Koizumi, Rip Van Winkle and Japanese banks: go back to sleep
Although Koizumi may initiate real corporate reform, bank shareholders are unlikely to prosper.
Rip Van Winkle1 spent his days avoiding work and his shrewish wife. Japan's politicians spent the 1990s steering clear of their festering bank problem.
After liberally drinking from a keg at a nine-pin mountain party, Rip fell asleep for 20 years. LDP officials, inebriated from the power of one party rule, slumbered for 10 years. Rip awoke to discover he was old with a long beard and unrecognized. LDP chiefs rose to find the bank problem had not magically disappeared, rather it had deteriorated.
Fortunately, Rip's daughter recognized him and he enjoyed a new life as the village storyteller. Japanese banks haven't been so lucky. So far, they are the third worst performing of the 33 TOPIX sub-sectors year-to-date.
The Koizumi question
Now, the final act in the latest bank rescue drama is playing itself out with the selection of the new prime minister. While it is fashionable to consider Juichiro Koizumi (as the new prime minister) a positive for the stock market, our outlook for bank stocks will remain negative. Here are the main points:
- Yanagisawa, the hard-line reformer at the FSA, will probably stay in the Cabinet. This is good news.
- The bad news? Koizumi was the least enthusiastic of the four candidates about the bank equity purchasing firm. The risk rises that this body will not be established in time for September and/or not backed by public guarantees.
- Koizumi favours public fund support for weak banks but has said little about a system-wide support plan and has downplayed NPL disposal as an important goal.
- There is also the risk that Koizumi will (or has) abandon(ed) his reform agenda in an effort to build LDP support (or that he simply will not be able to marshal LDP support for radical change, as was the case with Prime Minister Hosokawa). Whether or not Kamei receives a senior position will be the acid test.
- Though known as a reformer for his call to privatize the postal savings system, he appears to have abandoned this plan. This would have been good for banks.
- In any case, progress in structural reform would result in increased bankruptcies and could drive land prices lower - significantly deteriorating bank fundamentals.
- Appropriate bank reform/rehabilitation would involve sector-wide re-capitalization that would wipe out or significantly dilute investor interest.
The bottom line is that while hard-line structural reform in the banking/corporate sectors will hurt banks, lack of reform may kill them. Either way, they lack investment appeal at the moment.
Japanese bank investors have waited 10 years for a reason to turn bullish on bank shares, but Rip Van Winkle slept 20 before returning to the real world.
James Fiorillo is a senior analyst û Financials, ING Barings (Japan).