As Japan's prolonged recession has deepened, U.S. banks have been slashing their exposure to the world's second-largest national economy.
U.S. banks' cross-border exposure to Japan fell nearly 19% in the first quarter to $38.6 billion, continuing a retreat that began last summer, according to the Federal Financial Institutions Examination Council.
And though second-quarter data are not yet available, most banks say they have continued to cut back in Japan.
"U.S. banks' cross-border exposure to Japan is plummeting," said Lawrence Cohn, a banking analyst at Ryan, Beck & Co. "No prudent lender would consider extending credit to the same extent under similar circumstances."
U.S. bankers have been worrying about a further deterioration in the Japanese economy since the spectacular failure of several large brokerage firms and banks there earlier this year. Bankers and analysts noted that the biggest portion of U.S. banks' exposure to Japan is to Japanese banks.
Since last year, hundreds of millions of dollars in losses in South Korea and Russia registered by U.S. banks have added to these concerns.
More recently, Japanese government efforts to recapitalize the Long Term Credit Bank of Japan, one of the country's largest financial institutions, have run into political opposition and increased worries about the once- unquestionable creditworthiness of Japanese institutions.
Reflecting this concern, the rating agency Fitch IBCA earlier this month indicated it may cut Japan's triple-A rating as a result of mounting problems in the economy and banking sector there.
"Japan is more seriously troubled by banking and other structural problems than any other AAA or AA country," Fitch IBCA noted in its report. "Moreover, the policy response to Japan's economic problems has been hesitant."
On Wednesday, Bloomberg News reported that the Bank of Japan unexpectedly cut its target rate for overnight loans between banks to a record low 0.25%. The move was aimed at helping banks meet their immediate funding needs and averting a deflationary spiral.
The move comes amid growing concern that the government's failure to take decisive action to shore up a banking system crippled by bad loans will further deepen the country's recession.
The latest data on U.S. bank exposure exclude some $8 billion in off- balance sheet commitments, such as standby letters of credit and derivatives contracts, and $26 billion in local-country liabilities. Exposure of U.S. banks in these two categories changed little over the same period, according to the agency's data.
Bank analysts estimated that cross-border exposure to Japan has fallen by billions more since the end of the first quarter. Since most U.S. bank exposure comes in the form of loans of more than a year's duration, banks reduce their exposure simply by not renewing these loans.
Of the $38.6 billion in exposure reported as of March 31, 76%, or $29.4 billion, was held by money-center banks, including BankAmerica Corp., Bankers Trust Corp., Chase Manhattan Corp., Citicorp, First Chicago NBD Corp., and J.P. Morgan & Co.
The balance was held by other large U.S. banks, including BankBoston Corp., Bank of New York Co., First Union Corp., NationsBank Corp., Republic New York Corp., and State Street Corp.
More recent data from the banks themselves confirm analysts' forecasts that U.S. banks are continuing to trim their exposure to Japanese institutions.
Chase, for example, said it reduced its exposure to Japan to $6.2 billion as of June 30 from $6.7 billion at yearend, a 7% decline.
About half of that is in what the bank described as lending to "top- tier, top-quality Japanese banks" and about $3 billion is in off-balance sheet facilities such as backup lines of credit and risk management contracts, including foreign exchange contracts.
J.P. Morgan has also cut its exposure to Japan to slightly less than $10 billion from slightly more than $11 billion, excluding off- balance-sheet commitments. BankAmerica initially increased its exposure to Japan by 41% to $3.7 billion between yearend and the end of the first quarter, but then cut it by 14% to $3.2 billion as of June 30.
Citicorp increased its exposure slightly to $3.4 billion. Bankers Trust, which had $7 billion in cross-border exposure to Japan at yearend, declined to supply midyear figures.
"What's been going on in Japan is no secret and I don't think U.S. banks are taking anything for granted," said Raphael Soifer, a banking analyst with Brown Brothers, Harriman & Co.
"I think this is one situation the banks have been on top of and have been getting right," he said.
U.S. bankers said they are still sizing up the situation.
"We are very comfortable with our current level of exposure," said Robert Strong, chief credit officer at Chase. "We think it's appropriate for us to maintain this level. "
Ironically, deepening economic woes in Japan have helped drive more business toward U.S. financial institutions as Japanese consumers and corporations gravitate toward what they view as better capitalized and more efficiently run banks.
According to publicly released information compiled by Japan Financial News Co., Citicorp's pretax earnings in Japan for the year ended March 31 nearly tripled to $119 million.
Pretax earnings at Chase nearly doubled to some $32 million, while Bankers Trust turned a $13 million loss for the year ended March 31, 1997, into a $19 million profit. Republic New York, Bank of New York, State Street, and American Express Bank Ltd. also reported increases in earnings.
"Problems at Japanese banks are providing opportunities for U.S. banks," said Mark Gross, head of global financial institutions at Fitch IBCA. "The world's second-largest economy may be in a recession, but that doesn't mean there isn't business to be had."