JAPAN'S TRILLION-DOLLAR HOLE

By EDWARD W. DESMOND/TOKYO

REMEMBER THE GREAT SAVINGS AND loan debacle of the '80s, when Uncle Sam was forced to spend $150 billion to bail out hundreds of thrifts that had made bad loans, largely for bad real estate? Japan, famous for its ability to copy and enlarge upon invention, has an S&L-like banking scandal of even greater proportion--perhaps a trillion dollars' worth. The fiasco is so large it could even disrupt Wall Street, which relies heavily on Japanese money.

The scandal revolves around seven housing-loan companies, or jusen, created in the 1970s to provide loans to home buyers. During the "bubble" years of the late 1980s and early 1990s, these companies lent huge sums, not to home buyers but to shady real estate speculators, many of whom were linked to Japan's tattooed gangsters, the YAKUZA. Just as in the U.S., real estate crashed in Japan, although a bit later, in the early 1990s. Result: the housing-loan companies watched their bad loans rise to at least $77 billion, more than 75% of their total portfolios.

The JUSEN, however, are only Chapter 1. The official bad debt of the whole Japanese financial system is $349 billion, according to the Ministry of Finance, but the experts say it could be as high as $1 trillion. There is broad agreement that the government will have to spend billions of dollars and banks will need to write off billions more to restore the system to health.

Talk of a bailout has enraged Japanese voters. For three weeks opposition legislators blocked entrances to the budget-committee room of the Diet, Japan's legislature. They picked up their cushions and departed last week only after Prime Minister Ryutaro Hashimoto agreed to extend debate on what had been a no-questions-asked $6.85 billion bailout of the housing-loan companies.

The lack of a bailout plan poses a real threat to Wall Street, one reason U.S. Treasury Secretary Robert Rubin made a quiet visit to Tokyo recently to stress the need for decisive action. The threat? With their confidence in Japan's banking system still shaky, U.S. and other foreign banks could decide to cut off credit lines to overseas branches of Japanese banks. If Japanese bank branches here lose their access to credit--and hence their ability to do business--they might be forced to sell their huge holdings of U.S. Treasuries to stay afloat. That could trigger a sell-off in the bond and stock markets.

Rubin got some of what he hoped for last week, when 21 of Japan's top banks wrote off an astonishing $106 billion in bad loans--welcome news in global banking because it signaled Japan's intention of facing reality. But there is still a danger. "If it turns out that this first bailout is a nonstarter," says Richard Koo, a senior economist at Nomura Research, "it will force many U.S. banks to reassess Japan's ability to control the situation. They may be pressed to cut credit lines to Japanese banks."

Yet as news of greater problems surface, outraged citizens may stall any action. The public is furious at the Ministry of Finance, which in the past was the most powerful and feared institution in the country. Two senior finance officials were disgraced by revelations that shady business figures plied them with parties, call girls and big personal loans.

So far, Hashimoto is promising thorough investigations but insists that the bailout take place up front for the sake of international confidence in Japan's banking system. The jaded Japanese public, however, does not believe it will ever know the truth once the bailout funds are approved. It's a standoff that is making bankers around the world increasingly nervous.

--By Edward W. Desmond/Tokyo