By Sandra Sugawara
Washington Post Foreign Service
Thursday, June 25, 1998; Page C01

TOKYO, June 24—Japanese legislator Shizuo Sato is well aware that foreign leaders, economists and investors are pleading for Japan to bolster its ailing financial system by closing or merging its sick banks.

But Sato recently received a message just as compelling from a panicked hospital manager: The hospital is in financial trouble because it hasn't been able to find a lender since the failure in November of Hokkaido Takushoku Bank, the biggest Japanese bank ever to go bust. And the hospital manager is just one of many borrowers who have complained to Sato, a 56-year-old member of the ruling Liberal Democratic Party, as he has traveled across the island of Hokkaido recently.

"Everywhere I go, every meeting, I hear owners of companies, and wives of businessmen, and parents of those who work for companies who were hurt" when Hokkaido Takushoku Bank collapsed, Sato said.

Sato's experience helps explain why Japanese leaders are reluctant to let another large bank fail, without measures to help maintain loans to customers that might be left in the lurch. Some legislators fear that Hokkaido's suffering -- including increases in unemployment and the number of bankruptcies -- would be spread to the rest of Japan if widespread bank failures are allowed.

Japanese officials have said in recent days that economic recovery depends on reviving the banks, which means disposing of hundreds of billions of dollars' worth of bank loans that are not being repaid. But the Japanese government has produced no concrete plan for handling the bad loans.

LDP leaders have been discussing ways to create a "bridge bank" that could provide loans to customers left stranded by bank failures. LDP Secretary-General Koichi Kato, a major advocate of this idea, has said the party will release the outlines of a plan by July 8.

Hokkaido Takushoku was the largest bank in Hokkaido, a sparsely populated island north of Tokyo. Hokkaido is one of the less developed regions of Japan, dependent largely on agriculture, tourism and construction for jobs. The business community was dependent on Hokkaido Takushoku for much of its capital.

Hokkaido Takushoku's financial troubles had been rumored for years but were flatly denied by the bank and by Finance Ministry officials. Despite suspicions that its bad-loan levels were massive, most Japanese thought the government would never let such a large institution fail, so its collapse was a shock for the nation.

Although government officials were unable to save the bank, they did arrange for a smaller regional bank, Hokuyo Bank, to take over Hokkaido Takushoku's good loans. Hokuyo Bank also agreed to take over all "category 2" loans -- defined as debt that may pose collection difficulties for the lender -- that did not exceed $714,000. The bank said it had agreed to do this to prevent Hokkaido's economy from plunging into turmoil.

The government's Resolution and Collection Bank took over Hokkaido's bad loans -- those more than three months overdue. But that left the difficult task of deciding what to do about the "Category 2" loans that exceeded the limit set by Hokuyo Bank -- big loans from customers that posed a financial risk.

For example, Hokuyo Bank is still in negotiations with Chizaki Kogyo, the largest construction company in Hokkaido. Chizaki Kogyo is a well-connected company that had been run for years by Usaburo Chizaki, a member of parliament and former transportation minister who died a few years ago. In the past, those connections might have been enough to guarantee a deal with Hokuyo Bank.

But these days, Hokuyo Bank is first demanding that Chizaki Kogyo come up with a viable restructuring plan to reduce its debts. That will mean cutting back on projects and reducing the company's work force from 1,300 to 1,070 by the end of this year, through early retirement, attrition and recommendations to certain employees that they quit, said a Chizaki Kogyo spokesman.

"At this point we expect Hokuyo Bank to take over our loans, but we are still in negotiations," said the spokesman.

Although Chizaki Kogyo is based in Tokyo, it is one of Hokkaido's more important companies. About one-third of its business is in Hokkaido, and it provides business to hundreds of subcontractors that employ thousands of people.

"There are hundreds of companies in Hokkaido who do business with Chizaki Kogyo, and they are worried. Dozens of them have come to my local office in recent weeks to seek my help," said Sato, the legislator. "I tell them we are doing our utmost."

Another large company struggling to find a new banker in the wake of the Hokkaido Takushoku collapse is Marui Imai, Hokkaido's largest department store. The store borrowed heavily during the boom years to expand its business and invest in hotels, museums and even overseas real estate. For many years, Hokkaido Takushoku lent money without requiring collateral, because of the close relationship between the store and the bank.

In March bankers rejected Marui Imai's restructuring plan, so the store is working on a new proposal. "At this point we don't have a main bank to replace Hokkaido Takushoku," a spokesman said.

Although only sketchy and conflicting details on the "bridge bank" plan have been released, it would be designed to help customers such as Chizaki Kogyo and Marui Imai -- businesses that may pose problems for commercial banks but are still in operation and providing jobs.

Some financial analysts argue that these companies should not be funded, saying that if their loans are substandard they should be allowed to collapse. These analysts view the idea of a bridge bank as a bailout for the construction industry, which is a source of political funds for the LDP. Other analysts say a bridge bank can work as long as it is intended to be a temporary source of funding, until the economy improves, and not as a permanent bank.

But many analysts acknowledge that a bridge bank might be necessary to make bank closures politically acceptable in Japan, which had not experienced many bankruptcies or much unemployment until recently.

Indeed, although politicians such as Sato are concerned about the yen and the stock market, they see their first role as helping constituents, who are fearful about their jobs and employers.

"I think the worst is yet to come," said Sato, who expects the surge of bankruptcies in Hokkaido to continue. Hokkaido's unemployment rate is already 4.7 percent, compared with the nationwide rate of 4.1 percent. "But some companies are still holding on. So I hope to help these companies find loans and give them relief," Sato said.

Special correspondent Akiko Kashiwagi contributed to this report.