The Japanese government is expected to spend taxpayers’ money, and untold political capital, to bail out mortgage companies saddled with mountains of bad debt.
Such a course would follow the $90 billion taxpayer bailout of the U.S. savings and loan industry, a crisis brought on in large part by bad real estate loans.
News that public money would be needed to bail out seven of the eight housing loan corporations, or “jusen,” was leaked to local media Sunday night, but the announcement was expected to be made at a Cabinet meeting today.
The money would be spent in the next fiscal year, and government ministers are struggling to get the appropriations written into the draft budget that is due to be submitted to the various ministries Wednesday.
Several major banks founded the housing lenders in the late 1980s, when real estate prices were soaring, and the Finance Ministry wanted to encourage private citizens to invest in homes.
The founding banks, combined with financial organizations connected with wealthy agricultural cooperatives and a few smaller investors, together made trillions of yen in ill-fated loans to the housing lenders.
When the value of the land used as collateral on the resulting mortgages collapsed in the early 1990s, so did the value of all that debt and the mortgage companies.
A recession and relatively low property prices have dogged Japan for nearly four years. As a result, the seven jusen are holding about 7.5 trillion yen ($75 billion) of unrecoverable debt.
Finance Ministry officials and counterparts in the Farm Ministry have spent months trying to work out how the burden should be divided, but the controversy is coming to a head because the government has to decide by Wednesday whether tax money should be used.
That would be an unpopular use of public money and a major admission that the government has been dead wrong in trying to solve the problem by simply waiting for property prices to soar again, said Mineko Sasaki-Smith, an analyst at Morgan Stanley Securities in Tokyo.
“The government’s mistake was in thinking Japan is different from other countries,” she said.
“They assumed that because land is scarce on an island, and for other reasons, that prices would naturally rebound. Now they’re trying to shift the focus to Japan’s need to rebuild its international image of fiscal responsibility.”
The Finance Ministry and Farm Ministry have proposed that the founding banks bear 3.6 trillion yen ($36 billion) of the losses, other banks that made loans to the companies bear 1.6 trillion yen ($16 billion), and the farm-related groups take 1.1 trillion yen ($11 billion).
That would leave 1.2 trillion yen ($12 billion) over from the 7.5 trillion yen total, which would be converted into a debt-liquidating company, according to the original proposal.