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Monday, September 28, 1998 Published at 12:19 GMT 13:19 UK

Business: The Economy

Japan agrees bank reform deal

Wrangles over the future of LTCB have been ironed out

Japan's ruling and opposition parties have finally agreed on a deal to salvage the country's debt-laden financial system.

Real Video: Peter Morgan reports on the fragility of the world's second biggest economy
Japan's banks are burdened by at least 87.5 trillion yen ($650bn) in bad loans.

"We'd like to bring the process to a conclusion as soon as possible," said Yoshiro Mori, secretary-general of the governing Liberal Democratic Party.

Last week, the LDP and opposition reached a basic agreement on the bills, but the deal was vague and began to unravel almost as soon as it was announced.

The two sides have now reached a compromise over how much power to give a new independent body that will be charged with regulating the finance sector.

The opposition, led by the Democratic Party, had wanted the body be given full authority over the financial sector.

[ image: Dealers were cheered by news of the deal]
Dealers were cheered by news of the deal
But the LDP said that would take too much power away from the Finance Ministry.

They have now agreed regulation will be shared by the ministry and the independent panel.

They have also agreed that any bank whose capital falls precariously while purchasing an ailing bank that has been nationalised will be eligible for an injection of public funds.

US Ambassador Thomas Foley welcomed the breakthrough as " very constructive".

The United States and other countries have been growing increasingly impatient with Japan's inability to agree on the way forward for financial reforms, which are seen as essential for getting the country out of recession.

Sticking point

On Saturday, the two sides reached a compromise on one of their main points of contention - the fate of the ailing Long-Term Credit Bank of Japan.

The ruling party agreed to opposition demands that the government should acquire all of LTCB's shares, effectively nationalising it.

The government would then sell the bank back to the private sector after disposing of its bad assets.

The government has been trying to broker a merger between LTCB and Sumitomo Trust and Banking Co.

Under the terms of the new agreement, Sumitomo would be able buy LTCB shares from the government and turn the bank into a subsidiary.

Key points

The key points of the deal include:

  • Bank bail-outs The government will effectively nationalise failed financial institutions by purchasing shares to provide capital needed to write off bad loans.

  • LTCB The government will buy all outstanding shares and place the bank under state control. Private sector suitors may then submit bids for the bank.

  • Finance Ministry Regulatory authority for dealing with financial industry crises will be shared by the Finance Ministry and a new independent committee.

  • Japanese RTC Two existing entities established to buy up bad loans from banks and failed housing lenders will be merged into a more powerful body, creating a Japanese version of the Resolution Trust Corporation, created in the United States to deal with the savings and loan crisis of the 1980s.

    Further evidence of banking reform emerged on Monday, with news that two major Japanese banks are close to brokering a merger.

    The Asahi Bank and Tokai Bank are looking to create Japan's second largest bank with assets of 61 trillion yen ($457bn), as a way of slashing costs.

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