31 October 2002, 10:09  Japan Waters Down Plan to Reduce Banks' Bad Loans (Update1)

Tokyo, Oct. 31 (Bloomberg) -- Japan backed down on parts of a bad-loan plan that might have led to the government's seizure of some of the nation's biggest banks, bowing to opposition from lawmakers who said it could deepen a slump in the economy. Financial Services Minister Heizo Takenaka retreated from a proposed March 2004 deadline for Mizuho Holdings Inc. and other banks to reduce the use of tax credits as capital, a move that might have forced a third public bailout of lenders in five years. Japan is trying to mop up 52 trillion yen ($420 billion) in bad debts and re-inflate prices that haven't risen since 1998.
The plan's release was delayed by a week after ruling coalition politicians said it would lead to bankruptcies and increased unemployment. By watering down the measures, Japan risks prolonging a cleanup of bad debts that prevent banks from making new loans, hampering growth in an economy hurt by three recessions in a decade, economists said. ``The government is taking the `no pain, no gain' slogan literally,'' said Joji Maki, who helps manage 430 billion yen ($3.5 billion) at Baring Asset Management (Japan) Ltd. ``They won't gain anything because they are just not doing enough to restore any kind of health in the banking system.''
Tax Cuts
Banks must tighten scrutiny of borrowers and will be subject to a new round of inspections, Takenaka said. Japan previously set a target of halving bad loans by 2005. To ease the economic blow as banks cut off struggling borrowers, Prime Minister Junichiro Koizumi unveiled 1 trillion yen ($8 billion) of tax cuts and a new agency to prop up indebted companies. The yen strengthened to 122.82 per dollar at 2:53 p.m. in New York from 123.07 yesterday.
``It's a relief the banks won't go bankrupt immediately and the government won't have to take them over immediately,'' said Kenneth Windheim, president and chief investment officer at Strategic Fixed Income LLC in Arlington, Virginia, which manages $3 billion. Takenaka said he's preparing tax changes that will make it easier for banks to write off bad loans and reduce their reliance on future tax credits. He also said the government is prepared to seize lenders if necessary, and that guidelines would be prepared under which the government will convert its preferred shares in banks to common stock, giving it a greater say in how they are run.
Banks' Reaction
The government, which acquired the preferred shares in exchange for bank bailouts, may inject public funds into banks if needed, he said. Lenders will be punished if they don't improve themselves, he said. ``Although the issue on deferred tax assets requires further discussions, we incorporated every other issue'' planned in the draft, Takenaka said.
Japan's seven biggest banks, which have at least 26.8 trillion yen of bad loans between them, said they'll do their ``utmost'' to enact the proposals, though they asked to be given enough time to make the changes. The agency needs to take time to consider the impact of the plan on banks, depositors, shareholders and the economy, the lenders said in a faxed statement. The plan ``backs off from taking the ultimate step of cutting banks' capital down to size, which would require a capital injection by the government, cleaning them out and refloating them,'' said Marshal Gittler, a senior currency strategist at Deutsche Bank AG in Tokyo.
Action Plan
Regulators will next month release an ``action plan'' detailing the steps they will take to get Japan's banks to meet requirements set out in Takenaka's plan. It will ask banks to reassess their loans by March 31 using a discounted cash-flow model that evaluates borrowers based on their ability to generate cash from operations, Takenaka told reporters. The plan to cut taxes and tackle dud credits came as the Bank of Japan said it would boost monthly bond purchases by a fifth, a cash transfer designed to keep the world's second-biggest economy from falling into its fourth recession in a decade. Some investors were skeptical it can revive growth after the Nikkei 225 Stock Average fell to 19-year lows five times this month.
``It's unexciting, unconvincing, just like most Japanese packages are,'' said Russell Harrop, a fund manager at EN Asset Management in London, a hedge fund that manages $75 million in Japanese stocks. ``The $8 billion tax cut is less than 0.2 percent of GDP.''
New Agency
The new agency unveiled yesterday is being created to buy nonperforming loans from banks at face value and help revive viable companies that are struggling to repay debt. The group will be separate from the state-backed Resolution and Collection Corp., which buys loans from banks at market price and collects from borrowers.
``The reason they are setting this new agency is all about not allowing companies to go bankrupt,'' said Fiachra MacCana, a director at WestLB Securities Pacific Ltd. ``This was one of their last chances to do anything, and I think they haven't done much.''
Banks got into financial difficulty when Japan's real-estate bubble burst in the early 1990s, causing commercial property values -- used as collateral by many companies -- to fall by about 70 percent. Stalled economic growth and falling prices have generated more bad loans than banks can write off.
Japan's seven biggest banks had combined losses of 4.07 trillion yen in the year to March as companies such as Mycal Corp. and Aoki Corp. defaulted on debt. Banks made loans to large retailers and construction companies when land and stock prices were soaring in the late 1980s and early 1990s. Bad debts have contributed to a six-year slide in lending, starving companies of the credit they need to invest and hire more workers. Unemployment is at 5.4 percent, just below a record high. In the first nine months of the year, 14,501 companies went bust - - an average of 53 a day. //www.quote.bloomberg.com

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