The real estate market will soon recover and this whole financial crisis will be just a bad memory. This was exactly the reasoning of the Japanese authorities when the real estate market collapsed in 1990. The very obvious solution was to ensure that the debt accumulated in funding the real estate bubble could be parked safely away from prying eyes while patiently waiting for the real estate market to recover and the real estate prices to grow back to the levels required to settle the loans. Sadly it turned out to be a twenty year wait but the non performing loans could not remain parked in the private sector for such an extended period. Parking space required grew each time the problem was moved and the taint of government with it.
The tale starts in 1970 when eight Jusens were established. Seven by major banks and financial sector players with shareholdings dispersed amongst the players for each Jusen to avoid subsidiary status. The eighth was founded by Agricultural Finance Cooperatives which were banks (also called deposit taking institutions at the time). The Deposit Taking Institution definition was telling as it defined the status of the entity as a bank or not and not the fact that an entity may be making loans. The purpose of the Jusens was to finance mortgage loans for the household sector but they were not to take deposits and would therefore not be banks. The shareholder banks would provide all the funding required.
The non-bank status allowed the Jusens to escape regulatory scrutiny with the full knowledge and blessing of the political regime and the BOJ. The Ministry of Finance (MOF) actively participated with a policy of profit padding reminiscent of a protective cocoon of naval attack craft around vulnerable aircraft carriers nicknamed the convoy system (gosoo sendan hooshiki) to promote cartels and safeguard banking profits from unacceptable competition (Rosenbluth & Thies, 2000). Also called a “survival of the weakest” policy (Milhaupt, 1999).
The basic Jusen setup was a very simple structure which made a mighty contribution to the real estate bubble in Japan.
The Shareholder Banks in turn were also receiving generous liquidity support from the BOJ and all the building blocks for a real estate bubble were in place. Soon other banks described as non-founder banks were also lending into the Jusens. The Jusens in turn did not restrict its mortgage lending only to households but expanded into the (at first) lucrative lending for property development. Globalization, market liberalization and internationalization arrived in Japan in the 1980’s and together with epic loose monetary policy in the wake of the 1987 soon too be forgotten crash of the stock exchanges, accelerated lending growth into real estate to a fever pitch, with the Jusens out front. Dark tales are told of how even the Yakuza got involved in the real estate business in many ways including by providing jiageya (a land turner) who would clear the way for large real estate developments by for example “convincing” obstructive small land owners or tenants to cooperate.
The Nikkei peaked in Dec 1989, the real estate bubble popped and by late 1990 the Jusens were in trouble with non performing loans. The MOF inspected the Jusens for the first time ever in 1991 and concluded that almost 40% of the loans were non performing (Milhaupt, 1999). The response were predictably to underplay the problem as was shown later and to develop plans aimed at parking the problem out of the way while waiting for the real estate market to recover. The initial write off for the Jusens was around $5 million. See the table of losses published by the DIC (Deposit Insurance Corporation of Japan) further down for the disclosed losses after a final restructuring effort in 1996 which closed the Jusens down.
The structurers of the Jusens never anticipated any failure and it transpired that clear allocation of losses when they arrived could not be done. Soon the previous partners in the joint ventures were arguing who should bear the losses and in which percentages. Some argued for loan ratios, other argued for control ratios and fingers were pointed at the MOF as responsible. The MOF was forced to intervene in the growing Jusen crisis. MOF involvement “stabilized” the volatile situation within the greater context of the Japanese financial crisis with hints of public support and implied guarantees but was ultimately based on the vain hope that the problem would resolve itself as soon as the economy had been reflated.
The temporary parking space provided for the non performing loans policy was so successful that Visiting Executive Professor Masaru Yoshitomi concluded in his lecture at the Wharton School, University of Pennsylvania published 17 April 1996, thus:
In conclusion, the recent performance and recovery of the real economy is decoupled and isolated from the banking “crisis” in Japan. Therefore if both the Government and the public correctly handle the Jusen liquidation and other banking problems through overhauling the current financial and regulatory system, the Japanese economy will launch on the new underlying growth path of 3 percent or so with better shape of both real and financial sectors. (The “jusen” debacle and Japanese Economy.)
The parking space provided by the MOF supported by the BOJ’s ultra loose monetary policy with limitless liquidity provision and zero interest rates or near zero interest rates combined with the envisaged “overhauling of the current financial and regulatory system” failed to generate the 3 percent or so growth path for Japan. In fact, the by then around 75% non performing loan problem of the Jusens grew to an almost total conversion to non performing status. An attempt to raid the treasury to clean the Jusen slate met with fierce political resistance. The Founding Banks and the MOF were forced to thrash out a painful deal in 1997 to “permanently” deal with the Jusen nightmare. It was implemented by dividing up the non performing loans amongst the MOF and the Founding Banks with provisions for greater disclosure and transparency. Yet again the non performing loans were shifted from the previous parking space at the Jusens to the MOF, the Deposit Insurance Corporation (DIC) and the balance sheets of the Founding Banks on a 15 year envisaged repayment structure.
It did not take long to realize that the banks simply could not cope with the additional losses of non performing loans going bad and as early as March 1998 the MOF was obliged to inject capital into failing banks. Nine years into the Japanese Financial Crises having provided parking space for non performing loans for all that time and yet again the Japanese authorities faced another banking crisis. Rosenbluth & Thies (2000) describes it as follows:
Between October 1998 and October 1999, Long-Term Credit Bank and Nippon Credit Bank were nationalized, five other major banks were declared insolvent (Nikkei 10/18/1999), and many others have merged with healthier institutions. (The Electoral Foundations of Japan’s Banking Regulation.)
The history of the Jusen problem after the parking space deal can be seen in the numbers published by the DIC in the RCC – Secondary Losses of Jusen Account table hereunder:
Source: Deposit Insurance Corporation, Japan
It is clear, looking back upon the past twenty years of the Japanese Financial Crises that the ultimate parking space for most of the non performing loans were found on the balance sheet of the Japanese Government, those of the Jusen and of the banks alike. The policies of providing parking space to “stabilize” bubble excesses has mired the Japanese economy in a deflationary depression for two decades and saddled a younger generation of Japanese with a depressing Government Debt burden of a quantity that will haunt their economic life for more than a generation.
Only those afflicted with that special kind of blindness of them-who-do-not-wish-to-see would be able to look upon the policies of the FDIC, the FHA and its wards Freddie, Fannie and Ginnie together with the antics of the Fed to provide parking space for non performing loans will fail to see the parallel with the recent history of the Jusens. The not so blind will note how the taint of bailouts and stimulations festers in this still growing parking space and contemplate a future perhaps akin to the vehicles abandoned at the Dubai International Airport car parks. Those who watch the growing sovereign debt burdens may eye the IMF and the World Bank for parking space when the next sovereign debt default announces its arrival.
- Rosenbluth & Thies, 2000 – The Electoral Foundations ofJapan’s Banking Regulation, Electronic copy at: ssrn.com/abstract=1158646
- Milhaupt, 1999 - Japan’s Experience with Deposit Insurance and Failing Banks: Implications for Financial Regulatory Design?, Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, August 1999, pp. 21–46.
- Yoshitomi, 1996 - The “jusen” debacle and Japanese Economy, The Long-Term Credit Bank of Japan Research Institute.
- Felson, 1998 - CLOSING THE BOOK ON JUSEN: AN ACCOUNT OF THE BAD LOAN CRISIS AND A NEW CHAPTER FOR SECURITIZATION IN JAPAN, DUKE LAW JOURNAL Vol. 47:567, pp 567-612.
- Organized Crime Registry, 1996 - Who got Yakuza into our banking system?, http://orgcrime.tripod.com/yakuzabanking.htm
Disclosure: No positions in stock mentioned.