With new statistics showing that Japan's short-lived recovery is stalling, the nation's economy minister introduced on Friday measures to force banks to confront their long-running problems with bad loans.
Borrowing an accounting method from the US, the minister, Heizo Takenaka, said he would make banks announce results for their fiscal year, which ends in March, using a method called discounted cash-flow analysis, which requires banks to size up each borrower's ability to repay, instead of using the traditional method here, which relies on historical bankruptcy rates for the borrower's industry. The change will most likely force the banks to increase their reserves to cover loan losses.
In addition, banks will be subjected to another round of inspections for bad loans. The last round of inspections by the Financial Services Agency found that banks had underestimated their bad loans by 36 percent, Takenaka reported earlier this month. And taking an unorthodox step toward cleaning up bank books, the Bank of Japan, the nation's central bank, started a new program on Friday of buying bad loans from commercial banks.
In his plan, Takenaka postponed action on two issues: the nationalization of banks and the practice of counting tax credits as capital. By the end of May, a committee is to report on the legalities of nationalizing banks here.
The tax credit issue was seen as too controversial because tax credits at some banks here account for as much as half of their capital. Critics say this is an accounting sleight of hand because shaky banks have no hope of ever paying significant amounts of taxes.
The plan has provoked dueling essays by analysts.
"The impact will largely depend on how it is implemented," wrote Richard Jerram, chief economist for ING Barings Japan. "We doubt the plan implies serious problems for the banks."
Taking a more optimistic view, James Fiorillo, senior banking analyst for Commerz Securities Japan, wrote: "The Takenaka financial plan represents major change. Mr. Takenaka is threatening no less than doing away with the old way of doing business in Japan."
Offering evidence that the plan has teeth and threatens the politically influential banking interests, senior members of the ruling Liberal Democratic Party have urged Takenaka to resign. On Thursday, Akihiko Kumashiro, head of the party's financial reconstruction committee, said to applause of his faction members: "Mr. Takenaka must at least be replaced within December."
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