Japan seeks support for bank rescue

Japan Inc is praying that things can only get better

By BBC News Online's Jeremy Scott-Joynt

Japanese finance minister Heizo Takenaka is on his way to Washington in a bid to enlist US support for bailing out Japan's top banks, many of which are burdened by a mountain of bad debt.

Mr Takenaka is due to meet Paul O'Neill, the US treasury secretary, later on Monday. Also at the meeting will be the head of the Council of Economic Advisers, Glenn Hubbard, and the president's economic adviser, Lawrence Lindsay.

The stability - or otherwise - of Japan's financial institutions will be at the top of the agenda.

Despite concerns that the administration of Prime Minister Junichiro Koizumi is given more to talk than action, Mr Takenaka will emphasise his government's determination to avert a full-scale banking crisis.

Yen slide

The yen's new weakness will also be up for discussion.

Koizumi: plans to save the financial system by any means necessary

Japanese ministers have made little secret of their happiness that the currency has fallen back to 130 against the dollar, hinting that it is simply a correction.

But US policymakers are unlikely to be keen on concrete intervention - even though the Bank of Japan's policy of buying foreign bonds effectively weakens the currency by increasing the liquidity of the Japanese money markets.

In any case, the weaker yen makes exporting easier and takes some of the pressure off Japanese corporations, even though - as Sony president Nobuyuki Idei pointed out today - less than 10% of Japanese output is accounted for by exports.

Safety net

Few believe anything concrete will come out of the visit. But then again, that is not the point.

The aim is to encourage "understanding".

In Japanese terms, that does not mean negotiation or debate. It simply means making (in this case) the US understand that Japan has chosen its path and that there is no point in doing anything other than backing the decision.

The Takenaka visit comes as voices in Tokyo are making it ever clearer that the top banks will not be allowed simply to fail.

While analysts think it unlikely that public money will simply be thrown at the sector, any systemic crisis - such as a run on deposits, or the collapse of a really large borrower - now looks likely to trigger intervention.

Mr Koizumi himself hinted as much when he said that the government will use "all the various measures available to prevent a financial crisis".

Broad-based backing

And the Financial Services Agency, which holds final responsibility for the solidity of Japan's financial architecture, has thrown its weight behind the Japanese premier.

"As the prime minister said, we will respond boldly and flexibly," said FSA commissioner Shoji Mori, stressing that the FSA was watching a range of factors, not merely the prices of banking stocks.

"None of the major banks are likely to go under if the FSA doesn't want them to," Colin Asher of Nomura International told BBC News Online.

"They could apply the rules strictly [and drive banks under] but there's nothing in it for them to do so."

Systemic risk

The prospect of trouble for the banks is very real. With the stock market down 24% in 2001, their heavy reliance on equity assets has hit them hard.

And the 20,000bn yen set aside by the top half dozen institutions to cover bad debts built up during the bubble years of the 80s may not be anywhere near enough.

Come April of this year, the government has promised to phase out guarantees on bank deposits, making the financial sector even more of a risky bet.

If a bailout does materialise, it will probably be at the cost of rapid consolidation.

In any case, only the top-tier banks - the ones whose collapse could spell systemic disaster - are in line for a rescue.

A local bank, Ishikawa, was allowed to go under in the last week of December.