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It's Worse Than You Think in Japan

Benjamin Fulford, Forbes Magazine, 10.15.01

The world's economy hinges in part on a financial system that, by Western standards, is a shambles.

 The extent of Japan's banking rot is now the focus of an International Monetary Fund team in Tokyo. A consensus among banking analysts puts the total of bad loans at close to $2 trillion, about half of the nation's GDP.

But with all the emphasis on the bad debts and likely bankruptcies in Japan's business sector, a separate banking crisis exists in the defrauding of individual customers on a potentially massive scale. This largely unreported scandal helps to explain the deep Japanese cynicism toward the banks--a barrier to vital reform.

Even as commonly understood, the banking predicament is frightening. Without exception, the busted financial institutions in Japan since the bubble of the late 1980s have been found to have bad debt totals several times what their published accounts admitted or what foreign bank analysts estimated. In every case, the banks have engaged in the practice of tobashi, or switching debts from company A to paper company B in order to make it appear A's loans are being paid back.

"If Japan's government tried to clear up all the bad debt honestly it would go bankrupt," says Naoko Nemoto, chief banking sector analyst at Standard & Poor's in Japan. The sovereign debt rating of a country thought to be among the richest in the world is two notches shy of being classified junk and is on downgrade notice by both S&P and Moody's Investor Services.

Unless many of the banks are put under new ownership, as happened to Shinsei Bank (bought by Ripplewood, a U.S. investment consortium involving stars like former Fed chief Paul Volcker) and Tokyo Sowa (recently sold to the Lonestar Group, an investment fund from Texas), there's no reason to believe their behavior is suddenly going to meet global standards.

Japan's new, supposedly reformist political regime initially said it would clean up the bad debt within three years but now talks merely of cleaning up the latest officially admitted debt by 2007--hardly a sign the power brokers are serious about reform. When Financial Services Minister Hakuo Yanagisawa announced the new, neutered goal, stock prices plunged.

But the attention and talk mainly has been about the big business banks. A close look at Japan's small financial institutions, with assets of $2.1 trillion, a third of the banking system's total, reveals just how much deeper the system's rot runs.

Take Oji Shinkin Bank, with $8.1 billion in loans and officially $790 million in nonperforming debt. "About 70% of small companies are in the red. If we went by the book with our lending and foreclosed on insolvent borrowers, about half of our customers would go under," admits Tatefumi Onuki, head of the bank's inspection department. "This is not a problem at just our financial institution," he says.

Like many Japanese industries, the business-client base of Oji, based in a Tokyo suburb of the same name, has been devastated by competition from other Asian countries such as China. "These are hardworking people, and we cannot just cut them off," Onuki insists.

Given these statements, skepticism of Oji's official bad debt total is in order. There are other reasons to doubt the bank's commitment to global standards. Oji has been the target of at least ten suits alleging fraud against its customers. In 1997 an Oji official was convicted of forging documents to steal $12 million worth of depositors' funds.

A national association of "bank victims" exists in Japan, and a unit devoted expressly to Oji Bank was formed in 1995 by retail depositors and borrowers Misako Arai and Kenji Sakairi, to pursue claims Oji had fraudulently used their assets as collateral for bad loans to others. When Arai protested at the bank, claiming it misappropriated $400,000, she was arrested and held for 21 days as police, she says, tried to force her to confess she was blackmailing the bank. They failed and she was released. The police are mum about the episode.

If the hundreds of such stories from the victims association are to be believed, it is common for bank customers to find what are, in effect, unexpected liens being slapped on their assets. And the courts are of little help.

When Arai and Sakairi tried to sue Oji, they presented expert testimony that the bank had used fraudulent documents. But, photocopies of trial transcripts show, court records under the judge's official seal were altered in a way that validated the bank's claims. A lawyer for Oji bank denies fraud against Arai and Sakairi but would not provide FORBES with evidence.

Nor is this sort of case restricted to small banks. One aggrieved customer of Fuji Bank (now part of Mizuho Financial Holdings, the world's largest bank) succeeded after a long battle in getting the bank to erase $2 million of supposed debts--but only because he had the foresight to tape-record all of his conversations with Fuji officials. (Fuji/Mizuho won't comment.)

An even broader class of customers claim they are being hounded to pay perhaps $775 billion in bubble-era loans made under circumstances that "can only be described as fraudulent," says Masae Shiina, a lawyer writing a book about the issue. In many cases, the banks cajoled and pushed individuals into taking large loans to speculate in real estate. Who's to blame? Everybody.

No wonder bank relief is unpopular. Unwinding this mess will take years, creating a weak link in the international financial system and imperiling us all.

The Panic Spreads

Benjamin Fulford, Forbes Magazine, 02.18.02

You can no longer safely shrug off Japan's economic crisis. It just might drag the world into a depression.

The world--and even the previously sanguine Japanese--is now catching on to the fact that Japan's 12-year slump has deteriorated into a full-blown crisis, threatening a wild global ride. Falloffs in various indicators in the world's second-largest economy resemble the plunge of countries like the U.S. into the Great Depression of the 1930s.

What about the theory that Japan is so rich a nation that it can buy its way out of a financial collapse? After all, it is said, the huge debt overhang from the country's rotten banking system and the actuarial deceit of its postal- and insurer-based retirement systems is just Japan owing itself. This is not Russia or Argentina or Thailand.

No, it's not Russia or Argentina. It is potentially something far worse.

"Japan is 42 times bigger than Thailand," says Kenneth Courtis, vice chairman for Goldman Sachs (nyse: GS - news - people) in Asia, referring to the country dubbed the epicenter of the 1997 Asian crisis. That bout cut world output by $300 billion in a year. Japan represents the "largest economic crisis since the 1930s," says Courtis. "The world is heading for a once-in-a-century economic crisis," agrees Ryoji Musha, strategist for Deutsche Bank (nyse: DB - news - people).

How so? Consider the notion that, with perhaps $11 trillion in savings, the Japanese have enough wealth to cope. Sounds like they do, until you realize that the total on- and off-balance-sheet claims on the household, corporate and government sectors in Japan are about $30 trillion, according to estimates by Goldman Sachs. That sum is six times Japan's $5 trillion GDP. A like total of U.S. public and private debt: $19 trillion, two times GDP.

Those ratios in Japan are being made worse month by month, year by year, by deflation, which at perhaps 4% annually in Japan (measured in consumer prices) is the most pronounced in the world. Deflation aggravated the Depression here in the 1930s. And it can spread. Cheap Toyotas are already putting pressure on Detroit's prices. What if Japan engineered a devaluation of the yen, taking it from 133 to the dollar to 140 or 150? Then these Toyotas would be even cheaper for U.S. customers. Says Robert Jay Pelosky, chief global strategist for Morgan Stanley (nyse: MWD - news - people): "This would send a price shock into the U.S. and Europe at a time we are flirting with deflation."

At the same time Japan faces a debt bomb at home, it is also the world's largest creditor. If its banks were panicked into calling in overseas loans, say by a run on deposits, an economic contraction would sweep America and the globe.

To be sure, the specter of a withdrawal of Japanese money has yet to materialize despite having been raised for more than a decade. Some economists pooh-pooh the idea that lenders could or would move much of these funds home to low yields. Nevertheless, consider what happened on a far smaller scale in 1997. It took only the collapse of a medium-size Japanese bank, Hokkaido Takushoku (with assets worth $80 billion), to expand Thailand's problems into a regional crisis, says Thomas Byrnes, sovereign risk analyst for Moody's (nyse: MCO - news - people). Within three months of the bank's collapse, Japanese financial institutions pulled $118 billion out of the global economy, mostly from Asia and eastern Europe. South Korea, the world's tenth-largest economy, was effectively bankrupted by the withdrawal of Japanese money, he says.

The four biggest of Japan's troubled banks alone have total claimed assets worth $3.7 trillion. It would not be just Korea and other Asian countries that would suffer if these banks' latent troubles erupted. Japan is the world's main source of capital. Much of its $3 trillion in overseas assets is in liquid instruments, such as $333 billion worth of U.S. Treasurys and bank loans to the U.S. and Europe worth $340 billion and $363 billion, respectively. Moody's Byrnes sees signs that Japanese banks have already begun to repatriate some of their money. In the first six months of 2001 (second-half numbers have not been released) they pulled $17 billion out of the U.S.

Is anyone paying attention? The business press is more preoccupied with Enron and maybe even Argentina. But there are some voices of concern, including that of Treasury Secretary Paul O'Neill. Paul Volcker, former head of the Federal Reserve Board and a famous worrier, says he can't recall in his career a touchier global economic situation. "The U.S. situation is fragile: The stock market feels good, the short-run outlook is reasonably good, but it is fragile in that it depends on consistent and big imports of foreign capital," Volcker says. "This is not going to last forever." Fed Governor Edward Gramlich is calling for more U.S. savings to cut reliance on lending from abroad, now running to 4.4% of GDP.

So when might the piper get paid? Insurance on time deposits worth more than $75,000 at Japanese banks is supposed to expire at the end of March. A crunch could come then, if enough money exited the system. A recent 9.5% drop in savings at smaller financial institutions (in anticipation of the end of deposit guarantees) is a sign this may already have begun. If a panic caused Japanese to flee yen-based holdings, the U.S. dollar could soar in value, creating a dollar bubble that could fuel a temporary speculative stock market boom here. It might feel good at first, but, as post-1980s Japan and our post-2000 Internet sector show, bubbles have nasty aftereffects.

After three yearly downgrades, Japan has a sovereign credit risk rating of Aa3 with a negative outlook, the worst rating among developed nations. Byrnes of Moody's sees no default within five years, but he admits Japan is in "uncharted territory." John Makin of the American Enterprise Institute, whose bearish views are being picked up on Wall Street, cautioned in a recent essay: "Ratings agencies in Russia, Latin America and Asia have repeatedly demonstrated their inability to signal coming crises for the debt of governments because they persistently heed the admonitions of governments it would be ‘irresponsible' to warn investors to get out of assets whose value is about to collapse."

Argues London's Independent Strategy: "There is no record of any government ever being able to repay debts equal to several times the annual output of its country in real money. Japan will be no exception."

A shrinking majority opinion still believes Tokyo can muddle through. One common scenario, mentioned by Merrill Lynch (nyse: MER - news - people) Japan strategist Masatoshi Kikuchi, calls for one or two years of contraction accompanied by steady economic restructuring and a recovery in late 2003. This would be followed by a gradual pay-down of Japan's debts. Another view: Japan could simply continue decaying until it reached developing-country status, much as Argentina did after World War II. "We are very afraid of Japan becoming another Argentina," says Taiichi Sakaiya, who was Japan's economics minister until recently.

However, the pace of deflation already gripping Japan makes the gradual scenario less likely by the day. When asked if Japan faced the danger of a Russian-style collapse, Shoichiro Toyoda, the honorary chairman of Toyota Motor (nyse: TM - news - people), says, "It is already in the middle of one." But he complains the country's leaders don't recognize it.

The world can only hope that when George W. Bush visits this month he will focus those Japanese minds.


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