THE once high-flying economy of Japan has been thrown an $85.4 billion parachute by the government in hopes of halting a rapid descent of the stock market.
But the rescue plan, announced last Friday, has left the biggest problem still hanging. Japanese banks, among the largest in the world, are still sitting on so much bad debt from the bursting of a "bubble" property market that officials have asked banks not to reveal the size of their red ink for fear that the news might further depress markets.
"The government doesn't know the size of the problem," says Russell Jones, economist at UBS Phillips and Drew International Ltd. "But half the problem was just getting the government to look concerned."
The main aim of the emergency package is to restore investor confidence in financial markets that were near collapse by putting government money into the stock market ($9 billion) and into government construction, including the advance purchase of land for public works ($69.3 billion), with an eye toward supporting real estate prices.
Rather than help banks by buying up properties left as collateral from bad loans, the government has made a vague proposal for a new corporation that would sell the properties and clear the banks' portfolios of their defaulted loans.
The organization would be similar to the Resolution Trust Corporation set up to rescue the savings-and-loan industry in the United States. But Prime Minister Kiichi Miyazawa said yesterday the government might actually give aid directly to banks with bad loans "if needed."
"The healthy banks will be forced to bail out the unhealthy ones," says banking analyst Alicia Ogawa of S. G. Warburg Securities (Japan) Inc. "But the healthy ones are not so healthy." Watching the property market
Many analysts estimate the amount of bad debt held by banks to be at least $80 billion and rising daily as more manufacturing companies report losses. Japanese banks lent money lavishly in the late 1980s and helped fuel a boom in urban land prices that is now collapsing.
"There must be 10 percent of the banks' loans that are not paying now," says Ms. Ogawa, who adds that the government's central bank is forcing the big banks to stand by their loans. And the Finance Ministry has told banks and other institutions that they need not report stock evaluation losses as required each September. "All depends on the property market. Everybody's waiting around to see who is going to be the first to sell at what price. But now nobody's making a move."
After the proposed corporation is formed, which will not be for several months, the government may eventually need to dictate prices of the off-loaded properties to prevent a dangerous drop in the market. In the early 1960s, after a dramatic fall in stock prices, private banks were advised by the government to form an organization that purchased stock to boost the market.
"The important point will be whether you can buy the land based on the current price, which is now presumably half of the past price. This is not completely guaranteed," says Noriko Konya, analyst with the Japan Securities Economic Research Institute.
The government wants to prevent the same severe implosion of land prices, or "asset deflation," that has hit the stock market. After losing more than half their value since late 1989, stock prices reached a six-year low on Aug. 18, touching off fears that the financial system might collapse.
After word of a government bailout package spread, the Nikkei stock average gained ground as investors saw a change in official thinking. The emergency package is the largest ever in Japan, equal to 2.3 percent of the gross national product.
Until a couple weeks ago, the government had largely ignored the troubles of the financial system, contending that it had little to do with the "real" economy of making things.
But, says Richard Koo, senior economist at Nomura Research Institute, "This is not an ordinary recession. The bureaucrats wanted to treat it as a regular recession, but it is very serious."
"Banks have to unload the land to improve their portfolios. But at what price? There's no mention of what price to sell the land. That's the critical issue," Mr. Koo says.
Land prices, based on a 1985 index of 100, peaked at 250 in 1988, and have since dropped back to 125 to 150, says Masaru Yoshitomi, an Economic Planning Agency official. Banks will not go under
The economy may have hit zero growth in the last few months in what is called a "compound recession," most economists say. A cyclical downturn has coincided with the collapse of the speculative markets in land and stocks.
"The package gives the appearance that happy days are here again," Ogawa says. "But all it really does is guarantee to the public and investors that there will be no shocks and that the banks will not be allowed to go under."
Japan will need to find new ways to create capital, she says, such as allowing new markets in bonds and commercial paper. "The financial system is still pretty primitive here," she says.
The government plan may have come too late to help Japan reach its promised target of 3.5 percent economic growth in the fiscal year that ends March 31. That promise was made to the US and other nations that wanted Japan to act as an "locomotive" for the world economy.
"The government has the ability to intervene because it has the money," Mr. Jones says. "Japan is the only G-7 [Group of Seven] country with money to spend."