Fresh blow to Japanese banks

Reforming the banks is a challenge facing Mr Koizumi

Fears about the economic health of Japan's banks have re-emerged.

Two of the world's leading credit rating agencies have downgraded several Japanese banks, raising questions about their economic stability.

Japan's own financial regulators have questioned the need for the downgrades, but few others have any doubts that the banks will have a tough time calling in their bad loans.

Fitch IBCA, one of the world's leading rating agencies, says the global economic downturn is set to hit the already struggling Japanese banks hard.

"A strong economic recovery in the near term would require a miracle that no one currently expects," Fitch said.

The rating agency downgraded 19 banks, including the Bank of Tokyo-Mitsubishi and the Industrial Bank of Japan.

Weak profits

Moody's Investors Service downgraded Bank of Tokyo-Mitsubishi, citing its weak profitability in the face of the global economic downturn.

However, not everyone has agreed with its assessment of the banking sector.

Japan's Financial Services Agency chief Shoji Mori said: "It seems there is a view that Japan's economy is slowing down and that there will be a greater amount of bad loans that need to be disposed of, and perhaps there will need to be another injection of public funds."

He added: "That view is based on a misunderstanding. I'm disappointed."

Bad loans

The crux of the problem is that the Japanese banks have lent vast sums of money to people and companies which may never be able to pay them back.

In fact, their bad loans are estimated at well over a trillion dollars.

The banks would like to borrow money from other financial institutions to help them through the crisis.

But the fact that the credit rating agencies have downgraded their assessment will make it more difficult for them to raise this money.

The agencies are effectively warning future lenders that the banks may not be able to repay any money they borrow. At the very least, this will push up the borrowing costs for the banks concerned.

Koizumi's challenge

The banking crisis is one of the most pressing political problems facing Japan's prime minister, Junichiro Koizumi.

If the banks cut off loans, some businesses could go bankrupt and many jobs will be lost.

Already, unemployment is at a record high of 4.9%.

But if the Japanese banks are allowed to go on carrying debts that cannot be repaid, there is a danger they will be forced out of business themselves.