By Sandra Sugawara
Washington Post Foreign Service
Monday, September 28, 1998; Page A1

TOKYO, Sept. 28 (Monday)—A major Japanese leasing company filed for bankruptcy protection Sunday night, an action that signaled the willingness of Japan's ruling Liberal Democratic Party to allow politically connected firms to collapse in an effort to stabilize the nation's financial system.

Japan Leasing Corp. applied for court protection from creditors, a company spokesman said. The company said its debts totaled $16 billion, making it the largest bankruptcy filing since World War II.

The leasing company, established in 1963 with a staff of 1,300, is an affiliate of Long-Term Credit Bank of Japan Ltd., a large Japanese bank that for months also has been teetering on the edge of bankruptcy.

The ruling party had wanted to use public funds to prop up Long-Term Credit Bank, but opposition parties had blocked the proposed move, in part because it was seen as an effort to help Japan Leasing, which owes significant amounts of money to major LDP supporters, such as agricultural cooperatives.

After growing public outcry that taxpayer funds would be used to shore up Japan Leasing, and thus LDP supporters, LDP officials on Friday indicated they were backing away from their plan. With the collapse of Japan Leasing, the LDP has paved the way for the resolution of Long-Term Credit Bank's problems.

Long-Term Credit Bank is expected to request nationalization of its operations as early as October, according to the Nihon Keizai Shimbun, Japan's leading business newspaper. Until now the LDP has fought nationalization of Long-Term Credit Bank because it likely would mean that shareholders would lose their investments and borrowers, who for months have been unable to make payments on their loans, would be put into bankruptcy.

The bank's nonperforming assets are to be taken over under a program similar to that run by the Resolution Trust Corp., which took over failed U.S. savings and loan institutions in the late 1980s. The bank's viable assets then would be transferred to another bank.

Japan's banks are wallowing in more than $600 billion in bad loans, the fallout from eight years of economic stagnation. Long-Term Credit Bank, believed to be in the worst shape, is one of the 19 largest banks in Japan. The huge volume of unpaid loans has made it difficult for businesses to obtain credit lines or new loans for expansion, thus slowing economic activity to a dangerously low rate.

The collapse of Japan Leasing highlights the worsening condition of Japan's financial system and has increased pressure on Japan's politicians to move more quickly to pass bank reform bills before the current parliamentary session adjourns Oct. 7.

The LDP and opposition groups met for hours over the weekend but still were at a stalemate on some key issues at midnight Sunday, when negotiators learned of the Japan Leasing bankruptcy, according to Japanese news reports. The stunning news pushed both sides into making concessions that enabled them to reach an agreement today. The LDP lacks a majority in the upper house of parliament and thus needs opposition support to have legislation enacted.

The LDP agreed that no taxpayer money should be used to prop up Long-Term Credit Bank. Opposition groups, meanwhile, agreed that public funds could be injected into receiver banks, which agreed to take on the viable assets of liquidated banks, according to news reports.

The opposition groups also agreed that under certain circumstances weak but viable banks could receive an infusion of funds. The opposition groups backed off on demands that the Finance Ministry be stripped of its power over banks.

Japan's ability to stabilize and clean up its banking system is seen as key to the nation's ability to revive its economy and regain global confidence in its financial system. The Japanese economy has fallen into its worst recession since World War II, making it nearly impossible for the rest of Asia to pull out of a devasting economic crisis that has spread to financial markets across the world.

To further bolster the economy, Japanese authorities have drawn up an emergency plan to help the nation's banks that have been facing growing difficulties raising dollars, according to the Nihon Keizai Shimbun newspaper. Under a contingency plan, the government will deposit a portion of its foreign currency reserves into Japanese banks unable to make dollar settlements.

Increasing fears about the stability of Japan's financial system and about the inability of the government of Prime Minister Keizo Obuchi to do anything to fix it has made it increasingly difficult for Japanese banks to raise money in global money markets.

The government also said Sunday that it wanted to speed up passage of a new stimulus package, holding a special session in November, to get additional tax cuts and government spending into the economy more quickly. The government originally intended to pass the new budget next winter, but because of the severe state of the economy it decided instead to speed up the passage.

In another development, Taichi Sakaiya, head of Japan's Economic Planning Agency, said Sunday that he thought Japan's gross domestic product in the July-to-September quarter may shrink, for the fourth consecutive quarter.

Japan Leasing, the second-largest leasing company in Japan, leases a range of products, including aircraft, ships, farm equipment and land. Although its largest creditor was Long-Term Credit Bank, Japan Leasing also had loans with agricultural cooperatives, farm insurance companies, life insurance companies, regional banks and trust banks.

Because of this situation, the LDP for weeks had pushed a bailout of Long-Term Credit Bank that also would have propped up Japan Leasing, preventing some of these creditors, especially farm groups, from losing money. But the opposition parties strongly opposed the bailout of LDP constituencies.

Under the bankruptcy filing these creditors are unlikely to recover much of the loans made to Japan Leasing.

In Japan, as in the United States, there are two types of corporate bankruptcy filings. Under liquidation, a company's assets are sold to pay creditors' claims and the company then ceases operations. Under reorganization, a company is protected from claims by creditors while it comes up with a plan to pay off its debts.

Japan Leasing's president, Hiroaki Okamoto, said at a news conference today that the company was forced to file for reorganization because its creditors have "increasingly been trying to secure their assets" from the company.

Yasuda Trust Bank and farm insurance institutions, for example, have been sending notices to Japan Leasing's customers asking that the leasing fees be paid directly to creditors instead of Japan Leasing, news reports in Tokyo said. Such arrangements, Okamoto said, has made it difficult for his company to operate.

Eiji Katayama, an attorney for Japan Leasing, said a court appointed administrator will take over Japan Leasing, possibly by Tuesday, and the company's management will resign. A court appointed attorney will work on a reorganization plan.

Japan's prime minister, meanwhile, urged financial markets to react calmly to the bankruptcy filing. "The government will make doubly sure it does everything it can for financial stabilization, so I would like people to react calmly, without agitation," Obuchi said.

In Tokyo, stocks rebounded as the Nikkei 225-stock average closed the morning session today up 1.68 percent, at 13,954.09. Stocks of most major banks fell, as did the stocks of key creditors of Japan Leasing.

Analysts said that the stocks of banks may be under more pressure as details of the new bank plan are released, if banks are forced to disclose more of their finances by the new laws and if government assistance requires radical restructuring by weak banks.