"BIG FOUR" BROKERAGE GOES BUST:
BOJ Lending to Assure Stability after Closure of Yamaichi Securities

November 27, 1997

On November 17, one of Japan's 20 largest banks, the Hokkaido Takushoku Bank, failed; just a week later, on November 24, one of the country's four largest brokerage firms, Yamaichi Securities Co., effectively went bankrupt with a decision to submit an application for closure of its operations. The company's financial condition had been deteriorating, and its cash-flow situation had become untenable. With 3.5 trillion yen (28 billion dollars at 125 yen to the U.S. dollar) in liabilities outstanding, Yamaichi's failure is the largest ever recorded in Japan.

On the same day, Bank of Japan Governor Yasuo Matsushita announced that the central bank would provide special unsecured, unlimited funding to assure that Yamaichi customers were able to get their assets back without hindrance and to maintain the orderly provision of credit in domestic and international financial markets, and Minister of Finance Hiroshi Mitsuzuka declared that the government would consider every policy option, including the use of public funds, for stabilization of the financial system.

Both the Bank of Japan and the government have made it clear that they will do everything in their power to sweep away fears about the stability of the financial system arising from the succession of large-scale failures.

Bank of Japan Loans to Protect Customer Assets
Yamaichi Securities was a long-established fixture of the securities industry, having celebrated the centennial of its foundation this year. Back in 1965, when the securities business was in recession, it ran into a financial crisis, but it was able to pull through with special lending from the Bank of Japan. It recovered quickly, and within four years it returned the 28.2 billion yen that the central bank had lent it; thereafter its business progressed steadily.

In 1991, however, it lost trust over revelations that it had compensated selected customers for losses on their portfolios. And this year eight former executives, including the company's previous president, were arrested in connection with charges of having provided benefits for corporate racketeers. The scandal further hurt Yamaichi's business, and in its results for the six months ending September this year, it alone among the top four brokerages reported a current loss, which came to 2.7 billion yen (21.6 million dollars).

Then an American credit-rating organization announced at the beginning of November that it was reviewing its rating for Yamaichi's debt, news that sent the company's stock price tumbling. On November 19, the shares fell to 58 yen (0.46 dollars), barely above their par value.

With this succession of bad news, Yamaichi's customers deserted it in increasing numbers; cancellations of investment trust contracts and other withdrawals of funds caused a severe deterioration in the firm's cash flow. On November 21 the U.S. credit-rating organization lowered the ranking of Yamaichi's debt to non-investment-grade (speculative, or "junk bond") status, and on the following day it was revealed that the firm had major liabilities not listed on its balance sheet (according to a later announcement from the company, these amounted to 264.8 billion yen, or 2.2 billion dollars). As a result it became effectively impossible for Yamaichi to borrow on the financial markets. The company therefore held an emergency meeting of its board of directors in the early hours of Monday, November 24 (a holiday in Japan), just before overseas markets opened, and decided to go out of business.

Finance Minister Declares All Alternatives Will be Considered
Finance Minister Mitsuzuka held a press conference on Monday morning in the wake of Yamaichi's decision. He stressed that everything necessary would be done to protect the assets of the firm's customers, and he declared that the government would check all the alternatives and consider possible new policies for the sake of stability in the financial system. Bank of Japan Governor Matsushita also met the press on Monday, explaining that the central bank would provide special lending because a smooth closure of Yamaichi was important to assure stability in domestic and international financial markets.

The special lending from the Bank of Japan will serve as a form of bridge lending to allow the return of funds to customers and other closing-down operations to proceed smoothly. Meanwhile, the Ministry of Finance has declared that it does not judge Yamaichi to be technically insolvent: As of the end of September its reported net worth was 430 billion yen (3.4 billion dollars), and even allowing for the off-balance-sheet liabilities and other reductions, the amount was still around 100 billion yen (800 million dollars). For this reason the Bank of Japan explains that it expects no difficulty in getting the special lending repaid.

Ministry of Foreign Affairs

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