US Analysts Say Echoes Likely From Bank Crisis
THE United States expulsion of Japan's Daiwa Bank has raised not only the profile of troubled banks but also doubts about the strength of US-Japanese commercial ties.
Many Wall Street analysts, trade watchers, and economists charge Japan's Ministry of Finance, which held back information about Daiwa's corrupt practices and billion-dollar losses in the United States, with masking much deeper problems in Japan's ailing financial sector.
In Tokyo, finance ministry officials say the country's top banks have been saddled with $500 billion in bad business and consumer loans tied to the collapse in local stock and property values. But private analysts suspect the numbers are far worse, and the banks' lack of liquidity portends trouble for the US economy. Japanese banks could take actions including:
*Dramatically increasing their sales of US treasuries and bonds, for example, or at the very least, refraining from re-investing them when they mature.
*Cashing in on substantial investments in US real estate. (Japan is, by far, the single largest foreign investor in that sector - particularly in California where Japanese capital has helped the state during difficult recessionary years.)
*Drying up their loans to US borrowers who have found Japanese institutions a ready, if costly source of credit.
*Shrinking the availability of bank credit poured into Japanese industries that sponge up US exports.
"A doom scenario is not out of the question because the same sort of Daiwa situation could repeat itself and on a much larger scale," says Edward Graham, a senior fellow at the Institute for International Economics. "Informed analysts see a number of big banks that have publicly acknowledged bad loans and have even more hidden ones."
With slow economic growth, an overvalued yen, and banks already awash in bad loans, further blows to its financial sector "might be tantamount to a depression," Mr. Graham adds. He has heard leading Japanese forecasters privately issue the same warning, he says.
Could the situation spin out of control for even the most protective of government-private sector partnerships - the cozy relationship between official Tokyo and Japanese financial houses?
Some worry about what Scott McDonald, director of sovereign research at Donaldson, Lufkin, & Jenrette (DLJ), calls the "potential of the Japanese banking system sinking under the wave of insolvency."
That view is countered by Robert Feldman, managing director of Salomon Brothers Asia Ltd. in Tokyo, who says that the banks have enough in their coffers to cover the losses. He takes Japanese finance-ministry officials "at their word that internationally active banks, under no circumstances, will be liquidated."
The Japanese face an acute funding issue in the near term, says Tony Smith, DLJ's chief bank analyst. "Japan banks could earn their way through this for the next three years." He adds that the close financial links between Japan's banks and industry mean that "corporations will be able to invest equity in banks and help them through this period."
In virtually all the biggest Japanese banks, money for investments in the US has gone from a strong flow to a trickle. "They are trying to shrink their balance sheets, and less likely to reinvest securities that mature or extend loans," Mr. Smith says. And if one bank is prone in that direction, it will likely not proceed without other Japanese banks, Smith says.
The good news is that even if there were a dramatic sell-off of their US holdings, McDonald adds, "the US is not as dependent on Japanese finance as it was in the recent past. Given our fiscal discipline, we're ... reducing our reliance on foreign borrowing."
Daiwa's scandal has been characterized as part of a pattern which is leading to distrust between Japan and the US.
That Japanese government officials were not forthcoming with the facts about Daiwa until they were forced to do so "comes as no surprise," says Julius Katz, president of Hills & Co. As a former top trade negotiator, he found that Tokyo "didn't come clean. That's the Japanese style - it's not a transparent society."
But what many have called Japan's cultural practice of "saving face" - keeping internal problems from airing in the outside world - has actually exacerbated its troubles. "This won't work where the problem is enormous as a massive portfolio of nonperforming loans," Graham says.
"If it got out of hand, Japan's banking problem could have lots of repercussions," Mr. Katz says. One of the principal costs, he says, would be Japan's economic growth. "They are a major market for us." While the US has recently profited from an exchange rate-driven export boost, those gains could be quickly reversed if Japan's purchasing power were severely clipped.
For the past four years, the Asian powerhouse has lost steam, managing only minimal increases in its gross domestic product. This year, forecasters believe the growth rate will be no more than 0.7 percent, but project a rebound just more than 2 percent in 1996, barring a financial catastrophe.