Japan's latest plan for slashing bad loans

By SHIHOKO GOTO, Senior Business Correspondent  |  Oct. 29, 2001 at 6:13 PM
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WASHINGTON, Oct. 29 (UPI) -- As the Japanese economy faced little or no growth for the past decade, a number of efforts have been made to rid the country of bad loans which have stifled its banking system and thwarted hopes for recovery.

The latest endeavor to establish a quasi-public organization to buy some of the problematic loans, has made some progress in clearing out the mounting bad debt, but the government hopes to now allow the Resolution and Collection Corp. to wield greater power to deal with the situation.

On Tuesday, the ruling three-party coalition government led by Prime Minister Junichiro Koizumi is expected to put forward a bill to parliament that amends the existing Financial Reconstruction Law and give greater authority to the RCC to buy out problematic loans that have increased since the burst of the bubble economy in the early 1990s.

During the height of Japan's growth from the mid-1980s until the early 1990s, Japanese investors were eager to snap up real estate and buy up equities often using land assets as collateral to borrow more money from banks. Since then, however, share prices nearly dropped by three-quarters, and real estate prices have plunged to nearly a tenth of their value in some ritziest parts of Tokyo.

The banks, which in turn lent money on the back of the anticipated high land prices, have been crushed by mounting debts accumulated by companies which are unable to pay back their loans. The result is that banks have been less than forthcoming in lending to companies that are not blue chip for the past decade, which in turn has frozen up credit availability for the bulk of Japanese businesses. By keeping away financing from smaller-sized enterprises, Japan may have missed out on an opportunity to nurture a new generation of entrepreneurs.

Any breakthrough in reducing the mountain of debt, therefore, would benefit businesses of all sizes and ultimately bolster the sagging economy. The government officially estimates that Japan has at least 43 trillion yen ($37.1 billion) in bad loans, although some private sector analysts see the number considerably larger than the official estimate.

The government's proposal is to expand the Resolution and Collection Corp.'s power so that it can dispose of the bad loans within three years after purchasing them from debt-laden banks. It also hopes to allow the organization to set up a fund to help companies previously crippled by bad loans to get back on track financially.

In particular, the organization should be able to buy bad loans from banks at market value, as well as those loans that have the potential to fall still further.

If the law is passed, it would be a coup for the Koizumi Cabinet as one of the first concrete steps to improve the domestic economy fundamentally, without resorting to more spending or increasing taxes.

Some analysts are, however, concerned that those in the RCC, who are by and large bureaucrats from economic ministries such as the Ministry of Finance, do not have the ability or the willpower to push forward with the plans that the RCC is ultimately set to do.

Moreover, the RCC uses taxpayers' money to buy the loans, but the law currently prevents the organization from incurring losses when it sells bad loans. So far, that has lead the organization to buy out loans at deep discounts, which has discouraged commercial banks from selling their loans to the RCC. Thus, the organization has actually hampered banks from disposing their soured debts.

Whether that can actually be changed this time around remains unclear. What the government has indicated, however, is that it may be forced to inject public funds into troubled banks if there is a risk of a financial crisis.

That won't be the only sector of the economy that will require taxpayers' money to stay afloat. Indeed, the government has already decided to pump 3 trillion yen ($2.5 billion) as a supplementary stimulus package to keep the economic engine revving amid a global economic slowdown. Some argue, however, that this may not be enough, and an additional budget will be necessary to keep the economy from falling further.

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