is closing ranks around its most coveted secret -- how many non-performing loans banks have on their balance sheets. "We don't have the manpower to prepare for an inspection at this time," Financial Affairs Minister Hakuo Yanagisawa explained last Friday.

The IMF's plans to audit Japan are actually part of a series of reviews of some of the world's biggest countries. The UK and Canada are among those who've agreed to such inspections. Tokyo's hasty denial of the IMF's request validates analysts' biggest fear: it has something to hide.

IMF officials could be excused for wondering if Tokyo is trying to buy more time to fudge its books or stock up on shredding machines. No one's accusing Tokyo of doing so, but by rebuffing the IMF, Tokyo isn't helping its case.

Japan's authorities put problem loans held by lenders -- including regional banks, credit cooperatives and thrifts -- at about ?150 trillion. Many private forecasts are much higher.

Goldman Sachs, for example, estimates Japanese lenders' non-performing loans total are as much as ?237 trillion.

Government officials say they too are trying to figure out the true magnitude of the problem. The FSA wants to double its staff of auditors and step up its investigations. Yet the IMF wants to take matters into its own hands. The reason? Whether out of denial, incompetence or deceit, Tokyo has been underestimating its bad-loan problem for a decade.

"People are very skeptical about the Japanese authorities' ability to assess non-performing loans," in the world's second-biggest economy, said Shunichi Fukushima, a regional economist for the IMF.

Yanagisawa might confront a similarly disbelieving tone from officials in Washington this week, especially when he meets with IMF Managing Director Horst Kohler. No doubt Kohler was disappointed to hear the FSA say last week that banks probably won't reduce their non-performing loans during the next two years. Investors certainly were, as evidenced by the Nikkei 225 stock average slide to 17-year lows.

The gaping divide between Tokyo's estimates of the bad loan problem and those of private analysts are raising eyebrows. The IMF last month questioned the gap and now it wants to inspect Japan's banks "to help shed more light on these issues." That's exactly what Japan seems to want to avoid. If so, it's not hard to figure out why. If the bad loan problem is as bad as some observers think and the world finds out the true depths of the nation's financial troubles, investors may shun yen assets and consumers may stop spending.

Maybe Japan's loan crisis is less severe than private estimates suggest. By stonewalling the IMF, Tokyo suggests the opposite.

Inadvertently, Yanagisawa and others who would string the IMF along are validating concerns Japan's troubles are every bit as bad as skeptics think, and maybe worse.

Japan's economy, after all, is being kept afloat by zero percent interest rates and public works spending that can't continue indefinitely. The mountains of bad debt are standing between a vibrant Japan and another decade of economic malaise. All the IMF wants to know is whether we're talking about a Mt Fuji-size problem or Mt Everest.

The IMF's interest in Japan is telling. It's almost unthinkable that Japan, a G7 industrial nation, might require a bailout package, even if its banking system collapsed. Considering South Korea needed nearly US$60 billion in 1997, one has to conclude the IMF wouldn't have the kinds of funds Japan would need anyway. In this way, the world's second-biggest economy isn't too big to fail, but too big to save.

So if you're reading this, Tom Cruise, here's a suggested opening scene for Mission: Impossible 3: On a sleepy September evening in Tokyo, a group of black-clad commandos scale down from the roofs of government buildings all over the city. The camera zooms in on Cruise's character Ethan Hunt as he crashes through a window and yells: "Drop the files! This is an IMF raid!"
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