20 years on: Is financial crisis a thing of past in Japan?

November 16, 2017

Tokyo- November 1997 is best remembered in Japan as a month when the depth of damage in a financial system reeling from the collapse of the speculation-driven bubble economy was laid bare in a painful way.

Hokkaido Takushoku Bank, a major commercial bank, became insolvent under the weight of bad loans. One week later, Yamaichi Securities Co., one of Japan's Big Four brokerage houses, shut down its operations due to massive off-the-book liabilities.

Fully 20 years later, industry watchers wonder whether lessons from the financial crisis have been put to good use and whether there is any early sign of a new crisis brewing in an ultra-easy monetary policy environment globally.

Calm appeared to be returning to Japan's financial system after efforts to clean up the bad debt mess that knocked out "jusen" housing loan providers had almost ended.

But a crisis of unprecedented scale was about to begin in the interbank call money market, where financial institutions raise short-term funding.

On Nov. 3, 1997, Sanyo Securities Co., a second-tier brokerage house, filed for bankruptcy protection under the corporate rehabilitation law, weighed down by heavy capital spending.

Due to Tokyo District Court's order to protect its assets, Sanyo Securities became unable to repay about one billion yen in unsecured lending from a "shinkin" bank in Gunma Prefecture, eastern Japan, and 8.3 billion yen in financing from an agricultural cooperative in Miyazaki Prefecture, southwestern Japan.

The default, though small in size in the multitrillion-yen interbank money market, quickly intensified distrust among fund providers in the market. Hokkaido Takushoku Bank and Yamaichi Securities, which were both rumored to be in a poor financial condition, ran into difficulties raising funds.

On Nov. 17, two weeks after the collapse of Sanyo Securities, Hokkaido Takushoku Bank went bankrupt, a first for a major Japanese bank, having failed to wrap up merger talks successfully.

A week later, on Nov. 24, Yamaichi Securities applied to close its business voluntarily after accumulating large-scale losses that had been transferred off the books through fraudulent accounting.

Financial regulators and industry officials were unprepared for the shock to the broader financial system caused by the bankruptcy of Sanyo Securities.

"We were not aware of the danger of a problem in the call money market developing into a systemic risk," said a former financial regulator who addressed the crisis.

In the 20 years since, frameworks have been put in place to prevent a management problem at a financial institution from evolving into a full-blown crisis of the financial system, including public fund injection into a bank to replenish its capital and stave off bankruptcy and putting a debilitated bank under temporary state control to forestall a significant impact of its failure on the financial system and the economy.

Takahiro Mitani, former executive director of the Bank of Japan, said the failure of Hokkaido Takushoku Bank marked a turning point in financial administration. Before then, there was a myth that no bank would go bankrupt due to the "convoy system" of financial industry supervision and regulation.

"Japan's current legal system for addressing bank failures is in no way inferior to any other country's," Mitani said. But some industry watchers warn of the possibility of a new type of crisis being induced quietly amid the protracted large-scale monetary easing by the BOJ.

As part of its easy monetary policy, the BOJ has supplied large-scale liquidity to financial markets through purchases of outstanding Japanese government bonds and exchange-traded funds, while keeping interest rates very low through its negative interest rate policy and yield curve control.

The policy measures have gradually weighed down the earnings of financial institutions, which generate profits from interest spreads between deposits and lending and from JGB investment. In particular, regional lenders are acutely feeling the pinch, amid falls in local populations.

Masanori Tanabe, former governor of the Deposit Insurance Corp. of Japan, noted that regional banks have set up offices in Tokyo and accelerated real estate loans, citing information from the head of a shinkin bank. Also, subsidiaries of megabank groups have been making disorderly real estate investments, according to Tanabe, who once worked for the BOJ.

Still, in such a situation, few analysts see the kind of overheating found in the bubble economy period. "This is because regional banks have been pushed to the wall," Tanabe said.

If the rock-bottom interest rate environment is prolonged, signs of management crisis may appear in some regional lenders' earnings statements for the current year to March 2018, said another former BOJ official, who is familiar with the financial standing of regional banks.

Many Japanese companies are uncertain about growth in the economy or their own business operations and, therefore, are cautious about forward-looking investment. In the meantime, large-scale funds generated by global monetary easing have flowed into stocks and real estate, pushing up such asset prices.

In the Tokyo stock market, the benchmark 225-issue Nikkei average rose for a record 16 consecutive trading days from the beginning of October. This month, the Nikkei average surged to the highest level since January 1992.

According to the National Tax Agency's report in July on prices of land facing major streets as of Jan. 1, a one-square-meter tract of land in front of Kyukyodo, a traditional stationery store in Tokyo's upscale Ginza district, surged 26 pct from a year before to 40.32 million yen, the highest anywhere in Japan and topping the record high of 36.50 million yen posted in the bubble economy period.

Condominium prices have remained at high levels, especially in the Tokyo metropolitan area. A report from the Real Estate Economic Institute shows that the average condo unit price in Tokyo's densely populated 23 wards in September rose 7.5 pct year on year to 73.61 million yen, beyond the reach of ordinary people.

"We can't tell when and where a (financial) crisis will break out," said Takashi Anzai, chairman of Seven Bank and a former official of the BOJ. "Even if we keep past records correctly and study them, they may not necessarily serve a purpose in a new situation."

Anzai served as head of former Long-Term Credit Bank of Japan, now Shinsei Bank at the government's request after the lender became insolvent due to massive bad loans and was placed under temporary state control in 1998.

Anzai warns of a risk of Japanese financial institutions being hit hard in global financial markets in a way similar to the 1997 financial crisis having been triggered by a small default in the Japanese interbank market.

Major Japanese banks have expanded investments overseas due to the lack of lucrative investment opportunities in the home country. They could suffer a heavy blow "in the event of a default in dollar transactions somewhere in the world" after an excessive fund shift into dollars due to large-scale monetary easing, Anzai predicted. Jiji Press