Tuesday May 25, 2004
Japan banks get stronger as economy turns corner
TIMES NEWS NETWORK
First came a loud, worrying echo of old troubles. On May 17, the Tokyo stock market tumbled by 3.2% on word that UFJ, Japan's fourth-biggest banking group, would have to revise its earnings downwards for the second time in three weeks - this time, into the red.
Bank shares, which have done especially well in the past year, fell more sharply. The next day, though, came the latest evidence that the economy is on the mend: it seems that GDP grew even more quickly in the first quarter than most economists had expected. The market took heart and on May 18 and 19 the Nikkei 225 enjoyed a climb of 4.4%, its biggest two-day gain since last July. Bank shares also recovered their poise.
In recent months, Japan's banks have been looking healthier than for many years. Their bad loans seem finally to be getting sorted out. The strengthening economy, which has improved the lot of many borrowers, has helped in no small measure. However, UFJ, which with Japan's other big banks will publish its earnings next week, is clearly struggling to become profitable.
In late April, the bank lowered its earnings estimate for the year that ended in March from ¥210bn ($1.8bn) to ¥78bn, as its expected charges for bad loans mounted.
The trouble this week stemmed from reports that UFJ will have to set aside much more because its problems with loans to many big borrowers are worse than advertised. It may have made a net loss of ¥300bn or more. Top managers may now have to resign.
Despite this salutary reminder that the banks' balance sheets ought still to be looked at sceptically, the economy's recent good run means that their bad-debt problems look much more manageable than they did six months ago. Real GDP rose by 5.6% at an annualised rate in the first quarter; it was 4.7% higher than a year before. It has now expanded for eight quarters running. At 3.2%, real growth in the year to March was the best for seven years.
Perhaps the most encouraging aspect of the growth data was evidence of stronger domestic demand. Hitherto, the recovery has been founded on exports and corporate investment, but its base now seems to be broadening. Private consumption rose at an annual rate of 4% in the first quarter, accounting for more than one-third of the increase in GDP. Investment in housing also rose. This suggests that Japanese households are growing more confident, despite another year of falling wages. A recent drop in the unemployment rate, to 4.7%, may have boosted their spirits a bit.
Many economists still worry that any revival in consumer spending will prove short-lived if demand from China and America slows. Strong export growth has contributed to a rapid rise in corporate profits, from which everything else in this recovery has flowed. Higher profits at big manufacturers, for example, have boosted capital investment, with knock-on benefits for other companies. The mood of optimism now seems to have reached consumers too.
For the time being, the data are good - both for the economy as a whole and for the banks specifically. Troubled borrowers' cashflows are improving. Companies that are already healthy might even begin to borrow again.
The results that the banks publish next week will provide a useful snapshot of how far they have come in the past year. But the best guide to their prospects lies in those economic figures.
The Economist
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