On September 25, 2001 the Research Institute of Economy, Trade and Industry (RIETI) held a conference in Tokyo on Japan's non-performing loan (NPL) problem, co-sponsored by the US think tank American Enterprise Institute (AEI) and the Japanese newspaper Yomiuri Shimbun.
The title of the event was "Non Performing Asset Restructuring for Japan's Economic Recovery." Panelists included American experts as well as Japanese policymakers on the issue. The conference, attracting an audience of nearly 500 people, highlighted policy issues that deserve attention. Seven basic messages emerged from the day's discussions:
First, there was consensus that Japanese corporations must be restructured as part of the overall process of restructuring Japan's financial sector. This point was stressed eloquently by Glenn Hubbard of the US Council of Economic Advisers (CEA), who made a video taped presentation, and by Tadashi Nakamae of Nakamae International Economic Research. Richard Gitlin, a partner at Bingham Dana Law Firm, argued that successful corporate restructuring could bring about a win-win outcome for the banks and borrowers, as well as for the economy.
Second, it was argued that stricter evaluation of the assets held by the Japanese banks was crucial. Also, a number of participants pointed out that, since banks lack incentives to evaluate the loans more strictly,regulators should play a more aggressive role in ensuring proper evaluation. Yoshihiro Sakai of AEI proposed that category 2 loans should be divided into two subcategories and a higher reserve level should be set aside for the more problematic loans.
Third, Peter Wallison of AEI and others argued that if there were a shortfall in the capital of the banks as a result of stricter asset evaluation, the government should inject capital into or nationalize the banks.
Fourth, there was an understanding that the original lenders themselves cannot restructure the borrowers effectively. William Seidman, the former head of the Resolution Trust Corporation (RTC), which was instrumental in resolving the savings & loans (S&L) crisis, advocated the transfer of non-performing assets from the banks to a third party.
One entity would be the Resolution Collection Corporation (RCC), which would require a stronger mandate, however, to become a bona fide version of the RTC in Japan. Mr. Seidman recalled his experience with the US Federal Savings and Loan Insurance Corporation (FSLIC), which, like the current Japanese RCC, needed a clear mission and the wherewithal to sell the NPLs removed from the banks. An alternative could be to scrap the RCC and establish a new organization altogether. Dr. Hubbard agreed with this sentiment.
Fifth, it became clear that the transfer price between the banks and the RCC was a key issue. Mr. Seidman argued that the transfer should be made at fair market value on the condition that the assets held by banks need to be evaluated at fair market value. David Cooke, another former member of the RTC, also noted that if the RCC acquired assets at an artificially high price, the RCC would not be able to dispose the assets or restructure the borrowers.
Sixth, while the RCC was considered to be a possible vehicle to accelerate debt restructuring, participants emphasized the importance of outsourcing asset management activities and ultimately releasing the assets to the private sector. In this regard, Robert Dugger of Tudor Investment Corporation referred to the importance of training an army of entrepreneurs to manage the assets.
Finally, participants stressed the importance of acting quickly. Dr. Hubbard made it clear that the Japanese economy cannot recover without the speedy restructuring of the financial sector and the corporate sector.
We were also fortunate to hear Nobuyuki Kinoshita, director of the Financial Services Agency (FSA), who responded to these points. His analysis was based on the recent reform program that was announced on September 21, 2001.
There were no fundamental problems with the asset evaluation by the banks, according to Mr. Kinoshita. He argued that the only issue was the failure to reflect the changes in the conditions of the borrowers,after the periodic asset evaluation, in a timely fashion. This was the reason for the initiation of special inspections, as part of the reform program, when there is a substantial change in the market perception of the soundness of the borrowers. By limiting the scope of the reform, he, in effect, rejected the ideas proposed by other participants to make the asset evaluation stricter for a broader group of loans.
Mr. Kinoshita responded to the point raised by others of the need for speedy actions by defending the FSA's plan to reduce the level of NPLs in seven years. Yet, it was unclear how this seven-year plan could be reconciled with the commitment of the FSA to "normalize" the NPL problem in three years as described in the recent reform program.
The transfer price between the banks and the RCC remained ambiguous. The only explanation Mr. Kinoshita gave was that the price was somewhere between that quoted by the seller and the price the buyer was willing to pay.
Although he seemed to agree with the need to utilize the private sector, the examples he gave were limited to the hiring of experts by the FSA. There was no hint of a massive outsourcing of asset management activities or of the intention to sell the assets to the private sector.
As you may gather from the description above, there was significant ambiguity concerning the recent reform program. There also appeared to be a substantial gap between the seven points emerging from the symposium and the comments by the FSA director.
In my view, to accelerate NPL disposals and debt restructuring of the corporate sector, such ambiguity must be clarified and the gap should be drastically narrowed. Although these are by no means easy, there was a glimmer of hope that also surfaced during the conference.
Heizo Takenaka, Minister for Economic and Fiscal Policies, noted that Mr. Koizumi is now personally involved in these issues. He is no longer simply delegating the issues to his cabinet. Moreover he is demanding that FSA come up with results.
With Prime Minister Koizumi's high popularity and his strong leadership, there is hope that substantial changes may be down the road. Ever-dropping stock prices might persuade Mr. Koizumi to push bold measures. During their recent meeting, President Bush stressed the NPL issue above all others, which may have strengthened the Prime Minister's resolve to tackle the problem. After all, the war against terrorists cannot be fully won without a sound and strong global economy.
Let's watch how the story unfolds and keep our fingers crossed.
Author, Tatsuya Terazawa
Visiting Senior Fellow
Research Institute of Economy, Trade and Industry, IAI
e-mail: Tatsuyaterazawa@aol.com
Editor in Chief, Nobuo Tanaka
Vice President, Senior Fellow
Research Institute of Economy, Trade and Industry, IAI
e-mail: tanaka-nobuo@rieti.go.jp
tel: 03-3501-1362 fax: 03-3501-8391
The opinions expressed or implied in this paper are solely those of the author, and do not necessarily represent the views of the Ministry of Economy, Trade and Industry (METI), or of the Research Institute of Economy, Trade and Industry (RIETI).
