Interim Report By the Takenaka Task Force Due Out Today
Delayed from the 17th, the special task force put together by FSA Minister Heizo Takenaka is expected to release their interim report today, October 22. The report is expected to include; a) stricter evaluation criteria for bank NPLs, by adopting discounted cash flow analysis to determine the viability of loans on the books, b) a review of reported bank capital ratios, particularly as regards the appropriateness of deferred tax assets, and shrinking the loss carry-forward period from five years to one year, c) stricter corporate governance, including requiring that management of banks receiving government capital infusions take responsibilty, and conversion of government owned preferred shares in defacto nationalizations, d) measures to get bank NPLs completely off the banks' balance sheets, through sales to the Resolution and Collection Corporation, and e) measures to ease the pain of accelerated NPL disposal on industry, including a full-fledged re-vamp of the Industrial Restructuring Law. The most important issue in the bank countermeasures is the reduction of the deferred tax asset carry forward period from five years to one year. If this is implemented, essentially all the banks would have insufficient capital. In implementing stricter corporate governance, numeric targets will be established for NPL liquidations. If numberical targets or other restructuring targets are not met, the government would have the option to convert the convertible shares held and effectively nationalize the bank.
A full-fledged re-vamp of the Industrial Restructuring Law depends on the timely submission of an amendment to the regular 2003 Diet session, where if smoothly passed (which hardly ever happens), the bill could be passed by April of next year. The Bill ostensibly would include changes to allow foreign firms to use their stock to swap for target Japanese firms. In addition, the scope of loss carry-forwards for corporate restructuring and rationalization would be greatly expanded. However, to be eligible for this government largesse, the company receiving the assistance would have to be "approved", ostensibly by the FSA and respective ministries, ostensibly to match the corporate support net with the loans that compay has outstanding with the banks. The implications here are;
a) The companies that receive such approval are likely to be "too big to fail" companies in industries with substantial excess capacity, such as steel, chemicals, or semiconductors. The excess capacity could be spun off into a seperate entity, with the companies receiving tax breaks for liquidating capacity.
b) Or they could be large dud borrowers such as the construction companies that have received debt forgiveness from the banks, where consolidation could be accomplished by merging the weakest with other firms, or spinning off the "good" part of the company.
c) A third possibility would involve giving corporate revitalization funds (such as recently used to provide additional funds to Daiei) tax breaks.
However, one must view with extreme caution any proposal that suggests using tax cuts to promote industry restructuring. The Tax Agency has consistently shot down any such proposals over the past 10 years, as their focus is on somehow extracting more taxes as corporate profits and the weak economy have led to consistent undershooting of projected and actual tax revenues.
In addition, the danger is that, while the balance sheets of the banks apparently improve becuase of the accelerated NPL disposals and more aggressive purchases by the RCC, the risk is that the burden of problem companies merely shifts from the private sector banks to government-affiliated institutions, thereby further exacerbating Japan's already ballooning government deficits. Meanwhile, the government then wimps out on the hard line approach to the banks. With yet another bail-out, the banks merely buy more survival time while none of the necessary but painful restructuring and consolidation takes place.
