Japanese loan losses could reach $1.4 trillion, according to a report issued by Veribanc Inc.
The estimate is the latest - and largest - of the magnitude of the losses and is evidence of concern that the problems could continue to mushroom.
"Japan is somewhat akin to what our savings and loan debacle was in 1982 before passage of the Garn-St. Germain bill," said Veribanc research director Warren Heller.
In fact, Mr. Heller said the Japanese response to the loan problems is similar to the way the United States responded to the thrift problems of the early 1980s. The Bank of Japan has cut interest rates to less than 1% in an attempt to help banks "grow" their way out of the problems, he said.
Such a course is fraught with risk, he warned. When Congress took a similar approach by expanding thrifts' lending authority beyond home mortgages in the early 1980s, many speculated on real estate and real estate construction loans. Ultimately, the new lending powers, and abuse by thrift owners in some cases, led to the failure of hundreds of the institutions in the late 1980s.
"It appeared to work for us for awhile," he said. "But it's a very long and risky road, and their (Japan's) institutions are very thinly capitalized."
Mr. Heller's estimated loss for the Japanese banking industry is 3.5 times larger than the combined equity and loan-loss reserves reported by Japanese banks at March 31. His estimate also far exceeds the loss estimates offered by Japan's Ministry of Finance.
Part of the difficulty in arriving at an accurate picture of the problem is the shroud of secrecy over most Japanese banks, said Doug Ostrom, a senior economist at the Japan Economic Institute in Washington, D.C. As such, he said Veribanc's estimates are as reliable as any others.
"I'm not prepared to say he's way off base with that estimate," Mr. Ostrom said. "There are so many unknowns that estimates of what the land is worth range from 50% of the value at the time of the loan to as little as 10%."
The failure of Hyogo Bank last summer points to the level of subterfuge analysts face when estimating the extent of the problem. Prior to its collapse, the bank reported bad loans amounted to 2.2% of its loan portfolio. The Ministry of Finance later estimated the losses at 55.5% of total loans, or $15 billion, at March 31.
Despite the difficulties faced by Japanese banks, Mr. Heller said he does not see problems spilling over into U.S. banks. He said the two banking systems are "pretty well decoupled" and added that it is likely counterparties in derivatives transactions with Japanese banks have already considered the potential problems.
