Japanese Bankers Urge Cautious Approach To Deferred Tax Asset Changes

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

24 June 2004

The head of the Japanese Bankers Association has advised the government to exercise caution when introducing new rules setting tougher new limits on the amount of deferred tax assets banks can use as part of their capital base.

“A sudden change may have a significant impact on the macro economy,” warned Yoshifumi Nishikawa, head of the bankers association, at a regular news conference this week.

“I’d also like regulators to see how the banks have progressed with the bad loans,” in the year ending March, he added, referring to the three years given to seven of the country’s main lending institutions by the regulators to halve the level of bad loans to total lending from 8%.

It has been common practice for Japan’s major banks to prop up their capital base with unrealised tax credits for loan losses.

However, heeding the call by many analysts that such intangible assets are of poor quality, the government wants to impose restrictions on the use of deferred tax assets, especially after a crackdown by auditors last year led to the bailing out of two banks, Resona Holdins Inc and the regional lender Ashigaka Bank.

The Financial System Council, a financial advisory panel to Prime Minister Junichiro Koizumi which is looking into the issue, has also urged a cautious approach to the matter in a report released this week, and Akiyoshi Horiuchi, the Chuo University professor who heads the council, recommended that change should be brought about “in accordance with economic conditions and the pace of bad-loan disposals.”

Nevertheless, new rules limiting the amount of deferred tax assets that banks can use may be put in place as early as next April.

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