'Bubble Economy' Froth Still Troubling Japanese Banks

BY some standards, it might have been a bad week.

Three Japanese financial institutions with deposits worth 4.279 trillion yen, about $43.6 billion, passed into history. It was Japan's first bank crash in 50 years. Depositors fought as they struggled to collect their cash from windows at Japan's largest credit union.

Even so, Japanese financial authorities expressed satisfaction. Why? They say that they are closing in, at last, on the stupendous roster of bad loans rolled up by Japanese financial institutions during the heyday of Japan's ''bubble economy'' in the late 1980s.

In an interview on Japanese TV, Finance Minister Masayoshi Takemura said, ''I now feel relieved after announcing a plan to dissolve large financial institutions like Hyogo Bank. The announcement ... will put an end to a chain of announcements of liquidation programs. Such one-by-one solutions have reached a climax.''

One reason for Mr. Takemura's complacent attitude, of course, is that the bailouts, if effective, will clear about 10 percent of the estimated 10 trillion to 15 trillion yen in non-recoverable debt that saddles the Japanese financial system - about $102 billion to $153 billion at the current exchange rate of 98 yen to the US dollar. Total bad debt is estimated at 40 trillion to 50 trillion yen.

On Monday, regulators announced a 235 billion yen bailout plan, or $2.4 billion, for Tokyo's largest credit union, Cosmo Credit, which collapsed on July 31. On Wednesday, Osaka-based Kizu Credit Union, the largest of Japan's 400 credit unions and three times the size of Cosmo, announced it would close its doors. The same day, Kobe-based Hyogo Bank, the largest Japanese regional bank, with 2.65 trillion yen in deposits, said it would cease operations by January. Altogether, the three financial institutions had about 1.7 trillion yen in unrecoverable loans.

In all three bailouts, regulators have established that stability of the banking system comes first. Depositors at the two credit unions will get their deposits back, with interest, despite the fact that the high rates Cosmo and Kizu offered were part of what drove them out of business.

In US terms, none of the three crashes is an actual bankruptcy. Hyogo Bank will be replaced by a new bank with most of the same employees, its 600 billion yen in debt ($6.42 billion), and 400 billion yen ($4 billion) in new funds from deposit insurance programs. It has 10 years to pay off the rest of its debt.

Kizu will get a similar prop from deposit insurance, together with 40 billion to 50 billion yen in bridge loans from the National Federation of Credit Cooperatives. In all three cases, banks are likely to follow the precedent set by the Cosmo bailout, in which it is forgiving 60 percent of their claims on the credit union.

''What do you do when something goes bankrupt? Somebody has to pay, either today's depositors, today's stockholders, or tomorrow's taxpayers,'' says William Campbell, fixed income strategist at J.P. Morgan in Tokyo. ''The government seems to be saying, the pain will be shared out. Basically, they are saying that people who knowingly or unknowingly took high risks for high returns will at the end of the day not be punished.''

But Japanese regulators have other reasons to be cheerful.

The Japanese banks' calamity has been the Japanese yen's blessing. As financial markets reacted to the banking crisis by pushing the yen toward 100 to the US dollar, economists heaved a sigh of relief even louder than Mr. Takemura's. The high yen - it has appreciated 30 percent since 1993 - has been a major worry for Japanese exporters and for companies producing for the domestic Japanese market.

Ron Bevacqua, an economist with Merrill Lynch in Tokyo, says the yen's turnaround is a highly intentional effect of a dramatic shift in US policy toward Japan.

Early on, the Clinton administration had ambitions of forcing Japan to correct its current account and trade surpluses by pushing up the yen, offering credible retaliation against Japan for closed markets, and threatening to withdraw its military protection. The administration's change of position on the yen crystallized after the Cosmo bailout and ''took away the last and final prong of the three-pronged strategy to put pressure on Japan,'' Mr. Bevacqua says.

In July, US Treasury Department officials visiting Japan went home saying Japan's financial crisis was so bad that the US had to ease off pressure that had driven the yen to the low 80s to the US dollar over the past few months. On Aug. 15, US, Japanese, and German central banks drove the yen from 94 to the dollar to 99.

The banking crisis has also helped whip the Japanese stock market back to life, mainly on expectations of lower interest rates.

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