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How Much Trouble Are Japan's Banks In?
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20631 |
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Section : |
CURRENT ISSUES
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| Issue
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10 / 1992 |
3,055 Words |
| Author
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Jon Choy
Jon Choy is senior economic analyst at the Japan Economic
Institute in Washington D.C. |
After rising to the top of global rankings during the second half of the 1980s on the back of the domestic economy's long-running expansion, the Japanese banks have stumbled as events have transformed some of their strengths into weaknesses.
Major Japanese commercial banks have suffered mixed profits and have had their credit ratings downgraded by independent investment services. Although the chances of a major bank failure still are remote, the Japanese government and private analysts are concerned that the domestic banks troubles will make it difficult for them to meet international credit worthiness standards.
They also question whether the banks' struggles pose a threat to the health of the entire economy. Moreover, the ripple effect could spread throughout the global economy because of the important role Japanese banks have come to play in world finances.
As the Japanese economy has rebuilt and expanded since World War II, Japanese banks have grown in lockstep. The nation's primary financial intermediaries, banks collect savings from depositors and funnel them to corporations in the form of loans, providing the capital to transform Japan into the world's second-largest economy.
Paralleling the expansion of Japanese household income and corporate Profits, Japanese banks' deposits and assets also increased. In the late 1980s, several factors coincided to vault Japanese banks into the top ranks of the world's financial institutions:
·Corporate profits surged as the economy boomed beginning in 1987. Companies reduced their dependence on bank loans to raise investment funds, but banks still benefited as repositories for these monies.
·Shares listed on the Tokyo Stock Exchange jumped in response to strong company earnings and low interest rates. Unlike American banks, Japanese banks are allowed to hold stock in non financial firms (up top 5 percent of any single company's outstanding shares). Given the traditional Japanese business practice of holding small amounts of a business partner's shares, Japanese banks had amassed very large stock portfolios. As the Nikkei average rose to record heights, the value of these portfolios zoomed.
·Japan's real estate market soared in tandem with the stock market as they became linked in a virtuous circle" of financial speculation. Stock investors used some of their earnings to buy land, pushing up real estate prices.
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