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Japan takes its turn with banking disasters


TOKYO -- Those who despair that America's economy has surrendered its leadership to Japan can take heart. In at least one big area, Japan is scrupulously imitating one of the landmark American business events of the 1980s: banking disasters.

Nearly five years after Washington came to grips with the full horror of the $500 billion savings-and-loan collapse, Japanese banks and thrifts are following suit as precisely as if executives had studied a how-to manual by the least scrupulous bankers in the United States.

In Japan as in the United States, the biggest culprits are thrift institutions that were conceived to promote saving and home ownership.

In both countries, these institutions became go-go banks that attracted large sums by paying high interest rates. And then they used these deposits to underwrite dubious ventures.

In both countries, government ultimately contributed to the problem by helping hedge the risks through low-priced deposit insurance. Government-backed deposit insurance guarantees that bank or credit union customers will be kept whole, even if a financial institution goes bankrupt.

But the American savings-and-loan crisis overwhelmed the industry's insurance fund in the 1980s, and now Japan has temporarily wiped out its own insurance fund with the two recent bailouts.

No one yet knows the full scale of the problem in Japan, but it is not small. Two weeks ago, the Ministry of Finance shut down Kizu Credit Cooperative, the nation's biggest credit union, and a large regional bank; between them, they had roughly $16 billion in bad loans.

Government officials estimate that Japan's financial institutions have about $400 billion in problem loans, and other analysts suspect that the total is much higher.

Even by conservative estimates, the loans in arrears roughly equal the estimated capital of the country's banks and other zTC financial institutions. No one thinks Japan's financial system is about to collapse, but the problems are enough to delay the country's recovery from recession, and a few of the biggest banks could be hurt badly.

"In Japan, there was this myth that banks never go bankrupt," said Toru Nakakita, professor of economics at Tokyo University.

"The managers believed that as long as they took the same steps as all the others, they would never go bankrupt."

The government is trying to deal with the problem in an attempt at collaboration. Instead of simply bailing out the bad loans with public money, as the United States finally did, government officials are leaning on Japan's biggest banks to put up most of the necessary capital. But the big banks are balking, and they have their own problem loans to worry about.

Regardless of who supplies the money, the amount needed will almost certainly make it harder for Japan to bounce back from its recession. That would be bad news for other countries, because it means Japan that would be less likely to import foreign products or to invest overseas.

But the banking crisis also rebuts the popular wisdom that Japan can somehow defy the laws of economics and of human sense. It turns out that Japanese, like Americans, have been able to fall victim to the same timeless traps: the lure of quick profits and the false certainty that what was true yesterday will be true tomorrow.

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