The year ahead - Japan

Japan, Inc., Jan, 2003

And the supporting cast is a jaded generation too comfortable to get passionate about anything. Takenaka's bad-loan drama, starring the Gatekeeper of Hell, plays out on center stage. The third wave of buyouts lurks behind the curtains.

BAD LOANS LOOM ON the horizon like Mount Fuji. One brokerage, HSBC Securities (Japan), estimates that they equal 15 percent of Japan's gross domestic product. But the figures are numbing. The reality is that tackling these bad loans could result in a surge of bankruptcies, the collapse of one or more of Japan's main banks and soaring unemployment. In a word, solving the bad-loan problem means "pain." And Heizo Takenaka, the minister of economic and fiscal policy, has unleashed a plan that would bring plenty of pain and, he believes, forge a path through that mountain of bad loans.

THE ECONOMY--ENTER THE GATEKEEPER

The government unveiled an anti-deflation package on October 30 that would slash in half the ratio of nonperforming loans held by Japan's 13 major banks by fiscal 2004. On the same day, the Financial Services Agency (FSA), also headed by Takenaka, said it would use stricter standards when evaluating bank loans. This day, more than any other in recent memory, set the tone for 2003.

Although the anti-deflation package "diminished the risk of a hard landing" for the economy, says Yasuhide Yajima, a researcher at Nissei Research Institute, "deflationary pressures such as an increase in bankruptcies and the unemployed are unavoidable."

Yajima calculated several scenarios that may play out this year. If Japan succeeds in disposing of [yen]1 5.4 trillion worth of debts classified by the FSA as "bankruptcies or bankruptcies in the real term," GDP would be pushed downwards by 0.5 percent and the unemployment rate would rise by 0.4 percent. If Japan fails in its attempt, GDP will be pushed downwards by 0.7 percent, and the unemployment rate would rise by 0.7 percent. According to his calculation, at least 650,000 people would leave their jobs in the latter scenario.

What's more troubling to many businesses on the brink of collapse is that they may soon have their fates decided by "the Gatekeeper of Hell." At least, that's what the Japanese media are calling the future chairman of the industrial revitalization agency, because that person would have the final say on whether certain companies live or die.

The public-private agency, to be set up this spring, would focus on loans from borrowers that are to be rehabilitated, Sadakazu Tanigaki, the minister in charge of overseeing the agency reportedly said. Its counterpart, the Resolution and Collection Corp. (RCC), is focused on bad loans from borrowers that are to be liquidated. Thus, the person who decides whether a company's loans are sent to the RCC or to the planned industrial revitalization agency has the power of life or death over a company. This Gatekeeper of Hell should come from the private sector, says Tanigaki, according to reports in the Japanese media.

Will the gatekeeper plan work? Analyst assessments are mixed. Darrel Whitten, author of J@pan Inc's weekly email newsletter Money Watch, offers this assessment: "The one flash of hope is that the Koizumi Administration stumbles toward a 'good account,' 'bad account' solution. This solution was used immediately after Japan's defeat in World War II to clear the decks of nonperforming loans by having all the players -- companies, financial institutions, shareholders, corporate depositors and the government -- share the burden. However, neither Heizo Takenaka nor Junichiro Koizumi are a Douglas MacArthur, who had the luxury of a totalitarian occupation regime to impose such a solution."

Lists of companies on the verge of bankruptcy have been circulating through elite business and political circles for months now, beginning with the so-called "dirty 30" list and more recently followed up by a list of 51 companies widely reported in the Japanese media. But as one financial expert put it, you could give two people copies of the Kaisha Shikoho (the biannual book of financial data from listed companies), send one to the South Pole and another to the North Pole, and both would come back with pretty much the same list.

THE BANKS -- GOVERNMENT SHAREHOLDERS

The government's anti-deflation package also calls for the government to inject more public money into banks if their capital adequacy ratios decline. One point being debated as 2002 came to an end was whether the government should purchase preferred shares, as it did in 1998 and 1999, or whether it should opt for common shares, giving it a vote and a voice in the way the banks are run. If the government elects to buy common shares, it raises the specter of nationalized banks.

Technically, preferred stock -- which does not carry voting rights but is at the front of the line when it comes to collecting dividends or funds from a collapsed company -- can be converted into common stock after a certain period of time.

UFJ Holdings, for example, has issued [yen]1.4 trillion worth of preferred shares to the government, out of which [yen]1.1 trillion is already due for conversion. But no preferred stock bought with public money injections has ever been converted.