Japan circa 1996 – forgotten already?
For those of us who remember the Japanese rise and subsequent meltdown in the 1980s and 1990s, what is going on now is like deja-vu all over again. Except this time it is on a bigger scale. Remember Yamaichi, Nikko, Nomura and Daiwa? These were names to be reckoned with in the days of Milken and the Predator’s Ball. Today in 2008, these names are out of fashion or out of business.
So, here is a blast from the past from 1996 to jog your memory.
In a reminder of the scale of the bad debts still weighing on Japan’s financial system, Yamaichi Securities Co. on Wednesday became the second of the “Big Four” Japanese brokerage houses this week to unveil a billion-dollar bailout for a subsidiary struggling with irrecoverable real-estate loans.
Ryuji Shirai, vice president of Yamaichi, said the brokerage would spend 150 billion yen ($1.31 billion) to help its nonbank subsidiary, Yamaichi Finance. The bailout forced Yamaichi to revise its earnings forecast for the year to March 1997 to a consolidated net loss of 108 billion yen from a previously predicted net profit of 18 billion yen.
Yamaichi’s move followed an announcement by rival Nikko Securities Co. on Tuesday that it would spend 147.5 billion yen to help three affiliated units write off their bad debts. Nikko also cut its earnings forecast for the year, from a net profit of 24 billion yen to a net loss of 95 billion yen.
Yamaichi and Nikko’s bailouts and forecasts for big losses followed similar moves earlier this year by Japan’s two other major brokerages and came as little surprise.
But they again illustrated the difficulties that even Japan’s biggest financial institutions are having dealing with an estimated $400 billion in mainly unrecoverable real estate loans and underlined that it would take years for Japan’s financial system to recover from its real-estate lending binge in the late 1980s.
Over the past couple of months, Nomura Securities Co. has announced a 371 billion-yen bailout for a troubled financial unit while Daiwa Securities Co. has spent 120 billion yen. Nomura now expects to post an annual loss of 332 billion yen, while Daiwa said its loss would depend on the sale of securities.
The bailout of Yamaichi Finance was designed to maintain Yamaichi’s reputation and to “reinforce its competitiveness through early write-offs of the affiliate’s bad property-related loans,” the company said.
The daily Nihon Keizai Shimbun said Yamaichi Finance, which mainly lends to real estate firms, plans to write off all its bad loans in three years. Yamaichi Finance, which has 140 billion yen of bad loans and assets of 360 billion yen, will receive 100 billion yen from Yamaichi Securities and borrow 50 billion yen at low interest rates, the newspaper said.
Following Yamaichi’s announcement, the ratings agency Moody’s Investors Service Inc. said it was upholding its Baa-3 rating on Yamaichi’s senior debt and its Prime-3 rating on short-term debt, affecting $2.2 billion in debt securities.
“Although the full amount of the cash support will be recognized as an extraordinary loss, the actual impact on Yamaichi Securities will be reduced by the anticipated gain on the sale of securities and other assets and by profits arising from normal operations throughout the year,” Moody’s said.
Moody’s said its ratings had already “incorporated the expectations of substantial losses related to its affiliate” and noted that the size of the bailout was “within the anticipated range.”
“The firm’s capital adequacy, though weakened by its real-estate exposures, remains adequate, given the company’s liquid balance sheet and extensive domestic franchise,” the agency said.
On Tuesday, Nikko said it would give 82.1 billion yen to its affiliate Kyodo Mortgage Acceptance, 47.7 billion yen to Nikko Credit Services and 17.7 billion yen to Nikko Real Estate. Although Nikko plans to provide the money to the three nonbank affiliates during the 1997 financial year, the company said it would report a one-time loss of 147.5 billion yen for its financial year in 1996.
For those of us who remember the tearful shame of Yamaichi’s head Shohei Nozawa as he addressed the press after his company was declared insolvent, recent market events are eerily familiar. Will it take the shame of the boss of another large and storied brokerage to remind us of history?
Other Japanese securities stories
Japanese Thrust in Wall Street, New York Times, 25 Mar 1987
Daiwa’s Fate: Merger Partner Or Lesser Bank?, New York Times, 11 Nov 1995
Stake in Nikko To Be Bought By Salomon, New York Times, 30 May 1998
Nomura takes $4.5B hit, CNN Money, 26 Mar 1999
Statement by the Governor concerning the Yamaichi Securities Co., Bank of Japan, 2 Jun 1999