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Thursday, 20 September, 2001, 19:21 GMT 20:21 UK
Rescue plan for Japan's banks
A Bank of Japan worker moves banknotes
Bad debts: one of the biggest problems of the Japanese economy

by the BBC's Rodney Smith

To foreigners used to half and quarter point movements in interest rates, the Japanese token interest rate cut this week must have seemed absurd - especially as after cutting short term discount rate by 0.15%, the Bank of Japan still has a positive rate of interest - of just 0.1%.

This was barely more than window dressing, largely to satisfy world opinion in the face of rate cuts in the United States, Europe, and later, Britain.

But it will do little to help struggling Japanese industries, and even less to sort out Japan's principal problem, its debt-strangled banks - or the over-strong yen.

The Japanese government is well aware that the change in circumstances in the world economy since the 11 September terrorist attacks seriously threatens any hope of recovery in Japan.

Junior economy minister Heizo Takenaka says the government's recovery plan will be disrupted.

Pushing ahead with banking solutions

The government is believed to have brought the plan forward and is considering publishing the timetable before the week is out.

There are also signs that the Japanese government may at last be considering a workable solution to unlocking the banking sector.

The agency set up two years ago to buy bad debt from the banks, the Resolution and Collection Corporation (RCC) has responded swiftly to a call by the government for ideas.

The banks had tended to avoid the RCC since - by using public money - it was offering to buy debt at huge discounts.

Now it is suggesting that it be allowed to buy bad debt at book value - the price to be established by subtracting banks' loss reserves from the value of the bank loans - potentially a much better price than offered under the existing rules.

A working example

HSBC Tokyo bank analyst Brian Waterhouse is among those advocating a wider remit for the RCC to solve the banking problem.

He gives an example of how the new proposal would work:

A bank that has Y10bn in bad loans sets aside Y1.5bn in loan loss reserves. The RCC buys the loans at Y8.5bn.

If the RCC makes a profit or loss when collecting the loans, the profit or loss is shared between the RCC and the banks.

Flawed plan?

The plan does have two major flaws; it risks "moral hazard" where banks that had been understating the risk in their loan portfolio (and that would apply to many) would gain over banks that had been more prudent.

The other flaw is that the RCC would have to resort to public funds.

Prime Minister Junichiro Koizumi has set his face sternly against using more public money to bail out banks.

This is as much practical as it may be principle; the Japanese public would not stand to see more public money thrown at the frozen banking sector.

The government has spent more than eight trillion yen in failed attempts to bail the banks out over the past four years.

Politically sensitive

However, practicality may have to prevail.

Seasoned commentators and politicians believe that however politically sensitive it may be, nothing but public intervention will solve the banking crisis.

The RCC solution looks like a possible first step.

There was a glimmer of hope shortly after the RCC published its suggestions, when it looked as though the government would have to throw money at Mycal, the failed department store.

The implications was that if that were to happen, it would open the door to public money being made available to the banks - and direct implementation of the RCC plan.

The BBC's Charles Scanlon
"It's an acknowledgement that Japan is heading back into a recession"
Goldman Sach's Kenneth Courtis
"They really have no other option at this point"
WestLB's Fiachra McCanna
"To some extent the Bank of Japan is doing its best, but you should see this more as a political than an economic gesture"
See also:

09 Aug 01 | Business
Japan's budget tussle hots up
31 Jul 01 | Business
Japan's jobless at record high
30 Jul 01 | Business
Markets fall after Koizumi's victory
29 Jul 01 | Asia-Pacific
Japan's Koizumi secures victory
29 Jul 01 | Business
Can Koizumi save Japan?
16 Jul 01 | Business
Gloomy outlook for Japan
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