TOKYO (AFX-ASIA) - The admission by Financial Affairs Minister Hakuo Yanagisawa that the bad-loan problem will be harder to resolve than previously conceded has set the stage for further action on the banks, analysts said.
Bank stocks have tumbled since Yanagisawa said it may take seven years, not the three promised by the government, to cut the level of bad loans in half.
In fact, the chief bank regulator added, problem loans are not expected to decline at all over the next three years.
"We are in the midst of economic hardship. The level of bad loans in the banking sector will remain high and the pace of write-offs will be slow in the next few years," an official from the regulatory Financial Services Agency said.
ABN Amro senior analyst Hironari Nozaki said the market has taken the news as a "clear setback" in the commitment to solving the bad-debt problem.
"(This) is not something that the market has been hoping for," he said.
Shinko Securities equity strategist Tsuyoshi Segawa added that renewed selling of bank stocks is beginning to take over from high-techs as the "main driving force" for the market's deterioration. However, many analysts believe a more realistic approach to assessing banks' problems will lay the ground for further action, with some even hoping for the additional public injection of funds that the government has so far shunned.
"It's not a backdown, it's catching up with reality. Admitting reality is the first step in the right direction," Merrill Lynch chief economist Jesper Koll said.
"Practically no one in the market believed the numbers of non-performing assets were at their peak last March. "For the banks, the fact is that the credit costs are larger than their profitability. Every February-March and every August-September the size of the problem is upgraded," he said.
BNP Paribas Securities senior analyst Naoto Odagiri agreed that the statement should not be considered as a setback in the government's commitment.
"The latest assumption seems to be realistic, given the present economic conditions," he said. "Still, we cannot say this scenario is conservative, as Japan is deeply hit by deflation."
Odagiri added that the use of public funds seems to be unavoidable, as "given the falling credit ability of individual banks, we cannot eliminate the recurrence of a financial crisis."
Goldman Sachs banking analyst David Atkinson noted that, with Japan caught in a deflationary cycle, the ability of companies to pay back their loans is clearly deteriorating day-by-day.
"The vast majority of authorities do not know just how big the problem is, if they do not know how big it is, then how are they going to know how to deal with it," he told a briefing this week.
"The general consensus views that the government has committed to disposing of non-performing loans within three years ... but it would be no surprise to me if I am still here giving the same speech in eight to 10 years time," he said.
ING Barings senior economist Richard Jerram was also sceptical that this would be last of the missed deadlines for resolving the bad-debt issue.
"Even the new FSA schedule looks on the optimistic side," he said in a note. "It is likely that a hard recession means actual bad debts rise."
While Yanagisawa's statement "looks like serious bad news", Jerram said a more positive outcome could be that Prime Minister Junichiro Koizumi dismisses the new schedule outright and puts forward a proper solution.
"This could be either more public fund injections into banks' capital, or it could be a more inequitable donation of public money to the banks," he said.
In fact, the plunge in bank shares and the increased pressure on the already moribund stockmarket could yet provide the necessary leverage to bring some much-needed realism to the government's resolution plans.
"There is the chance that the government, faced with renewed selling pressure on banks and the broader market, may come up with more decisive action plans," ABN Amro's Nozaki said.