Breaking the Tokyo Banks?

by | Apr 25, 2000

Back in 1998, the big question in Japan was which, if any, of Tokyo’s big banks could escape collapse. Burdened by massive, non-performing loans, and holding assets (like Tokyo real estate) that had plunged in value, Japan’s big banks were in a serious crisis. Though several banks did ultimately fail, by 1999 the federal government […]

Back in 1998, the big question in Japan was which, if any, of Tokyo’s big banks could escape collapse. Burdened by massive, non-performing loans, and holding assets (like Tokyo real estate) that had plunged in value, Japan’s big banks were in a serious crisis.

Though several banks did ultimately fail, by 1999 the federal government had introduced a rescue package providing funds to most of the bigger institutions. In return for the government support, these big banks had to write-off bad debt, attempt to write down some assets, and generally restructure operations to provide hopes for future profitability.

Naturally, these restructuring exercises led to some massive write-offs and losses at the big Tokyo-based banks. And also naturally, the lower profits being recorded will mean lower tax bills now, and in the future, due to loss carry-forward rules.

While these may be the painful realities of restructuring, there appear to be some who don’t want to play along with the game. Indeed, instead of giving the big banks that populate his city a chance to catch their breath, the free-spending governor, Shintaro Ishihara, has decided to declare war and raise their rent, as it were.

Ishihara appears to be upset that the banks may avoid paying taxes for years to come as a result of the huge, bad-debt disposals (in the form of tax-deductible write-offs) undertaken by the federal government last fiscal year. This February, the governor announced a plan that would introduce a new corporate tax of 3% of the big banks’ gross operating income derived from their Tokyo operations, bypassing the banks’ write-offs entirely. With this plan, he hopes to generate taxes of about $1 billion next year.

It may not be surprising that Ishihara feels this tax is justified. Tokyo, with an annual budget of about $60 billion, expects to face a deficit of some -$6 billion this year, but even that sad figure doesn’t really illustrate how bad things have gotten since the heady days of the 80’s. Major banks paid Tokyo a combined 213.4bn yen ($2bn) in tax in 1989, but that total plummeted to 3.4bn yen in 1999.

As much as the governor may need the money, his plan has inspired shock and outrage among the banks’ representatives, many of whom believe the industry can’t bear this new and unexpected burden, and view the singling out of their industry as blatantly unfair. The banking industry, and even the federal government, have both vowed to fight the tax, but political analysts warn that the governor’s plan appears to be constitutional and popular with voters.

Though the government support package did manage to buy the big Tokyo banks some time, their profitability is still weak. What’s more, analysts warn that this operating profit tax could further reduce the big banks’ net profits by -20% to -50%. To make matters worse, new competition has recently arrived in the form of foreign banks and Internet banks from companies like Sony, who won’t be subject to the new Tokyo tax.

Let’s face it. Governor Ishihara’s actions appear to be those of a desperate man. Perhaps, seeing Tokyo’s fiscal deficit spiraling out of control, he’s hoping to use Tokyo’s big banks as hostages in negotiations with the Federal government. In other words, knowing that the Federal government wants to avoid financial chaos in Japan, he may try to extort Federal funds to relieve his Tokyo budget deficit in return for freeing the banks of his tax plan. It may seem like a good idea now, but one thing can ‘t be denied: if this is Ishihara’s game, it’s certainly a dangerous one.

Andrew West is a Contributing Economics Editor for Capitalism Magazine. In 1997 he received the Chartered Financial Analyst designation from the Association for Investment Management and Research.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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