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Responses to financial crises: Japan’s experience
20 Dec, 2012
September 17, 2012, the Ministry of Finance, Vietnam in cooperation with the Japan International Cooperation Agency (JICA) organized the workshop "Non-Performing Loan (NPL) Management in Restructuring State-owned Enterprises (SOEs)." The workshop aimed to share practical experiences in the process of restructuring SOEs of Japan since the financial crises during the decade of 1992-2002. The workshop attracted many representatives from departments and agencies, SOEs’ leaders, economists, journalists and others who are interested in NPL management, which is raising attention recently in Vietnam, especially when the credit growth has begun to show good sign after a freezing period. In these days, the biggest concern about the banking system in Vietnam is handling NPL, also handling inventory in the business sector - which are dilemmas in the process of enterprise restructuring and in need of support from countries that have gone through difficult time similar to Vietnam like Japan.
The workshop’s speaker, Mr. Daisuke Kotegawa - Research Director of CANON Institute for Global Studies - divided the financial crises in Japan during 1992 - 2002 into four phases with detailed characteristics and response policies from Japanese government. Those four phases are with milestones of 1992-1993 (Phase I), 1995 (Phase II), 1997-1999 (Phase III) and 2001-2002 (Phase IV) during which commonly known as ‘The Lost Decade’ of Japan (1992-2002). In the first two phases, Japan's GDP growth rate declined sharply while in the next two phases, the rate went down even below zero, the government faced many difficulties to revitalize the economy.
During the first phase (1992-1993), non-performing loans increased among Japanese banks, the condition of land prices decline and sluggish economy. The then Prime Minister Miyazawa raised the possibility of an ejection of public funds to stabilize the Japanese financial system in August 1992 but that action was not taken due to many critics. Therefore, basic stance of the government, banks and corporate sector was to "wait and see".
But then, the Japanese government implemented a sequence of economic stimulus packages in this Lost Decade, in which approved the initiative by major banks to establish the Cooperative Credit Purchasing Company in January 1993, to purchase collateral-backed bank loans in order to liquidate property mortgages. However, the effectiveness of those fiscal stimulus to solve the uncertainty in the financial market at that time was not as expected.
In regards to the phase II of the financial crises (1995), two credit cooperatives (Tokyo-Kyowa and Anzen cooperatives) went bankrupt in December 1994. These were the first bankruptcy cases in the financial industry since the World War II. Subsequently, a small regional bank (Hyogo bank) also went bankrupt together with many mortgage financial institutions (so called Ju-sen). The Japanese government established the "Takeover Bank" (Tokyo Kyodo Bank) in order to, in cooperation with Bank of Japan (BOJ) and other major banks, absorb the assets of those troubled institutions. In September 1996, Tokyo Kyodo Bank was restructured as "Resolution and Collection Bank" (Japanese RCC) to expand its operations. In December 1996, the Japanese government injected public funds worth $6.850 billion to compensate for the loss of Ju-sens. This measure brought acute criticisms to the government and the banking industry.
In the next financial crisis period (phase III, 1997-1998), the crisis happened not only in Japan but also in most countries around the world, often known as "Black November" in 1997, starting with consecutive bankruptcies of financial institutions in a short time. In Japan, it can be named that Sanyo Securities (7th largest then) went bankrupt in November 3, Hokkaido Takushoku in November 15, Yamaichi Security (4th largest) announced its bankruptcy in November 24, Tokyo-City Bank also went bankrupt in November 26, which Mr Daisuke Kotegawa was the Director in charge of settling the Sanyo Securities and Hokkaido Takushoku Bank in the Ministry of Finance. Within a month, the debacle of those leading financial institutions, commencing by the bankruptcy of Sanyo Securities (November 3) with the first fraudulent cases in financial loans in the short-term money market, rendered market paralysis. The resulting credit crunch caused by the debacle of those financial institutions had a negative impact on the economy. GDP recorded negative growth (-0.1%) in 1997 when Japan enter the third phase of financial crisis, first time since World War II.
During this period, scandals among bureaucrats in the Ministry of Finance showed out the cozy relationship between traditional bureaucracy and banks, therefore the National Diet’s Committee of Financial System had stormy debates of important financial system-related laws. Although those financial institutions were collapsed or nationalized, top executives of four major entities (Hokkaido Takushoku, Yamaichi, Long-term Credit Bank (LTCB) and Nippon Credit Bank (NCB) were arrested for allegations of illegal conducts, including window dressing settlement of their balance sheet. After several years of court proceedings, those of LTCB were found innocent by the Supreme Court, those of NCB are under review, others served sentences in jail.
To improve the situation, major initiatives were given out as follows:
(1) Injection of public funds to increase the capital of major banks: The injection of public funds was implemented twice, however, the amount of the first time (March 1998) was small and taken across the Board of banks without official examination, therefore, the confidence was not restored. More than that, the examination of assets had not been preceded, which lead to failure of this initiative. Lessons learned, one year later, in March 1999, an amount of ten times of that of public fund (approximately $74.6 billion) was released to banks, in which only the four large banks of Fuji, Daiichi-Kangyo, Sakura, Sanwa received half the amount.
(2) Introduction of new financial regulatory framework:
(i) Establishment of the Japan Financial Services Agency (JFSA) in June 1998 to maintain the stability of the financial system. JFSA played role in inspecting, supervising private financial institutions and monitoring securities transactions based on transparent and fair administration, focusing on market discipline and the principle of self-responsibility. Also, JFSA strives for qualitative repletion of Japan’s financial system by adjusting the practical measures of financial regulations and supervision to the finance related environmental changes, including technological innovation and globalization of the financial system.
(ii) Introduction of a system of prompt corrective action in April 1998: including a set of measures to be implemented orderly based on enterprises’ solvency margin ratio (in range of 0%, 0% - 99%, 100% - 199%, over 200%) and enables government officials request cessation of business activities or enterprises are not allowed to continue trading if their loans are over the permitted level.
(iii) New financial inspection manual became effective in July 1999.
(3) Introduction of "bridge bank" scheme for troubled banks, in which temporary nationalization scheme were applied to two major banks (LTCB and NCB). Finally, these banks were sold to investors.
(4) Lastly, the Bank of Japan (BOJ) lowered its target interest rate to zero in February 1999.
In the fourth phase (2001-2002), mergers and consolidations of banks accelerated in Japan. The Japan Government intended to implement early and full completion of non-performing loan issues among major banks. Measures of limit and change of bank’s supporting scheme were compiled as for bankruptcies of large corporate with excessive debt increased and focused on turnaround of companies with excessive debt.
The government required major banks for mandatory disposals of NPLs from balance sheets within two to three years. A mandatory quantitative objectives were imposed on major banks, including NPL / total asset ratio must be lower than half of the current level by the fiscal year 2004. Another initiative was approved in April 2003 that the Industrial Revitalization Corporation of Japan (IRCJ) was established to support companies in restructuring process since the bill "Law on Industrial Revitalization Corporation" was submitted to the National Diet in January 2003.
Unlike the Debt and Asset Trading Corporation (DATC) in Vietnam, the entire amount of capital to establish IRCJ were from banks, not taxpayers' money.
During its two years of operation (2002-2003), IRCJ helped revitalize many major Japanese corporations such as the largest supermarket chain, a second largest cosmetics group, 4 large developers in real estate industry, 9 local hotels, 4 transportation companies, a large discount electronic appliance store chain, 2 local department stores, 5 wholesalers and others (high-tech manufacturers, computer schools, leather companies, etc.). Mr Daisuke Kotegawa, in charge of IRCJ, emphasized that these revitalizations brought about a M&A boom in 2004-2006 and helped restructure Japanese industry.
In regards of the term "Non-Performing Loans", Mr. Daisuke Kotegawa said it originated from Basel Rule (1988) among members of the Bank of International Settlement (BIS) to prevent the entry of Japan banks to London market in the '80s. He said that Vietnam did not have to follow this rule because Vietnam was not a member of BIS. However, if considering application of the rule’s contents, Vietnam would find lots of valuable experience, for instant, to review the effective use of resources so that the economic growth would not be hurt; to reinforce financial institutions by well response to spreading rumors about their bad health by speculators attacking on the economy. It was also important to pay attention to the taxpayers by appropriate policies to avoid their revolt against the government. For enterprises now, it is important to have correct understanding of the Balance Sheet and the Business Statement to avoid either over-optimistic or over-pessimistic attitude. Collaboration of management is in need than ever so that they do not shrug off their responsibility. For the government, the welfare of the entire nation should be considered the most important when choosing which company to support. A company which accrues loss every year should be restructured to make profits by increasing sales and cutting costs through review, selection and concentration. Mr. Daisuke Kotegawa presented 4 categories of reevaluation of enterprises which generated loss from their initial business lines to other supplement lines in their operation years and the quantitative evaluation methods to decide which to retain and strengthen, maintain together with subsidiaries and which to cut apart and sell with discount.
As for the real estate industry, in the face of development of its bubble during the second half of the 1980s just before the crisis, Japanese government adopted the mechanism of controlling banks’ loan amount to this sector. From March 1990, the Ministry of Finance, Japan issued government’s guiding documents on regulation that banks have to set limit of loans increase for the real estate industry in total loans.
From measures by Japan to deal with the financial crisis as described above, Vietnam should consider the measure of pumping money to rescue banks as it may face strong public opposition, because using taxpayers’ money that way is like ‘tax the poor to save the rich’, or if it is required to do so, it is necessary to check banks’ assets before pumping to ensure its success. Vietnam should also restrict credit growth to real estate industry and the State Bank of Vietnam must take strong measures such as requiring all banks and credit institutions to maintain non performing loans below the safety threshold. Any organization with non-performing loans exceeds the allowed level have to sell or transfer its non-performing loans to DATC or being restricted in certain activities until it can handle its non-performing loans or reduce non-performing loans ratio to an acceptable level to ensure the safety of the banking system.
Source:
1. Presentation of Mr. Daisuke Kotegawa at the Workshop.
2. Report by the Nomura Institute of Capital Markets Research,
3. Report by the Japan Financial Services Agency,
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