By Reihana Mohideen
The plunge in the Tokyo stock market has dealt the banking sector some of the hardest blows. Banks' stock prices have fallen roughly twice as much as the average.
Bank shares have fallen 28% in April alone. Shares in the Industrial Bank of Japan (IBJ), considered to be a pillar of the establishment, plunged 39%. Fuji Bank's fell by 41%, Mitsui Trust's by 35%.
These banks are amongst the world's 10 largest. The April fall in the stock market value of the IBJ - $16 billion - is more than the total market value of any US bank.
The banks are being affected by three related factors: the decline in corporate share values, an increasing number of bad loans and a rapid decline in inflated land values.
Japanese banks typically hold large portfolios of stocks in non- financial corporations. A big chunk of bank capital consists of unrealised "gains" on shareholdings, and this shrinks with every fall in the stock market index.
In nine trading days from March 30 to April 9, the Nikkei index of the top 225 companies' stocks on the Tokyo Stock Exchange lost 15%. Share prices on average are at less than half their value in December 1989.
Even so, further steep falls are quite possible. The average price to earnings ratio of shares in Tokyo is still around 35, compared to 20 in the US and 14 in France.
According to the international credit ratings agency IBCA, "unrealised gains" on shares, which are the hidden reserves of the banks, are already perilously close to being wiped out in many Japanese banks. These hidden reserves are the banks' usual cushion against bad debts.
Bad debts
Yet the fall in the banks' stock market reserves is converging with an increase in bad debts as the "real economy" declines. Capital investment is falling, and real output is believed to have declined in the last two quarters.
This has brought a surge in the number of corporate bankruptcies. In 1991 the liabilities of corporate bankruptcies more than trebled from the previous year, reaching some A$79.6 billion. According to the April 17 Business Review Weekly, in a single day in early April four companies collapsed with liabilities estimated at $A955 million.
In an effort to hide the reality, company debts are being shuffled out of view through creative bookkeeping. For instance, on April 1 shareholders in the big Tobishima Corporation construction group were holding shares in a company which had a ly a day earlier, it had been loaded down with a debt of one trillion yen. With the help of its banks, the company had shifted 800 billion yen of doubtful assets and unpayable debts off its balance sheets to a new company set up by Tobishima. This is becoming an increasingly common practice.
Another big chunk of bank loans is to property firms; land is the collateral for some 35% of the loan assets of Japanese banks.
While Japan's commodity price inflation is one of the lowest in the industrial world, its land price inflation has no contemporary precedent. Land price inflation has far exceeded growth rates in the "real economy" - whose growth rates were largely financed by the speculative boom in property.
An indication of this is the fact that the real estate industry employs around 790,000 people, generating an operating surplus almost on par with the manufacturing sector, which employs 15 million people. The fall in land prices (30% in Tokyo and 40% in Osaka so far) has been described by the Economist as "the bursting of the biggest speculative bubble seen this century".
Land speculation has had a massive impact on living standards. In December 1990, the average price of a 57 square metre apartment in Tokyo was 80 million yen, or 12 times the average Tokyo resident's annual income. While corporate prosperity reached unparallelled heights, poverty became widespread. Hence the recently coined slogan fukoku hinmin: Enrich the country, impoverish the people.
'Godzilla is waiting'
It is possible that many of Japan's major banks are broke, though no-one knows for sure, since Japanese banks are not required to disclose the level of their bad loans. A recent meeting of bank sector officials is said to have discussed what to disclose and decided to reveal nothing. According to the Economist, "That obscurity is what makes the current conditions so scary. Godzilla is waiting in a Japanese bank vault. Once the monster escapes, it could lay waste to banks and their customers alike."
A collapse of the banking sector could be disastrous for the Japanese economy, which is highly dependent on borrowing from the banks: in 1991, bank loans were equivalent to 90% of GNP in Japan, compared to only 37% in the US. According to the Economist, as talk in financial circles turns "increasingly to comparisons between Japan in the 1990's and America in the 1930's, the Bank of Japan would be wise to treat them with consideration".
International repercussions would also be great. The Japanese have become known as "bankers to the world". The total assets of Japan's big six city banks are said to be larger than the combined assets of the 25 largest banks in the US. A large amount of the world's available credit has been based on the Japanese speculative bubble. Japanese money constitutes nearly 40% of international banking assets and accounts for more than 10% and 8% of banking industry assets in Britain and the US respectively. Overall, Japanese banks account for 15% of commercial credit issued in the US. In California last year, Japanese financial institutions were responsible for about 35% of commercial loans and 21% of real estate loans and owned 24.5% of all banking assets. The Japanese own the fifth, sixth and seventh largest banks in California, including the Bank of California. The Bank of California has sacked hundreds of workers and obtained a $250 million loan from its parent, Mitsubishi Bank, to cover loan losses last year.
If the credit squeeze tightens, Japanese banks may not be able to provide credit for US firms when the US economy "turns around". This could slow down a recovery and drag out the current recession worldwide.