Here's part of the reason gold has done well lately.
Japan: Investors Wising Up
21 February 2002
Summary
Japanese investors may finally be recognizing the true extent of their country's financial problems. Public perception of risk is on the rise domestically as investors are fleeing into highly liquid assets and safe havens like gold. They may soon start looking to take their money outside of the country, and that will be when Japan's problems will truly begin.
Analysis
A record number of Japanese investors bid to purchase $29 billion worth of three-month Japanese government treasury bills in a Feb. 13 auction, a particularly surprising move considering the bills carry an interest rate of zero. Meanwhile, January gold sales at Japan's leading precious metals firm rose 400 percent from a year earlier, according to the Japan Times.
Japanese investors are becoming increasingly skittish and have begun moving their money into new, more secure directions. This redirection of capital will put the already depressed economy into the deep freeze, and is also a precursor to a more dramatic transfer of domestic capital that could eventually foretell Japan's financial collapse.
The rush into short-term, zero-interest T-bills and gold is part of a larger shift in investment behavior. Japanese investors are beginning to recognize the increasing number of risks in their financial system and the dwindling number of safe options for their savings. They are also losing faith that Japan's latest and greatest "reformer," Prime Minister Junichiro Koizumi, can keep them away from the financial abyss.
Once investors feel that there are no more safe options, a rapid flight of capital out of the country will begin. Japan will have little choice but to intervene by enacting strict capital controls to stop the hemorrhaging.
There is ample bad news to support investor fears, and the pressure is rising. The already fragile Japanese banking system faces a pair of frightening reforms at fiscal year end on March 31, when the banks lose their unlimited deposit insurance on time deposits -- mainly savings accounts -- and must also adjust their books to account for massive losses in the stock market.
These pending reforms have the Japanese public and the government worried about the possibility of a run on banking deposits, and consequently about the banks' own liquidity and capital adequacy. Bank of Japan Gov. Masaru Hayami has advised Koizumi to funnel public funds into the banks' depleted capital accounts, Japan Times reported Feb. 20. Depositors have already begun shifting money out of higher interest time deposits and putting them into normal deposits, much like checking accounts, which offer unlimited deposit insurance until March of 2003.
Banks are not the only institutions looking less secure. Moody's Investor Services just downgraded Japan's three largest brokerages, with the smaller two now only one notch above junk-bond status. Brokerages have been hammered by the floundering stock market, which is hovering at 18-year lows, and Moody's warned of profitability problems at the Nomura and liquidity problems at the Daiwa brokerages. Declining public confidence in the security of the country's brokerage houses will further discourage investment.
Investors are also fleeing more stable financial instruments such as popular money market funds (MMFs). In Japan, these funds pool short- and medium-term corporate securities to offer investors a higher-interest alternative to banking deposits. Until recently, MMFs were considered very low risk. That perception is now changing.
Total cash in MMFs dropped 60 percent in 2 months -- from $152 billion at the end of October to $59 billion at the end of December 2001, Japan Times reported Feb. 15. To make matters worse, one of the country's downgraded brokerages, Nikko Cordial, offered MMFs that contained Enron bonds.
An investment association in January sought to counter the rapid outflow of money from the MMFs, as well as improve their damaged credibility, by imposing new restrictions on the type of investments allowed in the funds. But most economists don't expect a rebound in MMF investments soon, the Japan Times reports.
Even tried and true Japanese government bonds (JGBs) are looking riskier. On Feb. 13, Moody's issued a warning that it was examining Japan's sovereign-debt credit rating with a view to downgrading it two notches to A2, on par with Greece, Latvia and Botswana. One Merrill Lynch analyst told the Financial Times that the threat of a two-notch downgrade is having an impact on domestic investors who usually don't care about ratings.
The rest of the world has recognized these risks for quite a while -- foreigners have been reducing their exposure to Japan for years -- but the risks have not truly struck home in the country. That may now be happening, however.
Uncertainty is leading Japanese investors to keep their money liquid, in bank deposits or easy-to-sell T-bills, or to move it into hard assets like precious metals. The rush into gold, which pushed the market price above a two-year high of $300 an ounce in February, is particularly telling, as gold is almost always viewed as a safe haven in times of severe economic uncertainty or turmoil.
The Japanese are also increasing cash holdings. Bank of Japan figures cited by the Japan Times show that the amount of individual investors' liquid deposits jumped by about $12 billion in 2001 from the previous year. However, banks concerned about losing their deposits and risking collapse have begun to increase the interest rates offered on ordinary deposits. Concerned that banks are making promises they can't keep, the Bank of Japan has now decided to place a ceiling on deposit interest rates, Japanese daily Asahi Shimbun reported Feb. 20.
While some investors see the writing on the wall and are taking their money out of Japan, there is little indication at the moment that funds are shifting to overseas investments on a massive scale.
One reason that Japan isn't already suffering from massive capital flight is that banks have had to repatriate large amounts of foreign capital, often selling overseas assets, in order to strengthen their balance sheets in advance of March 31. Japan's Ministry of Finance reported a record sale of overseas bonds, primarily by banks, in January. Those assets could begin to flow overseas again once the banks report out at fiscal year end.
Also, much of Japan's capital is tied up in large pension funds. These funds are still controlled by the government's interlocking networks of bureaucracy. Tokyo rightly recognizes the importance of keeping capital inside the country, which it needs as a source of funding for its own enormous public debt. Japanese banks are also tied in closely with the bureaucracy, and thus offer customers few alternatives to invest overseas.
There is also a social aspect. Implicit in Japan's now breached social contract was the public duty to save and invest in the domestic economy. Japanese investors have invested domestically for decades, and old habits die hard.
But under extreme pressure they do die. The recent moves into gold and T-bills is the first indication that investors are no longer taking the security of their financial system for granted. At some point, domestic investors will finally clue in to the fact that Japan's economic illness is terminal and start sending their money out of the country en masse.
Tokyo will then be forced to intervene, and the strict capital controls and other measures that will probably be implemented will mark the true beginning of Japan's financial and economic collapse. |
