Japanese banks peer into abyss

CRISIS? What crisis? With Japanese bank shares at all-time lows and bad debts heading towards the stratosphere, the Tokyo government is still refusing to face the hard facts.

These facts are, insist Tokyo analysts, that the banking system is now in a much worse state than in 1998 when the government of the day was forced to save tottering financial institutions.

Unless action is taken soon to stop the rot, banks are heading for a very hard landing sometime next year. That could include the forced nationalisation of some of the world's biggest banks, and massive injections of public money that a near-bankrupt government can ill afford.

Banking stocks are in crisis. The world's largest, Mizuho Holdings, has seen its share price slump 70% from its year high. Yet Bank of Japan Governor Masaru Hayami, said on Monday: 'If a crisis occurs, obviously there could be an injection of public funds to protect the nation's financial system. But we're not in that kind of situation.'

His comments followed reassurances given last Friday to businessmen by financial services minister Hakuo Yanagisawa that public funds were not needed and ignore the consensus view that the crisis is already at hand, and has been for months. The government, however, is splitting hairs and refusing to act until it is officially declared the banks are undercapitalised.

Everyone agrees the figures are desperate, but just how desperate depends on how they are added up. Some government estimates put the total of problem loans at 150 trillion yen (£8.4bn). The Financial Services Agency estimates that total non-performing loans of the 15 major banks was 20.7 trillion yen at end-September, but independent observers are more pessimistic. ING Barings analyst James Fiorilli calculates the NPLs of the big nine alone was 43 trillion yen.

Despite soaring NPLs, banks and regulators point out that capital adequacy ratios, at 10%, are above the Bank of International Settlement floor of 8%. But ING Barings reckons the ratios are really nearer half the minimum.

Thanks to some judicious bond dealing, the major banks made small profits in the six months to end-September, but are expected to show a loss for the full year.

Huge write-offs will inevitably accompany the 12-month results in March, and that might force the government to bite the bullet.

One brave banker from among the smaller lenders told a businessmen's gathering in Tokyo last week that total write-offs could be as much as 6.5 trillion yen, threatening to wipe out banks' reserves.

As the shares continue to sink on the Tokyo stock market, the questions grow as to when the government will act in the same way as March 1999 - after a hideous 1998, the major banks received 7.45 trillion yen and two of the largest lenders were nationalised. This brought temporary respite to the banking system, but the reforms which were needed then, as much as now, were never put in place, as politicians flinched from inflicting the necessary pain.

This time, says Fiorilli, it is going to cost 50 trillion yen to recapitalise the banks - and every year of delay will add 20% to the bill. He reckons that by May, the pressure of falling share prices, ratings downgrades and soaring bankruptcies will alert the public to the need for action. Only then will the government finally admit what every banker, economist and analyst in Tokyo knows - the crisis has already arrived.