Japan's financial system suffered a double blow Wednesday as authorities simultaneously moved to shut down the nation's largest credit union and its 38th largest bank.
Both Kizu Credit Union and Hyogo Bank were known to be weak institutions, but few expected two of the country's biggest bank failures in the past 50 years to come on the same day.Japanese stocks tumbled and the yen fell to a six-month low against the dollar amid a growing sense that Japan's troubled banking system has arrived at a watershed in efforts to deal with at least 50 trillion yen ($500 billion) in bad loans.
"I think this will be seen as the beginning of the regulators' efforts to really deal with the small failing institutions," said Sesuko Akiba, an industry analyst with SBC Warburg. "The Ministry of Finance's biggest concerns are how to maintain the stability of the financial system and how to prevent a run on banks."
As regulators in Osaka announced the closing of Kizu, and Hyogo Bank officials spoke to reporters in Kobe, Bank of Japan Governor Yasuo Matsushita held a press conference in Tokyo to tell the country flatly, "Fear won't spread."
Together, the two institutions hold nearly 4 billion yen in deposits. Hyogo's failure was also the first time a publicly held bank was allowed to fail.
Matsushita promised depositors that all their money would be protected, even beyond amounts covered by deposit insurance. He said the Bank of Japan would extend special loans to both institutions - and to others that may need them. He vowed the government would put up taxpayer money if necessary to assure stability in the system.
Both institutions were victims of poor loan decisions made during Japan's speculative real estate boom of the late 1980s. When the economic bubble burst, ushering in Japan's worst recession since the end of World War II, many of the loans went bad as real estate developers, construction companies and other firms went bust in record numbers.
Among Kizu's loans, for example, nearly 90 percent went to real estate companies. It collapsed holding 600 billion yen in irrecoverable loans, Osaka regulators said. Hyogo holds 1.5 trillion yen in bad loans, or more than half its total portfolio. Most of them went to the real estate and construction industries.