With the collapse of the asset price “bubble,” following a tightening of monetary policy in 1989-90, Japanese banks encountered pressure from both a sharp decline in the value of equity holdings and a marked increase in nonperforming loans. Concern about the banks reached a peak in August 1992. This, along with the evident weakening of the economy, prompted the Government to introduce a comprehensive economic stimulus package. The Government also took several measures that helped to stabilize equity prices and that aimed to assist banks in managing their loan problems. In January 1993, the banks launched the Cooperative Credit Purchasing Company (CCPC) to accelerate the writing down of bad loans.
The major banks disclosed that nonperforming loans--defined as those on which interest has not been paid for at least six months or those to bankrupt companies--amounted to 4.6 percent of their total loans at the end of fiscal year 1992. A mechanical extension of the disclosed nonperforming loan figure to include those of the regional banks, as well as restructured loans of all banks, produces an estimate of total bad loans in the range of 6-7 percent of all banks’ total loans. In comparison, the hidden reserves of all banks amounted to 4.2 percent of total loans, whereas their core business profits have ranged from 0.4 percent to 0.8 percent of total loans. Thus, from an aggregate perspective, the bad loan problem is serious yet manageable.
The distribution of the bad loans is not uniform relative to the ability of the various segments of the banking industry to bear the associated losses. The problem appears to be more acute for the trust banks. Whereas the incidence of nonperforming loans of the trust banks is on par with that of the city banks, the core business profits of the trust banks deteriorated significantly in recent years. The trust banks have also fared less well than other types of banks in the more liberalized, competitive, and efficient financial system in Japan.
In view of the uneven distribution of the bad loan problem relative to profits, the most immediate policy concern has been the emergence of a liquidity strain. No Japanese bank has posted a net loss in the postwar period. To encourage the writing down of bad loans, the Governor of the Bank of Japan has stated publicly that the central bank would provide liquidity support to any bank that experiences temporary funding difficulties after posting a net loss because of heavy loan loss provisions. With this safeguard in place, every effort should be made to resolve reasonably promptly the bad loan problem.
Measures to enhance market discipline may lessen the likelihood that such a marked deterioration in banks’ asset quality will recur. Foremost among such measures is the placing of adequate private capital in the banking system. The fuller disclosure of banks’ asset quality may also enhance market discipline.