No. 8 — March 1, 1996

Weekly Review

--- by Douglas Ostrom

"I feel your pain." That sentiment, often associated with President Clinton, was conveyed to Prime Minister Ryutaro Hashimoto February 23 during their brief meeting in Santa Monica, California. As the American president expressed his empathy with the Japanese leader regarding the difficulties the latter faces in resolving the long-running problems of the nation's housing loan firms (jusen), Mr. Clinton noted the parallels to America's own difficult savings and loan crisis and the fact that his own approval ratings dropped in the wake of his administration's plans to assist Mexico in the resolution of its debt crisis last year.

That the president clearly identified with Mr. Hashimoto — the man blamed by many people inside the Beltway for making negotiations last year on a U.S.-Japan automotive trade agreement so contentious — might surprise some observers. In reality, though, Mr. Clinton's sympathetic view of Mr. Hashimoto's travails is not surprising in light of the president's ongoing political difficulties related to savings and loan problems in this country. As Arkansas governor in the mid-1980s, Mr. Clinton became enmeshed in the savings and loan crisis in that state. Even today one residual set of problems known as Whitewater remains a potential threat to his reelection. Whitewater has come to refer to a variety of real or perceived conflicts of interest dating from that time and involving Mr. Clinton's role as governor, which made him responsible for a portion of savings and loan regulation in his state, as well as his family's status as an investor in real estate schemes financed by savings and loans and wife Hillary Rodham Clinton's role in doing legal work for firms subject to state regulation.

Mr. Hashimoto has his own problems brought on by his at least indirect involvement with financial institutions prior to becoming prime minister. An aide's involvement with a loan scandal involving Fuji Bank, Ltd. led to Mr. Hashimoto's resignation as finance minister in October 1991. That event is less remembered today than the fact that jusen and other nonbanks received exceptional treatment when a Ministry of Finance headed by Mr. Hashimoto imposed lending restrictions on other financial institutions in April of 1990. Critics recently have suggested that the exemption jusen received at the time enabled them to expand loans rapidly just as the financial bubble was about to burst, exposing the mortgage providers to the large losses with which they now are burdened.

While the parallels between Whitewater and the jusen are tantalizing, the comparisons easily can be taken too far. Mr. Hashimoto's actions as finance minister, unlike those of Mr. Clinton as governor, arguably stemmed primarily from a bureaucratic consensus for which he served merely as a mouthpiece. Further, while it is easy to criticize the 1991 actions in hindsight, they may be defensible for the effort to give the jusen a profitable, if temporary, niche from which they could dig out of their then current troubles. According to this perspective, the subsequent problems could have resulted from the flawed execution of sound policy as well as bad luck.

The involvement of organized crime in the jusen problem is another apparent contrast with the American experience with savings and loans. While numbers are understandably hard to come by, American news media have reported that gangster groups appear to have played a major role in real estate financed by jusen loans. Yakuza have been involved, for example, in efforts to prevent landlords from expelling tenants in arrears on rent. Partly as a consequence of not receiving full rent payments, various landlords have become delinquent on mortgage payments to the jusen, which, in turn, have fallen behind in their loan payments to banks, agricultural cooperative-related financial institutions and others, according to this line of reasoning. These reports also note that creditors have been reluctant to seize property with which the yakuza appear to be involved.

The heart of the jusen problem, the allocation of losses, also is different than in the United States, where the financial burdens resulting from savings and loan losses generally were in accord with prevailing law. Under the scheme announced by the coalition government last December (see JEI Report No. 47B, December 22, 1995) taxpayers in effect will absorb some of the burden that in an American legal context would have been considered the responsibility of agricultural cooperatives. An indirect consequence could be that jusen borrowers as well as lenders might be spared some pain. Popular indignation has been fueled by reports that tenants and real estate developers, perhaps along with their yakuza buddies, continue to live high on the hog, while taxpayers will have to dig into their pockets to bail the jusen out.

As the controversy surrounding Mr. Hashimoto's own role implies, the jusen problem is at least half a decade old. For much of that period government officials clearly hoped that continued economic growth would permit the jusen and their lenders to overcome the problem of soured real estate loans. This crossed-fingers strategy has not been abandoned completely; Tokyo continues to hope that a portion of the apparently delinquent jusen-related loans eventually will be repaid, thereby limiting taxpayer exposure to the ¥685 billion ($6.9 billion at ¥100=$1.00) figure included in the FY 1996 budget awaiting Diet approval.

As the problem drags on, however, crossed fingers are being replaced by pointed ones. Mr. Hashimoto, as noted above, has come under fire, even though the most recent bailout plan was a creation of the previous coalition government headed by Social Democratic Party of Japan head Tomiichi Murayama; Mr. Hashimoto served as minister of international trade and industry in that cabinet. Mr. Hashimoto's Liberal Democratic Party and the SDPJ, the two dominant parties in the current government, have directed their criticism at the bureaucracy that makes the Ministry of Finance one of Japan's most powerful public entities. They have suggested that MOF needs to be restructured or split up, citing as one example of policy failure MOF's unwillingness to act in 1993 on what in retrospect seems like clear evidence that problems were spinning out of control at the largest of the seven troubled jusen.

In February the politicians pointed fingers at the banks that set up the jusen in the first place, suggesting not too subtly that these financial institutions should shoulder more of the burden of liquidating the seven real estate lenders. Among the ways reportedly under consideration for inducing banks to bear more of the cost were higher deposit insurance premiums and less liberal tax deductions for bad debt. By month's end, however, both the LDP and the SDPJ apparently had been persuaded, presumably by the banks as well as MOF analysis, that such measures would play havoc with other policy objectives or have other disadvantages that outweighed any benefit. The politicians were told, for example, that bank stock prices could plummet if the banks were asked to take on any additional burden. A drop in stock prices presumably would make the banks less able to bear even the burdens that they have agreed to accept, thereby raising the possibility that the whole rescue scheme could unravel. Although the situation remained fluid in late February, the political consensus seemed to be moving toward forcing banks to "bear responsibility" rather than suffer additional financial pain.

Few analysts had any trouble figuring out what was meant by the phrase "bear responsibility" — that at least some of the bank chiefs should quit. While such ritualistic resignations are common in both the Japanese public and private sectors, in this instance top bank executives countered that they had done nothing wrong for which they should bear blame.

As if to underscore this point, the banks continue to threaten to deal with the jusen problem by legal means. Recourse to the legal system would appear to represent a sort of doomsday weapon for the banks. If successful, this tactic could increase dramatically the burden on agricultural cooperatives compared to the levels projected under the December plan. Even under that scenario, in which the agricultural co-ops "contribute" a mere ¥530 billion ($5.3 billion), most of the nation's 47 regional agricultural cooperative associations are expected to register red ink. If legal procedures were allowed to take their course, the burden on the agricultural cooperative system would increase by a factor of 4.7, according to a MOF report distributed by the LDP; this estimate suggests that, even under favorable conditions, the regional associations could take years to work off their losses.

Under this "let the market rule" scenario the entire agricultural cooperative system could be in peril. The system, which includes local and regional banks, insurance businesses and providers of other financial services as well as arms that supply agricultural services and products to farmers, in recent years has depended on financial operations to offset losses from agricultural activities. As a consequence of agricultural market liberalization and other factors, demand for agricultural supplies and services has declined, even as farm incomes — and savings — have remained relatively high. More important in the present context, borrowing by farmers has been low, reflecting the uncertain future of Japanese agriculture. The jusen problem is in part a consequence of an official effort to find a use for agricultural savings and to protect the profitability of the overall agricultural cooperative system. If the jusen package were to unravel, exposing the cooperatives to the full extent of their losses, the jobs of co-op employees, who numbered 356,000 as of March 31 last year, could be at risk.

Few Japanese politicians can afford to ignore the employment consequences in a weak economy of appearing to let the agricultural co-ops sink or swim on their own. In addition, the traditional overrepresentation of rural areas in vote distributions and the value of agricultural organizations as sources of funds give the problems of the agricultural cooperatives political influence they would not have otherwise. Such factors were presumably behind the reported opposition of key Shinshinto leader Tsutomu Hata to a trial balloon floated in party circles to press for a legal remedy to the jusen problem; the fate of that plan remained uncertain in late February.

However, pushing the burden of bad loans away from the cooperatives and onto taxpayers or banks still appears unacceptable politically, economically or both. The pain that any jusen decision will involve for Mr. Hashimoto is one that fellow politician Mr. Clinton probably would have no difficulty feeling, even in the absence of comparisons to America's savings and loan mess.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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