Buying banks' bad loans

By BBC business reporter Rodney Smith

Members of parliament from across Japan's ruling coalition parties sat up late into the night on Tuesday.

They were discussing how to give more bite to the Resolution and Collection Corporation (RCC), a little noticed government agency - with a vital remit.

The RCC buys bad loans from Japan's indebted banks. It is potentially one of the most important economic tools available to the Japanese government.

Japan cannot grow because the banks cannot lend; the banks cannot lend because they are suffocated by bad loans, and they cannot get rid of the bad loans.

Buying debt

The RCC was set up in 1999 to buy debt, but lost credibility with Japanese banks when it offered what the banks believed were derisory settlements.

The RCC had been charged with buying the debt at no loss to the jaded Japanese taxpayer.

In its short life, the RCC has bought Y1,000bn of bad loans.

The Japanese parliament is about to consider legislation that could give the RCC powers to buy a much broader range of bad loans and be more adventurous with them.

The RCC should be freed to pay market prices.

While that would allow the RCC to take on more than the severe basket cases it has been restricted to until now, it is not clear how this more frontal attack would be funded.

Freeing debtors

However the programme should free debtor companies in bankruptcy protection, to borrow against restructuring. The RCC is expected to provide a guiding hand here as well.

As part of the package, the Financial Services Agency (FSA) would be empowered to conduct tough inspections of the banks and their loan books.

Experienced observers of Japanese banking are bothered that the RCC does not have the expertise or resources to fulfil a much bigger remit than it has had until now.

It is also likely to be encouraged to use the experience of non-Japanese investment banks and consultants.

So will these changes make an important contribution to Japan's economic resurrection?

"Unlikely," says Brian Waterhouse of HSBC Securities in Tokyo.

"Not in this Japan. For all the old reasons: unreal expectations by the government and the banks."