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Tokyo bank will be world's biggest

Mitsubishi's ascent symbolizes renewal of industry in Japan

TOKYO -- Buying a scandal-tainted bank plagued by four straight years of red ink hardly seems like an auspicious way to cement a turnaround.

But when Mitsubishi Tokyo Financial Group Inc. takes over money-losing UFJ Holdings Inc. tomorrow, the new bank will not only emerge as the world's biggest -- surpassing Citigroup in terms of assets -- it also will symbolize the rebirth of a Japanese banking industry once buried in bad debt allowed by weak regulatory oversight.

Named Mitsubishi UFJ Financial Group Inc., the new giant will lead an industry that has undergone years of consolidation, largely reduced the burden of onerous bad loans and is now helping underpin the nation's economic resurgence.

''The banks are back," said Jesper Koll, chief economist at Merrill Lynch & Co. Just a few years ago, Japanese banks were saddled with massive debts that had piled up over a decadelong slowdown in the world's second largest economy after the stock and property price bubble burst in the early 1990s.

Unlike their US counterparts, who more systematically force banks to quickly write down the value of nonperforming loans, Japanese bank regulators allowed local institutions to carry bad debts on their books for many years.

The administration of Prime Minister Junichiro Koizumi, elected in 2001, has stepped up pressure on banks to clean up their balance sheets of bad loans, which peaked at $325.7 billion in March 2002.

The banks have accelerated their writeoffs of bad loans -- leading to years of massive losses -- and reduced bad debt to $166.5 billion by the end of March, according to the latest data from Japan's Financial Services Agency.

The banks also cut back on lending, sold problem loans to foreign banks and gobbled up weaker lenders -- dramatically consolidating the industry.

The country's ''Big Four" -- Mizuho Financial Group, Mitsubishi Tokyo, Sumitomo Mitsui Financial Group and UFJ -- didn't even exist 15 years ago. All were formed in recent years through mergers with smaller banks.

The new Mitsubishi UFJ Financial Group Inc. will have total assets of around $1.68 trillion, topping US-based Citigroup Inc.'s $1.55 trillion, based on most recent company figures.

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