Frank Gibney Jr.

By Japan Goes to the Ghosts

Last week, when many Japanese deserted Tokyo to pray at the graves of their ancestors--an annual August festival known as O-bon--subway commuters were treated to a rare opportunity: enough elbowroom to actually open their morning newspapers. That was a mixed blessing, given that the news was so grim. Amid the usual litany of ominous rumblings about the sagging yen and anemic economy were reports that the Long Term Credit Bank, Japan's 10th largest financial institution--which is to say, bigger than almost any U.S. bank--was in imminent danger of collapse. The bank's "bottomless" stock price (27[cents]), screamed a tabloid, could mean only one thing: CRISIS AFTER O-BON!

Things are so bad here that the prospect of one bank's demise conjures up images of a cataclysmic cascade of failures. With some reason: the collapse last November of the Hokkaido Takushoku Bank shattered the economy of Japan's northern island of Hokkaido. Affiliated lenders and thousands of businesses went bust. Since then the prognosis for the nation has worsened steadily. In reaction, commentators have lashed out, blaming the nation's woes on everything from American "free-market imperialism" being forced on Japan's financial system to a laggardly birthrate.

Time for such fanciful notions is running out. Prime Minister Keizo Obuchi, in office barely three weeks, faces the lowest popularity ratings of any incoming Prime Minister in 40 years. An emboldened opposition is challenging his administration's plan to rescue Japan's banks from more than $620 billion in bad loans. If Obuchi doesn't show results by next month, he could be out of a job.

Saving--or sacrificing--Japan's banks has become a litmus test. Obuchi's rescue plan envisions a "bridge bank" that would consolidate ailing institutions and protect healthy depositors without causing any outright failures. That means "the government will not cure the most crucial wounds," complains Hiroshi Kumagai, a leading member of the opposition. Kumagai wants to close bleeders like the Long Term Credit Bank, which holds more than $350 billion in international derivatives contracts. Institutions worldwide are party to those contracts, so the bitter medicine of a closing would not be Japan's alone to swallow. Whatever Obuchi does, most economists predict that Japan's crisis will get worse after O-bon. The festival has its ancient roots in the story of a Buddhist disciple who frees his mother from hell by offering food and prayers at his ancestors' graves. With their economy at stake, the Japanese can only hope that their own prayers do not go unanswered.