THE merger of the Bank of Tokyo and Mitsubishi Bank is a marriage of two partners who complement each other well. But it is hardly just a business decision.
The merger, announced last week, will create the world's largest bank with more than $700 billion in assets. It is part of a plan by Japanese regulators to strengthen the country's healthiest financial institutions, analysts say. In return, goes the logic, these banks will have to shore up the weaker elements of this country's troubled financial sector.
In recent years Japan's banks, brokerages, credit unions, and other financial institutions have been characterized by low interest rates, low or nonexistent profits, and lots and lots of bad loans. As of 1992 Japan's commercial banks may have had as much as 40 trillion yen worth of bad debt on their books, or as much as 10 percent of their total outstanding loans, according to an analysis issued last year by a pair of Goldman, Sachs & Co. economists.
The reason for all this bad debt is Japan's notorious ''bubble economy'' of the mid- to late-1980s, when the prices of real estate and other assets surged dramatically. Banks and other institutions issued billions of dollars worth of loans to finance property transactions. When the bubble burst at the turn of the decade, that property was suddenly worth a lot less.
Some economists blame the bad debt, in part, for Japan's dawdling recovery. The country's worst postwar recession followed the bubble's burst and reached its low point in October 1993. But since then the economic recovery has been more virtual than real. The increasing strength of the yen, which hit yet another postwar high against the dollar on Friday, now threatens to snuff out the recovery altogether.
It doesn't help prospects for recovery when financial institutions have a lot of bad debt, because it makes them more conservative and less likely to finance companies with risky plans.
That is why Japan's financial regulators, the bureaucrats at the Ministry of Finance and the Bank of Japan, have been urging banks to grapple with their bad-loan problem. During the past six months regulators have taken several key steps, suggesting they are speeding up repairs in the financial sector:
*Last December, the Bank of Japan, the Tokyo metropolitan government, and several commercial banks announced an unprecedented $1.68 billion bailout package for two failing credit unions. Regulators ''tried to use [this approach] as a kind of prototype for the final solution of the bad-debt problem,'' says Rie Ota, banking analyst at Barings Securities (Japan) Ltd., but the plan backfired.
It turned out that the credit unions had a long history of shady dealings and allegations were raised about corrupt links between the credit-union operators and regulators. The public outcry prompted Tokyo authorities to suspend their $300 million contribution and the bailout package is now ''in abeyance,'' as Ms. Ota puts it.
*Sumitomo Bank, one of the world's biggest, announced in January that it would write off $9.1 billion in bad debts and take a $322 million loss for the fiscal year that ended March 31. The write-off marked the first time in postwar history that the Ministry of Finance allowed one of Japan's 11 major commercial banks to declare a loss.
*Last week, all but overlooked in the merger hoopla, three big banks based in the Kansai region that surrounds Osaka and Kobe announced they would close 11 affiliated nonbank financial institutions with more than $11.5 billion in outstanding loans, much of it nonperforming. The nonbanks are consumer-loan, credit, and leasing firms that extend loans but do not accept deposits, and they have been particularly hurt by the sagging real estate prices. The earthquake effectively eliminated prospects for their rehabilitation.
Now comes the Tokyo-Mitsubishi merger, which brings together two of the country's healthiest institutions. It seems a good fit. Bank of Tokyo, ranked 24th largest in the world, has a vast overseas network. In North America alone it has 12 offices and 247 subsidiaries, including Union Bank of California. It is strong in corporate banking. Mitsubishi, ranked No. 6, is strong in the domestic market with more than 355 offices in the island nation and a good reputation in commercial banking. But rumors immediately circulated that the combined unit will soon be forced by regulators to take over a much less healthy institution, such as the Kobe-based Hyogo Bank.
''It's a consistent policy of getting the strong to become stronger,'' says Ota.
At the same time, notes an analyst at New York-based brokerage who declined to be named, financial-sector recovery, with or without bad-loan write-offs, will be slow. ''Real estate is not moving,'' this observer says, so banks will have a hard time converting collateral into cash.