"Stronger financial markets crucial"

Panel Discussion: June 7, 2001

Japan's bad loans, slowing U.S. economy cast shadow over region

Under the theme "Asian Financial Markets: Requirements for Attaining Maturity," panelists agreed that it is indispensable for Asian nations and regions to strengthen cooperation toward stabilizing currencies in the area by, for instance, forming broader currency swap agreements.

The panelists were Thanong Bidaya, economic adviser to Prime Minister Thaksin Shinawatra of Thailand; Hakuo Yanagisawa, Japan's minister for financial services; Kenji Yoshizawa, deputy chairman of Bank of Tokyo-Mitsubishi; and Masaru Yoshitomi, dean of Asian Development Bank Institute. The following is a summary of remarks from the panel discussion:

Moderator: The bad loan problem is weighing on the Japanese economy as stock prices of Japanese companies that received debt forgiveness are still flagging.

Yanagisawa: There are cases in which share prices of companies that received debt forgiveness from banks based on rehabilitation plans do not turn upward. This is probably because stock prices tend to reflect the performance of a company on a long-term basis, but it may not be the case on a short-term basis. There are apparently doubts concerning transparency of some rehabilitation plans by borrowers.

It is thus desirable that guidelines be established by the private sector to ensure such transparency, with such guidelines expected to help engender mutual trust between banks and debtor companies.

Moderator: Nonperforming loans are concentrated on particular sectors, such as construction, real estate and retail. There is concern that deflationary pressures could take their toll on such sectors during the process of cleaning up bad loans.

Yanagisawa: Nonperforming loans at manufacturers increasingly account for Japan's overall bad loans as a result of the economic slump. But until the previous fiscal year, three to four particular sectors were responsible for generating much of the nation's bad loans. Some point out that if the bad loan disposal scheme planned by the Japanese government is applied to such sectors, the consequences at the macroeconomic level could be grave.

There are a huge number of subcontractors in the construction industry, and if a major builder failed, 200-300 firms would collapse, it is believed. Although the government has to deal with them carefully, such subcontractors are having a tougher time than others might think.

Moderator: Is it possible for the Japanese government to dispose of nonperforming loans over the next two to three years as it claims?

Yanagisawa: A two-to-three year term is realistic, and this can be explained in microeconomic and macroeconomic terms, especially through Bank of Tokyo-Mitsubishi's experience on microeconomic terms.

There is some interesting data to support this view from a macroeconomic viewpoint, which compares excess liabilities at companies with cash flow that is used to eliminate the debt. According to separate data compiled by the Bank of Japan and the Ministry of Finance, aggregate excess liabilities at one point in 2000 stood at some 100 trillion yen ($806 billion).

The issue is how to eliminate such liabilities, and assuming such debt can be eliminated using cash flow at each company, total cash flow in all industries stood at some 42 trillion yen in fiscal 1999. This means 42 trillion yen is available for repaying 100 trillion yen in liabilities, so unless the economy itself deteriorates, the bad loan problem can be solved.

Moderator: The economic slowdown in the U.S. is casting a dark shadow over Asian economies.

Thanong: The decelerating U.S. economy is worrisome. The Thai government, after factoring in the U.S. economic slowdown, has revised the nation's economic growth forecast to 2.5% from 4%. Since the economic crisis in 1997, the Thai economy has been driven by trade surplus and revenue from tourism. Thailand's current-account surplus topped $10 billion a year until the beginning of this year and the nation could afford to build up foreign reserves, but its trade surplus has almost dried up.

On the other hand, domestic consumption in Thailand remains weak because investors do not have confidence in the results of the nation's economic reforms. The Thai government intends to push ahead with financial reform, especially in the banking sector, and enliven the capital market.

The Thai government injected capital into the financial sector by making use of funds made available through an aid scheme initiated by Japan's former Finance Minister Kiichi Miyazawa, and it helped the nation's economic growth to recover to around 4%. But the Thai economy cannot keep adopting such policies forever.

The banking sector in Thailand does not function properly as it is saddled with nonperforming loans. The Thai government set up the Thai Asset Management Corp. for the 100-day term of operation, and the bank is continuing purchasing bad loans, with consultations with private banks, in order to bring the bad loan ratio to less than 10% by the end of this year. Bad loan disposal for large corporations has almost been completed and most remaining bad loans are those for smaller firms. The Thai government is also making strenuous efforts to enliven small and midsize businesses by gaining support from Japan.

Yoshitomi: According to Thai Finance Minister Somkid Jatusripitak, the Thai government has similar problems to Japan in terms of macroeconomic policy. That is, lending by banks to small and midsize companies has not increased enough. Although money supply is steadily increasing, bank credit remains flat in many Asian nations, posing a hindrance to steady economic recovery in the region.

This is a critical time for Japan, which faced similar problems several years ago, to think with the rest of Asian countries how to coordinate macroeconomic policy with microeconomic problems in the banking sector.

Thanong: The Thai economy is expected to shrink some 2.5% due to the economic downturn in the U.S., and unless the real economy is revitalized, Thai economic growth might fall below the 2.5% line.

The Thai government holds a meeting of experts every Monday and has made decisions on effective measures such as adjusting fiscal and monetary policies. Through such meetings, the Thai government will be able to deal with matters involving the foreign-exchange market and economic slowdown in an appropriate manner.

(The Nikkei Weekly July 30 Issue)

Titles of speakers, names of companies, etc., were correct as of the time when the forum was held.