Bank Reform Plan Finally Published In Japan

by Mary Swire, Tax-News.com, Hong Kong

31 October 2002

The plan for reforming Japan's banking sector was finally published yesterday after a week of intense negotiation between the Government and senior members of the ruling coalition - and the crucial provision to limit the banks' use of deferred tax as capital is still alive, although without specific targets for time-scale or percentage limits.

The plan, formulated by Japanese Prime Minister Junichiro Koizumi and his protege Heizo Takenaka, Minister for Financial Services, was to have been published last week, but was held back while while Mr Koizumi attempted to face down his critics.

Opposition to the plan focused particularly on the proposal to reduce the use of deferred tax as equity by banks: currently banks are allowed to use tax credits on loan loss provisions for up to 40% of their capital, and Mr Takenaka wanted this reduced to 10%, which would have pushed many banks' capital well below the statutory 8% level, in turn forcing the government to support them.

The plan as published requires banks to adopt the stricter United States accounting rules, including an external audit of their capital adequacy ratios, and Mr Takenaka said that even without precise targets on deferred tax, the plan was a "good start" for removing the 52 trillion yen (about US$400bn) of non-performing loans the government estimates are on the books of the nation's banks.

Bank of Japan and the government announced a series of other reflationary measures yesterday, including tax cuts worth about one trillion yen, and raised the possibility of a supplementary budget. The Bank also said it would boost its monthly bond purchases by 20% to 1.2 trillion yen.

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