starting the thread with some observations on Japan:
last week, while all eyes were firmly fixed on events in Iraq, the stocks of the major Japanese banking groups plunged by 25% in 3 trading days. mind you, they were already trading at all time lows just prior to this latest plunge. concurrently a number of Japanese corporations have announced huge write-offs over the past two weeks relating to their stock portfolios, mainly 'losses in bank stocks'. for instance, Japan's second largest paper manufacturer had to write of $250 million of bank stock losses for the quarter .
apparently, last year Japan's major banking groups attempted to shore up their capital Keiretsu style, by asking those of their customers that appeared to be still solvent to subscribe to their newly issued shares. once again this tried Japanese tradition of corporate incest has backfired big time.
Japan's economy and financial system have been tottering on the brink for a seeming eternity now - but it now looks as if the day of reckoning that many have expected is finally drawing near.
what is 'different this time'? for one thing, we have just seen the traditional Japanese government fiscal year end stock market manipulation scheme fail for the first time since the Nikkei peaked in late '89. in an effort at damage control the Nikkei level at which bank capital adequacy ratios are thought to begin to fall below the BIS mandated 8% has been massaged lower in the financial press for the umpteenth time, this time to '7,600 points'. recall that last year, the magic number was supposed to be 10,000 points or so. in reality however, Japan's major banks haven't even a fraction of the capital considered adequate: this is due to the fact that over 50% of their capital consists of deferred tax assets - in essence an ephemeral book-keeping conjuring trick. they're counting the taxes they WON'T have to pay if they ever turn profitable again as if they were capital.
no-one dares to admit this truth though - after all, should the BIS determine that Japan's banks are indeed insolvent, they and their overseas counterparties would have to cease to trade with each other - the effects on the global derivatives ponzi pyramid alone could be quite severe (Japan's derivatives notionals amount to nearly 5 times GDP if i recall correctly). note also that the broader South East Asian region is entirely dependent on Japanese financing, and the same goes incidentally for a big percentage of the hedge fund industry (Japanese banks are the biggest lenders to hedge funds in the world).
the failure of Japan's bureaucracy to prop up the Nikkei this year ironically coincides with an agreement to 'co-ordinate market intervention' with the Fed, ostensibly to 'protect' the markets from an unwarranted Iraq war fall-out, see:
news.bbc.co.uk
of course what would you expect when these economically illiterate Keynesian incompetents enlist each others help except utter failure, but it's still remarkable, as the Japanese government's market support operations have never before failed to lift the Nikkei during March . in addition this year even the BoJ has been involved directly in the market manipulation operation by means of buying up the stock portfolios of the bankrupt Japanese banks.
after Mizuho Holdings, the world's largest bank by assets, announced the biggest Japanese corporate loss ever in January ($16 billion) concurrently with plan number 1,107 to raise capital (from their solvent customers, as well as various circling Wall Street vultures), it appeared that nationalization of the big Japanese banks couldn't be far off. indeed, this 'solution' is being talked about more openly all the time: timesonline.co.uk
note however that the banks managers consider nationalization as a grave 'loss of face', a concept that is incredibly important in Japan - so they will do whatever it takes to put it off. of course, there's every reason to expect that nationalization will only make the problem worse - after all, why would anyone believe the state to do any better at managing the banks than the current crop of bank managers? you'd merely exchange one batch of nincompoops for another - hardly a confidence inspiring event.
surprisingly, there's still a lot of complacency regarding the outlook for Japan - for instance, you may remember the brief flurry of gold buying by Japanese citizens fearing the end of the state's deposit guarantees (a necessary reform step that the Japanese govt. has predictably completely abandoned in the meantime) - this has subsided now, as apparently everybody is still convinced of not only the willingness but also the ability of the government to bail out all and sundry when push comes to shove (when, not if).
Koizumi's promised reforms meanwhile are mainly conspicuous by their complete absence - he has failed to break the grip of the LDP's old boys network on the process, mainly because he lacked the resolve to grasp the brief window of opportunity that his initial popularity with Japan's voters gave him.
the first obituaries on the still-born reform process have already been written:
ntrs.com
the complacency regarding Japan's immediate outlook is partly due to the fact that the 'muddling through' policy has seemingly worked so well over the past decade - but the costs of this policy keep mounting. Japan's government is basically bankrupt as well - if it were a 3rd world country, its currency would have collapsed by now and interest rates would be in double digits. the wasteland that used to be a vibrant economy is home to more and more industrial zombies staggering about - aside from the banks, the not-so-much-talked-about insurance industry is also completely ruined.
unfortunately, there is no chance whatsoever that things will suddenly change for the better, although contrarian investors may be enticed by the low valuations of those Japanese companies that have successfully weathered the storm - the entire Japanese electronics industry has a market cap that is less than that of GE alone for instance.
one problem is that Japan is getting the wrong advice - it is urged by Western 'economists' to employ the central bank in an attempt to 'reflate', i.e. print a lot of money, a measure that is apparently seen as a panacea for all economic ills - in reality, it does far more harm than good. note btw. that the constant harassing of the BoJ which consists mainly of admonitions that it hasn't done 'enough' is totally misplaced - in reality, the BoJ has indeed heeded the advice, and embarked on a series of conventional and unconventional measures (the most recent is that it will lend money to small firms in the commercial paper market) , chiefly among them the printing of a lot of money.
the following article, although a bit dated, lays out why this strategy has failed to work, and will continue to fail to work (an important read, highly recommended): mises.org
it asks the simple question: "can more yen save Japan?" included are several charts that prove beyond doubt that Japan has followed the recommendations of the Keynesian and monetarist set to a T - both deficit spending and monetary inflation have been applied in spades. naturally, the effect has been the exact opposite of what was expected. no big surprise for those with a smattering of common sense, since we'd already live in Utopia if all it took was engaging the printing press. (in the same vein, read "should Japan fight deflation" also by Shostak: mises.org
of course Japan's lack of success with these policies stands as a stark warning in light of recent comments by Fed officials (most prominently Mr. Bernanke) regarding the Fed's own plans to 'fight deflation'. in essence, they have promised to transform the economic downturn into an interminable, memorable affair for the history books - taking a leaf from the 1930's playbook of how to turn a recession into a depression.
one can only hope that Japan's muddle through policies do indeed fail spectacularly in the form of a systemic collapse. why 'hope' for such an event? because it would be the only way to FORCE reform. note e.g. that Russia's economy is booming ever since the system there went belly-up in '98. once the entrenched system collapses, the elite that profited from maintaining the status quo is usually swept from power, and the new brooms have finally a chance to implement the necessary reforms. the fiat money system that is the root of the huge boom-bust cycle the bust phase of which is now engulfing the entire world has already shown to be a failure in the collapse of Argentina (interestingly, now that Argentina is free from the IMF yoke, one of its presidential candidates has proposed a gold-backed currency system) and there is some hope that Japan will ultimately also serve as an example of the failure of this misguided system. nobody talks about it, but fractional reserve banking is what has brought Argentina down - while the currency board promised that every peso in circulation would be backed up by a dollar in reserves, the banks created pesos by the bucket-full. the promise of full backing was swallowed by foreign investors who helped Argentina to amass the huge foreign debt that advanced the tipping point by becoming unserviceable - had they stopped to think, they would have asked how the currency board and the fractional reserve credit creation system could possibly be reconciled.
of course no-one can say for sure how long Japan might take to realize just how broke it now is - after all, Argentina's downfall was also a gradual affair beginning in the first half of the 20th century. it is possible that 20 or 30 years from now no-one will remember that Japan was once an economic superpower.
but it at least appears now as if things MAY be coming to a head in the form of a major crisis of confidence that will swallow what's left of Japan's sorry financial system. and as the Chinese have so sagely observed in their language, crisis may well mean opportunity in this case.
PS: please note: first of all, hello to everybody...i will try to post as often as possible on this thread, and also try to follow it regularly. however, be aware that i won't be able to reply to all posts directed to me due to time constraints. please don't take it personally if a fail to reply. my intention is to from time to time post similarly extensive rants on various financial/economic topics - this is NOT a Japan thread, Japan merely popped up as the first subject i wanted to say something about, since it seems timely in light of recent events there. basically every topic is welcome on this thread,and other contributors are welcome to initiate debate on other topics.
i will try to follow up on this Japan post with more Japan specific information as it becomes current. note e.g. that the new governor of the BoJ, widely denounced as being too 'conservative' will probably try to make a mark by compounding the mistakes of his predecessor, and it will be fun to watch him implement the latest series of grave mistakes.
and to pre-empt a likely question: yes, i think one should stay long the gold stocks here. -bg-
Argeninian stocks are also worth a punt imo - since things can hardly get much worse there, they're bound to get better. |
