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Tuesday, October 13, 1998 Published at 11:03 GMT 12:03 UK

Business: The Economy

Japan overcomes another bank reform hurdle

The Long Term Credit Bank is effectively bankrupt

Japan's lower house of parliament has approved yet another raft of legislation designed to reform and bail-out the country's faltering banking system.

The new provisions detail how to use public money - up to 60 trillion yen ($510bn) - to bail-out banks that are about to be overwhelmed by bad loans. The upper house is expected to approve the bill by the end of the week.

Key provisions of the reform package have already been approved by parliament. They allow the government to liquidate or temporarily nationalise failed banks.

The finance ministry's authority over financial affairs has been weakened too, after criticism that it had failed to exercise its supervisory role.

The Yomiuri Shimbun newspaper reported on Tuesday that Prime Minister Keizo Obuchi was now considering to force more than 10 major Japanese banks to accept some ¥20 trillion yen in publicly funded capital injections.

However, some economists warn that the package could fall short of what is needed. According to Nancy Kimelman, chief economist and director of research at Thomson Global Markets, Japanese banks could be facing bad loans worth more than ¥118 trillion ($1 trillion) - far in excess of the public funds available.

Banking impasse

[ image: Japan's traders have waited a long time for reform]
Japan's traders have waited a long time for reform
Political gridlock between the government and opposition parties has dragged on for months, preventing the decisive reforms needed to solve Japan's banking crisis. Official estimates see the financial system smothered by ¥87.5 trillion ($650bn) in bad debts.

The government has been trying to reform the banking sector since spring, when problems emerged at one of Japan's major banks, the Long-Term Credit Bank.

Resolving the banking crisis and allowing an economic revival is seen as the single most important issue in reviving the Asian region and turning around world economic slowdown.

Stumbling blocks

Last week, yet another stumbling block emerged to the passage of the long-delayed banking reform bills.

The ruling Liberal Democrat Party lost the the backing of some of the smaller opposition parties for its plan to buy up the stock of failing banks.

It had hoped to overcome the resistance of the main opposition Democratic party to its proposals by enlisting the support of the smaller parties to ensure passage in the Upper House, where the LDP lacks a majority.

Recapitalise the banks

Under the government plan, the government would purchase half the stock of any bank if its ratio of capital to assets fell below 4%. The government has set aside 10 trillion yen ($76bn) to fund these purchases.

The international standard set down by the Bank of International Settlements in Switzerland says that banks need to have double that amount - 8% - of capital to be considered sound.

Bank of Japan officials have admitted that most of its 19 biggest banks may not meet international capital standards, although the problem has been concealed. Many banks are sitting on large losses from their stock holdings which are still valued at the price at which they originally bought them.

The main opposition party, the Democrats, has supported some of the reform process. But it balked at a government bailout of other private banks, who it believes should bear the consequences of their failure.

Takeover of LTCB

One of Japan's biggest banks, the Long Term Credit Bank of Japan, is likely to disappear after being nationalised by the government, under other legislation approved earlier by the Lower House, and agreed by all the parties.

Originally the government hoped it would be taken over by one of its rivals, Sumitomo Trust - but that company balked at absorbing all the bad debts.

Sumitomo said that "the situation has changed and the conditions for a merger have dissipated."

Now the government plans to auction off the remains of LTCB to the highest bidder after taking over its bad debts.

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