Tokyo agrees on bank surgery Takeovers, closings planned, as is huge infusion of yen

September 19, 1998|By BLOOMBERG NEWS

TOKYO -- Japanese leaders agreed yesterday on a plan designed to restore the nation's debt-burdened banks to health, a crucial step to reviving growth in the world's second largest economy.

The plan calls for a government takeover of some of the country's biggest and weakest banks, closing smaller institutions and pumping trillions of yen in taxpayer money into the banking system to dispose of bad loans.

The prolonged debate over what to do about Japanese banks took on new urgency in recent months as it became clear that Japan's slumping economy -- now in its third quarter of contraction -- threatened growth around the world.

"I'm determined Japan won't be the source of a global financial meltdown," said Prime Minister Keizo Obuchi. "Restoring financial stability to Japan will quickly lead to a revival of the economy."

With the recession deepening around Asia, investors deserted risky emerging markets. Companies from Paris to Palo Alto warned of falling profit, sending stock markets tumbling. Economists began reducing their forecasts for growth in both the United States and Europe -- the twin engines of world growth.

President Clinton and U.S. Treasury Secretary Robert Rubin are expected to discuss the banking plan during Obuchi's visit to New York Tuesday.

After watching successive Japanese governments shrink from tackling the 77 trillion yen ($580 billion) or more of problem debt held by the nation's banks, there are plenty who doubt the politicians are serious this time. Yet the compromise hammered out yesterday between Obuchi and opposition leaders, by calling for the government takeover of Long-Term Credit Bank Ltd., one of the country's biggest and sickest banks, may mark a significant turning point.

Obuchi's ruling Liberal Democratic Party also agreed that the RTC Finance Ministry will be stripped of much of its authority over banks, a move that could help end the cozy relationship between regulator and regulated that critics argued helped create the current crisis.

Precisely how the bailout would be structured wasn't immediately clear. Both government and opposition representatives had earlier said that they wanted to create a government agency similar to the U.S. Resolution Trust Corp. to buy up bad loans with public funds, recouping some of the money through the sale of the assets that backed them.

The vagueness of the agreement sparked speculation that it would soon fall apart.

In anticipation a compromise was imminent, Japanese stocks rose after three sessions of declines, with the benchmark Nikkei 225 index climbing 123.98 points to 13,983.1.

The agreement was announced after the close of trading.

"The agreement does look very encouraging," said John Hayter, who helps oversee $2.7 billion at Pavilion Asset Management in London.

"We're thinking very seriously about buying bank shares and I would imagine we're not alone."

That would be good news for bank shares that have taken a beating over the past year, as investors worried that they were in worse shape than they let on, and rating companies cut their credit ratings.

Pub Date: 9/19/98

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