Japanese banking crisis: dire predicitons premature
Just how bad is the condition of the Japanese financial sector? On any realistic assessment the problems are serious, and the prospect of the world's largest creditor nation encountering a period of even more acute financial distress is worrisome. Yet some recent analysis has had an almost hysterical tone, and some of the nightmare scenarios are fanciful. Research on the Japanese economy, reveals that the extent of Japanese bank loans in East Asia (US$260 billion was outstanding at the end of 1996) does not necessarily mean that a high proportion of these loans will turn bad. For example, around 55 per cent of outstanding Japanese credit to East Asia is in Singapore and Hong Kong. By and large, this concentration of lending does not reflect Japanese financing of local property speculators in those economies; it occurs because Japanese banks go to Hong Kong and Singapore to do business with the many reputable international institutions that choose those locations as their bases in the Asian time zone. Needless to say, these firms, which include prominent US and European banks, do not necessarily present significant default risks. Nor is Japanese capital that has gone elsewhere in the region at serious risk. In recent years, many Japanese manufacturers have moved their bases into East Asia in order to lower production costs. The strong Japanese presence in the Malaysian and Indonesian electronics industries is a case in point. Much of the Japanese capital that has flooded into East Asia is supporting these blue-chip Japanese firms rather than dubious speculators. Ironically, some of these manufacturers may even have become more, rather than less, creditworthy as a result of the East Asian currency crisis, since the depreciation of their local currency gives them a competitive advantage when they export back to Japan. Taking these factors into account, insiders estimate that about five per cent of Japanese banks' loans in East Asia could now go bad. Compared with the bad loans that Japanese banks are already nursing, this is not as serious as many people think. In dollar terms, about US$13 billion is probably at serious risk. To put that in perspective, roughly US$640 billion in bad debts is outstanding and about US$84 billion is estimated to have been written off in the fiscal year just ended. Alongside those numbers, the problem loans in East Asia are minor. Although there are likely to be some heavy losses in the banking sector over the coming year as a result of accelerated bad-loan write-offs, the problems are under control and the markets are well aware of this. Most of the major city banks had reasonably healthy reserves that covered the bulk of their bad loans at the end of the 1997 fiscal year. Some important banks are at risk of having their credit ratings reduced to extremely low levels but most have their problems under control and there is little suggestion that the institutions which are in crisis are in danger of dragging the entire system down with them. There are weak institutions that are under threat of liquidation, and there will be more significant bankruptcies before the financial system has purged these bad debts. But the more dire predictions about the fate of the Japanese financial markets and the markets which depend on them are premature. *Dr Luke Gower is Associate Director of the Australia-Japan Research Centre. His research is focused on developments in Japan's financial system. He has just completed a review of current developments in the Japanese economy for Asia Pacific Profiles (FT Reports, Singapore).