Japan Moves to Protect its Financial System

  • Share
  • Read Later
Kevin Wolf / AP

Japanese Finance Minister Shoichi Nakagawa, left, speaks at a news conference with Japan's Central Bank Governor Masaaki Shirakawa Friday, Oct. 10, 2008, in Washington

To reassure the public that its financial system can withstand the global crisis, Japan is dusting off an expired law allowing the government to inject capital into the country's regional banks and other financial companies.

Finance Minister Shoichi Nakagawa made the case for using public funds to stabilize the financial sector following similar moves by the U.S. and Europe. Japan's national banks are considered to be in much better shape than counterparts in the West. But after the recent failures of Yamato Life Insurance Co., one of the country's major insurers, and New City Residence Investment Corp. a real estate investment trust (REIT), government officials are pushing to reactivate the law as a precautionary measure. "Huge storms are coming to Japan from abroad," says Masaaki Kanno, chief economist at JPMorgan Securities Japan. "It's not a bad idea to set up those laws to avoid or minimize the worst situation."

The law, which expired in March, is a remnant of former Prime Minister Junichiro Koizumi's era of reforms in the late 1990s and early 2000s, when the government recapitalized and even nationalized some of its major banks after real estate and stock-market bubbles burst. The government says it currently plans to take a localized approach to intervention to make sure weaknesses it sees chiefly in regional banks don't develop into a systemic infection. Japan's regional banks don't appear to be facing an immediate crisis, say economists, but the government wants to be prepared. "It's a safety net for smaller institutions," says Takahide Kiuchi, chief economist at Nomura Securities.

Smaller lenders are increasingly under stress due to the country's stumbling economy and growing competition with new banks set up by the ongoing privatization of Japan's postal system, which for decades acted as a government-run banking system. Hiromichi Shirakawa, chief economist at Credit Suisse Japan, says that several regional banks have also been hurt by investments in securities sold by the bankrupt Wall Street giant Lehman Brothers, and by soured subprime-related securities holdings.

While the failure of Yamato Life is being regarded as an isolated case and not an indication of an ailing insurance sector, some economists say there is growing concern about Japan's property market and the damage that could be done to the banking system if real estate developers and owners began failing in large numbers. New City Residence Investment Corp. became the first REIT to go under since stocks of property trusts were first allowed to trade publicly on the Tokyo Stock Exchange in 2001. "The major REIT failure last week has affected the regional banks' balance sheets," says Shirakawa, adding that the trusts could be bellwethers signaling trouble for the real estate sector at large. "Property cash flows and the general economy are weakening. Banks have tightened their credit policy and some REITs cannot refinance themselves," Shirakawa says. "We will probably see more failures of REITs."

The Diet's ruling parties aim to pass the legislation this month. Nakagawa, the Finance Minister, says the law could include a new measure that would allow credit unions and credit associations with weak capital bases to apply for public funds.

(Click here for photos of Japanese women in despair.)