Rescue of Japanese bank may be first step

Continued disappointments since the end of the war in Iraq have further depressed the Tokyo stockmarket. But the government rescue of Resona, the fifth largest bank in Japan, may signal the first step in a series of reforms.

Jonas Lindmark 23 May, 2003 | 5:48PM
Facebook Twitter LinkedIn
On May 17th Resona admitted that its auditors had refused to sign off its financial accounts. This forced the Japanese government to take action. It pledged ¥2 trillion (£10.4 billion) to prop up the bank. As this accounts for about 80% of the firm’s equity it is an effective nationalisation of the bank.

Exactly what will happen to Resona is unclear. Conflicting descriptions in the Japanese media and ambiguous political statements make it hard to separate substance from talk.

Different interpretations co-exist. One is that the effective nationalisation of Resona is a well-planned first step in a series of government reforms of

the financial sector. Another is that taxpayers’ money has been handed over to the present owners of Resona and that the over-capacity of the banking sector will remain.

Some economists have long argued that the whole Japanese banking system is bankrupt. They cite the enormous amount of bad debt on the banks’ books from the property bubble of the 1980s and the continued operation of loss-making companies. The only way out is nationalisation. And this can happen if the other large banks are also forced to admit that their capital base is inadequate.

Political showdown

The outcome of the struggle for political power will be decisive. So far Heizo Takenaka, the minister for the economy and financial services, has been the strongest proponent of banking reform. But in September the Liberal Democratic Party (LDP) is holding a presidential election with the winner also becoming prime minister. Some say Junichiro Koizumi, the current prime minister, may be forced to sacrifice Mr Takenaka to win re-election.

Investors appear sceptical about the Resona bailout. The Tokyo stockmarket fell in the first week after the rescue. This can be interpreted in different ways. Perhaps investors believe that nationalisation is bad for shareholders or they may be disappointed because the government has once again failed to send a clear signal.

Political developments, especially regarding economic reforms, are critical for Japan. The LDP presidential election is likely to be the next significant event. Mr Koizumi was elected on a reform agenda in the spring of 2001. The key questions now are if he will stick to his agenda and whether he will win the election in September.

For the Tokyo stockmarket political developments are also critical. The investors who believe Mr Koizumi will finally begin the implementation of substantial reforms may also be expecting this year to be a good buying opportunity.


The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Jonas Lindmark

Jonas Lindmark  has been editor and head of fund analysis at Morningstar Sweden since August 2000. Before that he was personal finance editor and designed fund ratings during 9 years at the weekly business magazine Affärsvärlden.

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures