/www.bloomberg.com/ By Taizo Hirose, Kazu Hirano and Mariko Iwasaki
Tokyo, Oct. 21 (Bloomberg) -- Heizo Takenaka, the new Japanese banking regulator who said no company is ``too big to fail,'' may not match tough talk with action when he unveils a plan this week to tackle $420 billion of bad loans, investors said.
Takenaka has already shown signs of backtracking, saying Friday that Japan should use state lenders ``aggressively to revive companies.'' The government has also said it may let banks sell bad loans without posting losses, with taxpayers possibly picking up the tab -- a policy Takenaka rejected when he took office last month.
Forcing banks to write off bad loans and cut off deadbeat borrowers would worsen a surge in bankruptcies and unemployment. That means Takenaka may have to temper bad-loan disposal plans with life support for weak borrowers.
``The market is already starting to factor in that the government is going to keep bailing out the zombie companies,'' said Joji Maki, a senior director at Baring Asset Management (Japan) Ltd., which manages 430 billion yen ($3.43 billion) in assets.
Takenaka and his task force will release the draft bad-loan plan on Tuesday, and the government will incorporate it in a package of anti-deflation steps due out Friday, Hidenao Nakagawa, a ruling Liberal Democratic Party official, said yesterday.
Shares of Daiei Inc., Japan's third-largest retailer, surged 11 percent Friday after the Development Bank of Japan said it would bail out the company, which is saddled with $13.5 billion of debt. The Development Bank said it's in talks with other companies on possible aid packages.
Friday's biggest gainers on the Tokyo Stock Exchange's first section included Daikyo Inc. and Orient Corp., among Japan's most indebted companies measured by total debt to equity.
`He Talks Too Much'
Takenaka is under pressure from some lawmakers to avoid pushing companies into bankruptcy, boosting a jobless rate that's just shy of a record. Twenty-five publicly traded Japanese companies have gone under so far this year, the highest on record.
Japan's banks -- already hurt as falling stock markets erode their balance sheets -- may not be able to withstand a crackdown from Takenaka, said Hideyuki Aizawa, head of the ruling Liberal Democratic Party's anti-deflation panel.
``I told him the market is falling because he talks too much,'' Aizawa told reporters after meeting with Takenaka earlier this month. ``The biggest concern is that with the decline in the stock market, banks' shareholdings will decline and that will make them even more reluctant to lend.''
Japan's banks haven't increased lending in six years, cutting companies' access to credit and prolonging a 12-year economic slump.
While banks need to clean up their balance sheets before they can resume lending, they probably won't be forced to bear the burden of bad loans alone.
Easing the Pain
Investors said Takenaka may propose reducing private banks' lending to weak borrowers by injecting money from state-funded agencies and taxpayers into the companies, avoiding the change of bank management that a direct government transfer of public money to banks would entail.
Chief Cabinet Secretary Yasuo Fukuda said on Oct. 10 that Takenaka's team may let the state-backed Resolution and Collection Corp. pay above market value for the bad loans it buys from banks to help them avoid losses. Taxpayers would pay the difference if the agency collected less than that amount from debtors.
Takenaka may also allow Resolution and Collection to start lending -- which it's currently barred from doing -- or use other state institutions to prop up delinquent debtors, investors said.
``Japan may be trying to shift a private-sector problem to the public sector under the guise of a safety net,'' said Muneyuki Tsuji, who manages 15 billion yen in assets at Japan Investment Trust Management Co. ``That has little to do with reform.''