Japan: Banking crisis

Yamaichi was Japan's third largest broker of stocks and securities

The news that one of Japan's biggest financial institutions, Yamaichi Securities, has gone bankrupt owing billions of dollars has been greeted by share price falls around the world, and the voicing of fears that Japan's troubled economy could lead the whole world into recession. Economics analyst Richard Walker considers what has gone wrong in Japan.

Yamaichi Securities was Japan's third largest broker of stocks and securities. It's not the first large Japanese company to go bankrupt this year, and it may not even be the last.

So this collapse has not come as a surprise to the financial community: The top management of the company quit earlier this year after the company owned up to a racketeering scandal, and it had been known for several years that Yamaichi was losing money. According to Jachir Retash Rita of Deutsche Morgan Grenfell in Tokyo, Yamaichi had been living on borrowed time: "It should have been allowed to happen ages ago - I think the fact of the matter is better late than never. But it might have been a bit too late."

The boom years

Yamaichi's problems are the problems of the whole Japanese economy, and they have their roots in the boom years of the late 1980s.

The good times lasted through the 1980's

That was when the Japanese economy was growing at a headlong rate, and companies were expanding and investing as never before.

The trouble was that much of this investment was being financed by an extraordinary boom in property and share prices. Property and shares were used as security for huge bank loans - and when the property markets and stock markets suddenly crashed at the beginning of the nineties the whole spiral of borrowing, asset price inflation and investment came to a full stop.

And despite many government initiatives to kick start demand, Japan's economy has remained fairly stagnant for the last six years. The stock market has been flat too, making it difficult for companies like Yamaichi to make profits.

Political will to reform the system

Ever since the so-called 'bubble economy' burst, there have been persistent fears that Japan's big banks had so many bad loans on their books that the whole Japanese financial system was in danger of collapse. That appeared to be the first thought of many when the news of Yamaichi's collapse came through.

But Yamaichi Securities is not a bank - it doesn't lend money, it only invests it on behalf of clients.

According to Richard Werner of stockbrokers Jardine Fleming in Tokyo, Japan's banks have in fact already made great progress in strengthening their balance sheets: "The good banks have already cleaned up their balance sheets. And that means that they are beginning to lend again, because as you get rid of the bad debt, they can lend again, and that creates new money which creates an economic recovery."

How much the Japanese financial institutions have improved their underlying financial positions remains to be seen, but they have been under strong pressure from a government keen to reform the sector before next spring, when the Japanese financial market is due to be deregulated and when Japanese institutions will for the first time face real competition from efficient global operators.

Conflicting scenarios

Some argue that Japan is actually on the threshold of a period of strong growth, and the failure of a company like Yamaichi only goes to show how much more open and confident the management of the Japanese economy is becoming. In the past, as when Yamaichi faced bankruptcy in the mid-1960s, the government would have poured public money into such a failing company to keep it on its feet.

Others say the Yamaichi collapse is only the first of many bankruptcies, as the turmoil in other Asian economies begins to hit Japan. But Richard Werner says Japan has already had its bad times. The rest of Asia that will stagnate for the next few years:

"In terms of timing Asia is now where Japan was in 1991 or 1992, at the beginning of a five year recession while Japan is emerging from a five year recession. But it's precisely because of the problems in Asia that Japan now needs to clean up its act, and that is now happening," he said.

The question is, which of these two scenarios is the right one? If Japan - the world's second biggest economy - is dragged back down into a recession, the rest of the world will soon know about it, and feel it too.