The woes of Japan's banking sector have been painfully obvious for years. But Ishihara's public vote of no confidence served notice that, after a brief period of relative calm, the financial system of the world's second largest economy has slipped back into crisis mode. Days earlier, the government released economic growth data that indicated recovery is even farther off than expected, thanks in part to economic weakness in the U.S., a key export market. Of more immediate concern: a sharp stock market decline—fueled by plunging bank stocks—sent the Nikkei average to its lowest level in 19 years on Sept. 3. That's a big problem for the banks, because they hold mountains of shares in Japanese firms. As their value evaporates, so do bank assets, ultimately threatening solvency. According to Brett Hemsley of Fitch Ratings in Tokyo, if stocks drop about another 11%, the shakiest institutions will risk breaching a key requirement for how much capital they need to maintain.
Instead, the weak get weaker, and hope is fading that relief will come from an economic rebound. Government economists on Aug. 30 estimated that the country generated zero GDP growth in the first quarter, revising an earlier estimate of a 1.4% gain. Ken Courtis, vice chairman of Goldman Sachs Asia, predicts no growth at all in calendar year 2002. "The only way to be optimistic about the Japanese economy," he says, "is to turn the charts upside down."
One danger is that Ishihara—who hopes to succeed Koizumi as Prime Minister—might spark a wider loss of confidence in Japan's banks, scaring regular Japanese depositors into withdrawing their money in droves. That could have major repercussions for global stock and currency markets. "It is wrong to underestimate the severity of the Japanese financial crisis," warns Goldman's Courtis.
Bankers themselves aren't inspiring much faith. Mizuho—the product of a merger between Fuji Bank, Industrial Bank of Japan and Dai-Ichi Kangyo Bank—only opened its doors in April. It was immediately beset by problems when thousands of Mizuho customers using ATMs to wire cash found that tthe money had been deducted twice from their accounts. Then Japanese utilities sued after Mizuho's computers botched standing orders to pay monthly electricity, phone and gas bills. Because Mizuho handles the Tokyo city government's payroll and tax collection, Ishihara dispatched inspectors to examine the bank's books and management. He has refused to discuss the city's findings. But the Tokyo government withdrew $2.5 billion from the bank in April, lending credence to his threat to yank more money in months to come. "The government is applying great pressure on Ishihara not to penalize Mizuho," says Hideyasu Ban, who follows Japanese banks for Morgan Stanley. "But nobody knows what he will do."
For now, Ishihara is holding his fire. "I gave (the bank's officials) a list of conditions to meet," he says. "Based on whether they meet those, I have to reconsider the city's ties to Mizuho." It is tempting to assume Japan's banks will somehow muddle through once again. Still, it is hard to exaggerate their talent for shooting themselves in the foot.