By Sandra Sugawara
Washington Post Foreign Service
Tuesday, January 13, 1998; Page D01

With Southeast Asian currencies in a free fall and worldwide markets jittery over Asia's economic crisis, Japanese Prime Minister Ryutaro Hashimoto yesterday presented to the legislature a $227 billion financial stabilization plan and $15 billion income tax cut that authorities here hope will be a first step in calming panicky investors and reviving Japan's domestic economy.

The Japanese government has been under strong criticism from U.S. authorities for not acting aggressively or quickly enough to tackle its economic problems. As Asia's largest economy, Japan is a major investor in the region and a big market for other countries' products, and U.S. and Asian officials have asserted that a domestic demand-driven recovery in Japan is critical for the region.

"We must by all means prevent the failure of financial institutions from putting at risk the credit system and the economy," Hashimoto said in a speech before the legislature.

Acknowledging Japan's importance in reviving the regional economy, Hashimoto said, "Asian economies used to grow like wild geese flew, with Japan leading the flock." He vowed the stabilization plan would help Japan regain its place as a strong, stable economy in the region.

But there is growing skepticism that the tax cut will go far enough to stimulate the economy, while the banking proposal -- which still lacks critical details -- has received mixed reviews here. Authorities say the plan would separate the terminally ill banks, which would be closed, from those that just need a bit of care. The latter would receive massive capital injections. But the fear is that the government will argue that most banks are salvageable.

To try to convince global markets the Japanese government and industry are serious about reforms, the Federation of Bankers Association, Japan's major banking industry group, is scheduled today to approve new, voluntary reporting standards on bad loans that the banks say will bring them closer to U.S reporting standards.

Japan's Finance Ministry, meanwhile, in a bid to boost its own credibility with the markets, announced that the nation's banks had a total of more than $575 billion in bad or questionable loans on their books, according to Bloomberg News. That's nearly three times the total the ministry had previously reported and is equal to about 16 percent of Japan's gross domestic product.

Owning up to a higher level of bad debts and improving reporting standards represent significant step for Japan's banking sector, but analysts caution that Japan is far from being out of the woods. For Hashimoto's bank bailout proposal to be effective, authorities will still have to publicly untangle a system that has enabled Japanese banks and bureaucrats to hide bad debts and disguise the true health of financial institutions, several analysts said. For example, the voluntary reporting standards won't address issues such as requiring banks to include the value of loans sold to unincorporated affiliates, a technique many have used to make their level of bad loans appear smaller than they actually are.

Hokkaido Takushoku Bank, which failed this fall, is a case in point. The public learned only after its collapse that Hokkaido Takushoku's bad debts were a stunning $17 billion, not the $7 billion reported in the spring.

Likewise, bad loans reported by Tokyo-Mitsubishi Bank, Japan's largest bank, to U.S. and Japanese authorities provide an interesting contrast. Because Tokyo-Mitsubishi Bank is listed on the New York Stock Exchange, it must file reports with the U.S. Securities and Exchange Commission, using stricter U.S. definitions for bad loans and U.S. accounting standards.

The result was that last spring, Tokyo-Mitsubishi reported in Japan that it had $6.9 billion in bad loans, while in its SEC filings later in the year it reported $14 billion in bad loans.

This fall, Tokyo-Mitsubishi announced that it was writing off $8 billion in bad debt, more than the total of bad loans it had publicly reported in Japan.

Bank reporting rules have enabled Japan's banks to legally hide hundreds of billions of dollars worth of bad loans for years. "Banks can hide their real health pretty easily under the Japanese definition of bad loans," said Yukiko Ohara, a Tokyo-based banking analyst with UBS Securities.

In addition, accounting loopholes mean banks can legally hide bad loans in affiliated companies. And Japanese-style capitalism, where banks were expected to prop up the major companies in their "group," has created a system with lots of hidden time bombs that outsiders have no way of evaluating.

"So analysis is impossible," said Ohara. "Analysts don't have the figures to differentiate between banks. We are always probing."

"There's no way of telling what potential problems there are," agreed Nozomu Kunishige, banking analyst at Lehman Brothers Inc.

For years, this reporting system frustrated foreign investors, but shielded Japanese banks. It enabled even the weaker banks to fulfill their roles as the key lifeline of Japan's major industrial groups. The banks provided a steady stream of capital to companies for expansion and prevented corporate bankruptcies, especially helping companies in their group. The system, for years, provided Japan with enormous economic instability and low unemployment.

But now, with Japan and the rest of Asia staggering from one financial crisis to another, this system is backfiring. It has fueled a dramatic loss of confidence in Japan's banking system. International money markets demand higher rates because they can't accurately assess the risk of Japanese banks, and thus assume the worst.

Investors have shunned most banking stocks, sending them plunging over the past year. Even Japanese depositors have lost faith, transfering billions of dollars from private banks into Japan's state-run postal savings system and Tokyo-Mitsubishi Bank last month, despite industry and government assurances that the other private banks are safe.

The Finance Ministry asked the banking association to draw up the stricter disclosure standards, in an effort to restore confidence in the reporting system, as well as to generate public support in Japan for the $227 billion financial stabilization package, said a spokesman. Ironically, after years of insisting there is no problem, the Finance Ministry and banking industry now must convince the public of the gravity of the crisis to win support for the bailout effort. That's one reason the Finance Ministry released the higher bad-loan figures, some analysts said.

How can mountains of bad loans go legally unreported for years? For one thing, loans must be at least six months past due before they are counted as bad loans. So as that six-month deadline approaches, many banks either make loans to delinquent borrowers so they can pay the interest, or they significantly lower the interest rates, say analysts. These loans do not have to be reported as problems in Japan.

Under the proposal to be voted on today by the board of the Federation of Bankers Association, banks would be asked to disclose both loans overdue for three months and rescheduled loans. The banking industry said this would raise the standards to those used in the United States. But the association is still developing the definition of rescheduled loans, and it is not clear that category would cover situations in which banks made additional loans to cover interest payments on delinquent loans.

The new disclosure rules won't address the loans sold to affiliates, however. Japanese authorities have said they want to change accounting procedures for affiliates to reflect international standards, but no details have yet been worked out.

Many Japanese banking industry executives privately insist they are eager to unravel the system that was supposed to protect them, but is now creating problems for them. But there is still debate within the industry about whether new stricter disclosures standards should be adopted immediately or later.

The weaker banks are fighting stricter disclosures, said one American banker. And the healthier banks are hesitant to make more detailed disclosures on their own, because that might focus greater attention on the weaker banks, said James Fiorillo. banking analyst with ING Barings in Tokyo. "It's not in any bank's interest to cause more of a scare right now."

Indeed Finance Ministry efforts to force banks to meet tougher capital adequacy ratios and to adopt slightly stricter assessments of bad loans caused such panic among banks that it led to a severe credit crunch, contributing to the bankruptcy last year of Tokushoku Ltd., a midsized trading company and food trader, said analysts. The Finance Ministry has since relaxed requirements for domestic, although not international banks.

Even though the Finance Ministry has released the higher figures of total bad debts, it remains unclear whether the new reporting standards will restore credibility for individual banks. "Even if banks did disclose the absolute amount of bad loans, I wonder who would believe them," said Ohara.

Special correspondent Akiko Kashiwagi contributed to this report.