950809

BOJ says bad debt

is biggest issue facing

financial system

TOKYO: Bank of Japan Gov. Yasuo Matsushita said the mountain of irrecoverable debt accumulated by Japanese financial institutions was the biggest issue facing the country's financial system.

Matsushita also said resolving problems at the country's seven housing loan companies, saddled with up to 15 trillion yen ($163.72 billion) in bad loans by government estimates, is the key.

Matsushita said the central bank and other regulators are hurrying to put the finishing touches to the bailout of Tokyo's largest thrift institution. He offered no specifics.

On July 31, the Tokyo metropolitan government froze business at Cosmo Credit Union after a run on its deposits caused by news over the weekend about its load of nonperforming loans.

In today's regular monthly press conference, Matsushita also said the Bank of Japan hadn't changed its view on the economy or its monetary stance, and welcomed the yen's recent decline.

Japan's financial authorities are trying to regain investor confidence in the nation's financial system following the collapse of there thrifts this year. As yet, there is no national consensus on whether taxpayers' money should be used to clean up the mess.

Japan's financial institutions have 40 trillion yen in bad debt.

On March 20, the Tokyo Kyodo Bank was set up with help from central bank fund to absorb the assets and debt of Tokyo Kyowa Credit Union and Anzen Credit Unions, two of the failed thrifts. They were bailed out partly with public money.

Using the Tokyo Kyodo Bank to bail out Cosmo Credit Union case is a possibility, Matsushita said today.

The central bank governor said any solution to the housing loan companies' problem "must be based on the principle of self-responsibility" on the part of the companies and the banks that set them up.

Established in the late 1960s and 1970s to promote housing construction, these companies turned to investing in riskier real estate projects in the 1980s, in the process accumulating massive loan that went sour as the speculative "bubble economy" burst.

Part of the reason these companies shifted their attention to real estate developers was because their parent banks moved into the housing loan business themselves.

The government will probably have no choice but to use taxpayers' money to pay off the housing loan companies' bad debts, according to a Finance Ministry's advisory group on the financial system.

On the state of the economy, Matsushita said the central bank hadn't changed its overall view that the recovery is stalled.

Following las tmonths' policy change, money market rates fell below the Bank of Japan's discount rate and banks' prime lending rates have fallen to historic lows for both long-term and short-term loans, Matsushita said.

Meanwhile, the benchmark Nikkei 225 average stock index has stabilized and the yen's rise is in the process of being corrected, he added.

The Nikkei 225 ended the day at 16,789.33, down 49.64 points from Tuesday's close, while the dollar was little changed from late Tuesday at around 91.60 yen today.

On Aug. 2, the Finance Ministry announced measures to boost overseas investment by Japanese institutional investors to help the US dollar rise against the yen.

The Bank of Japan followed up by jointly buying dollars for yen with the US Federal Reserve the same day.

Those measures were timely, and had a positive impact on the foreign exchange market, Matsushita said, adding that Japan will continue to coordinate its policy with other countries so that exchange rate reflect fundamental economic conditions.-Reuter