Japan Holds American IOUs

The Nikkei average Thursday went up 2.6 percent, one of its best days in recent memories, after three banks who are merging said they're writing off $8 billion dollars in bad debt.

Investors cheered signs that banks are cleaning up their books, no matter how painful.

CBS News Correspondent Barry Petersen reports America should also be glad Japanese banks are getting their houses in order, since they hold billions in IOUs from the U.S. government.

The good news came from the UFJ Group, a new banking group led by Sanwa Bank, which said would take massive additional loan-loss charges to tackle its problem loans, pushing the group into the red.

"The Sanwa comments snapped investors out of their selling mood — at least for now," said Toshihiko Matsuno, a deputy general manager at Sakura Friend Securities.

One hand washed the other: the bank's announcement boosted stocks, and the higher stock prices helped Japan's banks, which own a lot of shares.

In the last few years, Japan's banks have written off a staggering $560 billion in bad debts but they still hold $250 billion more.

Over the last decade, as the economy kept sliding, real estate values plunged as much as 80 percent. Now, banks are holding loans worth only pennies on the dollar.

Despite widespread concern, one influential politician told CBS News that Japan's banking system is not going bust.

"Politically, we cannot let those banks go under," said Yasuhisa Shiozaki, a parliament member.

What American markets should really be worrying about, say experts, is not bad debts in Japanese banks, but the big debts the Unites States owes Japan — namely, billions in Treasury bills that financed years of U.S. budget deficits.

When the federal government ran annual deficits — in other words, spent more on programs and entitlements than it took in tax revenues — it had to borrow money to fill the gap. It did this by selling bonds, allowing the government to raise cash.

The danger would be Japan pulling its money back from American bond markets.

"What does that do to the United States? It would rip a path through it that would be very ugly indeed," said James Abegglen of the Asia Advisory Service. "I think that's the real underlying danger. Never mind what some Wall Street trader is saying."

American budget surpluses have allowed the government to retire some of its debt. But some of the outstanding debt is long-term, and the Treasury Department may wish to sell new bonds to retire some of the old. If Japan stopped buying, that could foul the government's financial plans.

In addition, if Japan's banks were to suddenly sell their U.S. bonds, that could wreak havoc on interest rates and the strength of the dollar relative to other currencies.

On balance, however, Japan has much more to worry about, and American companies are profiting from the country's slump.

Unemployment is at a record high. Young Japanese can't find jobs, and their fathers are being laid off in record numbers.

But the Gap has never had it so good. Toy-R-Us came to Japan a decade ago. Today its 111 stores boast annual sales of $1.3 billion.
Costco opened a store outside Tokyo three months ago and Costco Managing Director Richard Chavez described business is "very good."

The lingering economic trouble here has produced a total cultural shift. Japanese consumers once believed high prices meant high quality, so they turned up their noses at bargain stores.

No more. Foreign business in Japan is booming because Japan's economy has gone bust.

"No bonus payments, overall wage gains are being slashed. As a result of that, Mr. and Mrs. Watanabe — guess what? — they've become price conscious," said Jesper Koll, a chief economist with Merrill Lynch in Japan.

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