Loss admissions boost Japanese banks

Traders believe the banks are dealing with their bad debts

Shares in two of Japan's leading banks, Asahi and Sumitomo Mitsui, rose sharply despite admissions that they will slide into the red this year.

Traders read the banks' downbeat statements as signs that the country's banking sector is moving closer to sort out its bad debt problem.

The 14 biggest banks in Japan are believed to have non-performing loans worth up to 6 trillion Japanese yen (£34.5bn; $48.9bn).

Traditionally, Japanese banks have used creative accounting to avoid revealing the extent of any losses in their balance sheets.

But investors have become increasingly aware of the practice, and banks' financial difficulties have been well documented.

"Banks often hide these things only to fuel fears about their financial health," said UFJ Capital Markets Securities general manager of equities sales Kazuyuki Naito.

"But Asahi disclosed its inner facts and showed how to deal with them.

"Asahi's statement is expected to be a flood of admissions of losses by Japan's banks.

Shares in Asahi closed 8.5% higher at 102 yen.

Stock in the country's number two bank, Sumitomo Mitsui Banking Corporation, also rose, gaining 5.0% to 732 yen.

New law

The banks' admissions coincided with the introduction of a law that will limit the banks' shareholdings in a bid to insulate them from the volatility of the stock markets.

As part of the bill's introduction, Japan will set up a state-backed vehicle that will buy shares held by banks to prevent their equity sales from hitting the stock market.

The banks must sell shares worth 10 trillion yen before the law comes into effect in 2004.

Banks that sell their shares to the share-buying vehicle will have to pay an 8% handling fee.

Losses from the share transactions over and above the fee will be paid by the government, though the banks will contribute 10bn yen to the scheme.

Japan's banks are heavily exposed to the country's sliding stock market.

This is a direct consequence of a culture which has encouraged banks and client companies to hold shares in each other as a way of building strong business links.