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Wednesday, Sept. 17, 2008

Collapse echoes through Japan

Aozora leads banks on loan exposure but government officials say sector can take the hit

Staff writer

Monday's bankruptcy of Lehman Brothers Holdings Inc., the fourth-biggest financial institution in the United States, sent shock waves through the global financial industry, and Japan was no exception.

"Each bank seems to have a certain amount of exposure to Lehman Brothers, and that is a negative element," said Shinichi Ina, a banking analyst at Credit Suisse in Tokyo.

According to Lehman Brothers' court filings, major financial institutions in Japan had about ¥170 billion in loans extended to the company.

The impact of the bankruptcy, however, is unclear because not all of them have disclosed how much of their loans or investments were tied up in Lehman, analysts say.

Ina said the losses are likely to rise because the court documents only disclosed the loans extended to the holding company, not its Japanese unit.

Another disturbing factor is the dearth of information on how deeply Japan's banks invested in high-risk products like derivatives, he said. The documents only referred to loans.

"I think other major financial companies whose names have not surfaced yet have much greater exposure than that in the form of derivatives and other financial products," Ina said.

But experts said the key point is not how much exposure they had to Lehman Brothers, but to the high-risk products themselves.

"Even if the amount of exposure is large, it may already have been covered with collateral, like in Aozora's case," Ina said. But it is difficult to predict how big the impact will be without examining their portfolios, he said.

According to the Lehman Brothers documents, its top creditor was Aozora Bank Ltd., at about ¥49 billion ($463 million). Aozora said in a statement that the actual loss could be revised to less than $250 million because it acquired $180 million worth of collateral and other measures to hedge the risk.

The document also named Mizuho Corporate Bank Ltd., Shinsei Bank Ltd., the Chuo Mitsui Trust and Banking Co. and Nippon Life Insurance Co. as other major creditors.

Later Tuesday, Mizuho Trust & Banking Co. said it expected to book ¥11.8 billion in losses from the bankruptcy. It also revised downward its mid-term earnings forecast to September from ¥21 billion in net profit to ¥9 billion.

Sumitomo Trust & Banking Co. meanwhile said its net exposure to Lehman was about ¥6 billion.

On Tuesday, the Topix index of all first-section issues dropped 59.63 points to close at 1,117.57, its lowest closing this year, led by banking sector shares. The 84-stock Topix Banks Index, meanwhile, plunged 8.1 percent — the most since May 10, 2004.

Mitsubishi UFJ, Japan's biggest bank, plunged 7.7 percent to close at ¥792, the steepest drop in four years, while Aozora Bank slid 16 percent to ¥171 and the Mizuho Financial Group dropped by its limit to close at ¥418,000.

Outside the banking sector, investors were also keeping a concerned eye on the fate of American International Group, the world's largest insurer, which was fighting for survival after its credit ratings were downgraded by Standard & Poor's and Moody's Investors Service. If AIG were to fall, it would have an even bigger impact on the worldwide economy, including Japan.

Top government officials, however, played down the potential impact Lehman's bankruptcy might have on Japan.

After the daily Cabinet meeting, the top economic ministers met with Chief Cabinet Secretary Nobutaka Machimura and Prime Minister Yasuo Fukuda to exchange information on the collapse of Lehman Brothers and its Japanese unit.

"Comparing the amount of capital that Japanese financial institutions have and the credit they extended to Lehman Brothers, (the investment house's bankruptcy) will not have a serious impact on their businesses," said Finance Services Minister Toshimitsu Motegi.

But Chief Cabinet Secretary Machimura said that although the impact on Japanese banks is small, Lehman's collapse will probably deal a severe blow to the Japanese economy in the long term.

"If we look at the situation in a longer term, the state of the U.S. economy may affect that of Japan's," he said. "We need to make sure through our financial policies that (the turbulence) will not affect small and middle-size firms" that are vulnerable.

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The Japan Times

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