While Taiwan ponders the prospects of a financial "crisis," there may be some comfort in knowing that Taiwan's struggling banks may be in better shape than their counterparts in Japan. Over 18 months ago, Japan's major banks announced record write-offs for bad loans and record losses. In turn, it was declared that bad debts from the late 1980's bubble economy had been eliminated. They also pledged to post pre-tax profits during the current fiscal year.
Then in April 2000, it was announced that a new record was reached for bad loan write-offs and losses for all the major banks at the end of 1999 fiscal year. It was reported that 17 major banks wrote off ?10.065 trillion in bad loans in that reporting season, with all but the Bank of Tokyo-Mitsubishi (BTM) reporting losses.
Total losses for the major banks came to a total of ?5.99 trillion in fiscal 1999, an amount that was ?1.74 trillion more than 1998. Sakura posted the largest loss of ?754 billion. Once the world's largest company as measured by market capitalization, the Industrial Bank of Japan made ?924 billion worth of provisions leading to a pre-tax loss of ?352 billion after losing ?358 billion in 1998. Japan's Financial Supervisory Agency has required all but BTM to accept public bail-outs totaling ?7.46 trillion.
Now a report for the first half of fiscal 2000 indicates a mixed report on profits of Japan's main banks while problem loans continued to pile up. Most of the declines in profits and revenues were attributed to stock market woes, loan-loss charges and investments in information technology.
These results are of considerable interest since several financial institutions are preparing for consolidation in April 2001. For example, the Bank of Tokyo-Mitsubishi and the Mitsubishi Trust & Banking Corp. will merge and become Mitsubishi-Tokyo Financial Group in April 2001, forming Japan's fourth-largest banking group in terms of total assets. There is good reason to remain concerned about asset-quality problems in Japan arising from exposure to real estate, construction and non-bank finance. These are the most vulnerable sectors of its economy. Then there is the impending impact of corporate debt restructuring and continuing write-offs of bad loans currently held. It can also be expected that loans considered to be sound at the moment will turn sour with ongoing corporate shakeouts. The evidence suggests that problem loans remaining on their books are at about the same scale as those currently written off. At the end of the 1999 fiscal year, the total value of problem loans was said to be ?21 trillion.
As it is, credit assessment by Japan's banks is questionable. After the Financial Reconstruction Commission announced that borrowers classified by the banks as sound accounted for up to 75 percent of eventual loan losses, there were expressions of surprise when listed companies and non-bank affiliates of major banks went belly up.
At present, Japan's banks hold reserves worth between ?21 trillion and ?25 trillion. But estimates suggest that there are ?132 trillion at risk in real estate, construction and non-bank finance.
This situation borders on the tragic and implies considerably more downside risk in Japan's financial system. Until the banking crisis is resolved, Japan will be doomed to a prolonged period of sluggish growth, at best.
Yet even this is but a small first step towards the overall restructuring of Japan's economy. Despite announcement of yet another supplemental budget, neither Keynesian pump priming nor reflation will induce Japanese consumers or businesses to spend their way out of the ongoing slump. The future tax burden of deficit spending combined with increased job insecurity and shaky pension plans continues to frighten Japanese to become a country of currency hoarders. Despite nearly a trillion dollars thrown at the economy since the early 1990s, retail sales in Japan continue to slump as consumers stockpile their financial resources against an uncertain future.
Japan's leaders should consider a permanent and radical restructuring of tax policies. Following America's successes of supply side economics from the 1980s, the implementation of deep cuts in income and corporate taxes should be considered. This would allow citizens to exercise greater control over their own resources and induce them to spend more today.
Such cuts can more effectively encourage increases in household consumption and business investment than artificially low interest rates or boosting inflation.
Christopher Lingle is Global Strategist for eConoLytics.com.
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