The turmoil in the U.S. financial system since the last summer reminds me (and many others) of the problems in the Japanese financial system following the end of the land and stock prices boom in the late 1980s. The financial problem in Japan continued for more than a decade and Japanese economy experienced so-called “lost decade.”

There are many differences between the Japanese situation in the early 1990s and the U.S. today. For example, the capital of Japanese banks was quickly eroded after the collapse of stock prices as the regulatory capital included (40% of) the unrealized capital gain of stock holdings of the banks. The capital position of the U.S. banks has been much better. Nonetheless, there are some useful lessons that we can derive from the Japanese experience. Especially, Japan provides us with many examples of “not-to-do’s.”

One of those lessons comes from the experience with jusen. Jusen companies were mortgage lending institutions created by Japanese banks in the early 1970s with strong encouragement from the Ministry of Finance (MOF) that saw growing importance of financing housing for increased urban population. Increased competition in the financial industry following the deregulation in the late 1980s drove jusen companies to shift away from mortgage financing (where they often had to compete with their parent banks) to more risky loans to real estate developers. The banks often “introduced” very high-risk projects that they were reluctant to finance to the jusen for “finder’s fees.” In this sense, the jusen then resembles the bank affiliated SIVs (structured investment vehicles) of the U.S. banks that invest in securitized sub-prime loans.

Large exposure to the real estate sector made the jusen the first casualty of the collapse of land prices. In 1991, the MOF put together a rescue attempt that included loan forgiveness and interest concessions by founder banks to help the jusen, their borrowers, and agricultural coops, which were their important lenders. The financial situation of the jusen, however, did not improve, and the MOF put together the second rescue plan in 1993. Both of these plans were based on the assumption that land prices in Japan would recover soon. The MOF hoped the financial assistance would allow jusen to survive the temporary shock without resorting to fire sales of the properties that backed their loans and without imposing losses to agricultural coops. The land prices did not recover. By 1995, when the jusen were finally closed, the total write-offs were ¥6.4 trillion, much larger than the estimated amount of total non-performing loans in 1991 (¥4.6 trillion).

The jusen case shows how the Japanese government regulators tried to help troubled financial institutions and their borrowers to cope with what they saw as a temporary setback in land prices, and how such a regulatory forbearance failed. The MOF rescue attempts may have stopped the fire sales of properties for a while, but it seems to have just lengthened the falling phase of land prices. Of course, it is hard to tell, but earlier liquidation of the jusen and sales of the properties would have lowered the land prices even more, and that may have attracted new investors who saw the prices have fallen sufficiently.

In the U.S. case of troubled SIVs, there was initially a plan to create a rescue fund for them. The plan eventually failed, and the banks had to bring the losses on their balance sheet. The rescue fund would have helped the banks to continue operating those SIVs without fully recognizing the losses. This might have eventually led to even bigger losses as it happened in the jusen case in Japan. It was fortunate that the rescue fund never materialized.

6 Responses to "Jusen"

  1. Vitoria Saddi   May 13, 2008 at 8:48 am

    Takeo,In my view the actions taken by the Fed are similar to your ‘rescue fund’. The Fed is bailing the banks either by accepting all the junk on the banks’ balance sheets against T-bills or even by allowing banks to borrow in the discount window without any punishment. I see these actions as a coordinate plan to bail the banks. I don’t see the difference b/w this cenario and the one wehn they create a rescue fund as you mentioned. Am I wrong?ThanksVitoia

  2. alexcanuck   May 13, 2008 at 9:57 am

    Most of the actions of the US Fed appears based on the belief that this is a temporary blip and prices will soon recover. Or perhaps just keep a lid on the problems until a new administration is in power?In either case, just delaying the inevitable and hoping for a miracle.

  3. London Banker   May 13, 2008 at 12:08 pm

    @ TakeoWelcome! I agree with Vitoria that the Federal Reserve has become the SuperSIV that Congress would not enact, monetising the illiquid, unmarketable, unpriceable dross on the banks’ books. As market-maker of last resort, the Fed has enabled the banks to continue to pay out dividends and bonuses at the expense of taxpayers under secret facilities with secret beneficiaries against secret collateral that is never to be revealed, audited or accounted transparently.In many ways, the USA official response to the recent credit crunch has shown a tendency toward self-reinforcing corruption, ill-transparency and acccountability-free looting much worse than the interlinked networks of politicians, bankers and businessmen which took Japan to the edge of collapse. Without savings, however, the American people face a much more fragile and dangerous future than the thrifty Japanese.

  4. Ne mawari Kakurigoto   May 14, 2008 at 12:55 am

    Prices were supported by the ever-enlarging pool of available credit. When the constraints of real world imposed some discipline upon that credit extension it pulled back exceptionally. Without increasing credit to fund the speculative future cash flow models envisioned, business models are unsustainable. Unsustainability will lead to delinquency, zombification, default and bankruptcy. The weak links will fall first and panic others higher up in the chain. Standard economic drawdown in the face of diminishing credit.This time however supply and demand were clouded by time dilations due to complex, innovative securitizations. Ultimately, though this paper could delay rectification of pure S/D, transparency returned. Capital and lending sought refuge and safety.Never again in this generation will lending be so lax or extravagant chasing thinner margins of return. The self-correcting cycle which returns foolish risk/reward to baseline will demand a hefty financial punishment.Four horsemen of apocalyptic finance are waging war against the common man. (1) Homes, RE, CRE diminishing from 20%-50% down. Destroying equity buildup, wealth impressions, and paper retirement stockpiles. (2) Fuel. Oil at $126 US, Petrol at $4-$5 US means every large-body vehicle is now a diminishment of lifestyle not a bragging device. Overnight resale values plunged, secondary market values plummeted. Vehicles that get less than 30 mph are dead. Commuters hate now their fancy and terribly expensive means of transportation. 2nd large loss of sense of wealth. (3) Securities. Stocks (volatile, unstable, rife with speculation and manipulation), Bonds (same), Currency (reflated, manipulated, inconstant as seen on FX market–and particularly the USD), Gold (IMF & major players dump to suppress rise) (4) Ability to borrow. Mostly gone. Rate cuts not passed along by banks. Highly stringent lending standards suddenly adopted. Diminishing pool of capital from which to make offers. Banks hoarding reserves for loss accounting and future shocks.The largest features of the common man’s wealth are under attack and he is helpless to hedge. In such an environment, personal and social capitulation are not far away.

  5. Shalin   May 16, 2008 at 4:21 am

    Takeo provides a good summary of the financially disasterous actions in Japan of the 90s. The numbers, even by todays standards is huge Y6.5 Trillion. While Fed is certainly going down the wrong path, BOE here has decided to follow suit as well by agreeing to accept just about any security under the guise of mortgage swaps. It is difficult to see how such actions strengthen financial systems, induce desired incentives or strengthen the currency. What whould retail investors be well advised to do to preserve capital?

  6. Takeo Hoshi   May 19, 2008 at 8:12 pm

    Thank you all for the comments. I agree that there is a serious danger of these actions by the Federal Reserve and the Bank of England can encourage financial institutions to delay the final resolution of the problems. You comments also prompted me to think about more general issue concerning the role of the central bank in financial regulation, so I am preparing the next blog on this theme.