Hi Sam,
The huge Japanese trade surplus has resulted in many Japanese banking and nonbanking institutions holding (investing in) US Treas in addition to investing in US stocks. The unfortunate part of this is that Jap Banks cannot improve their equity by selling these US Treas. It is like your equity in your margin account got depleted as the stocks in your account depreciated. By selling the US Treas/Bond portion of your account you cannot improve the equity of your margin account. You need to infuse more of your cash from elsewhere. BOJ cannot legally infuse common/preferred equity into private Japanese Banks. Sure, BOJ will have to bail out failing banks. But, how can the Japanese Govt/BOJ increase equity in those capital-strapped banks whose capital ratios have fallen below 8%? These banks can issue new common stock: but they know what this will result in -- a downward spiral in the bank stock prices.
The Jap market believed in the latest Jap Govt move to have pension plans sell their US Treas holdings to buy Private Jap Bank preferred stock because this move is the only viable alternative left to rescue the Jap banking system. This is serious and the govt has to do it and so the market believed in this move, bid up the bank stocks which squeezed shorts, etc. [Recall the great depression of US was triggered by a collapse of the US banking system; the Fed was then created!]
The pension plans must sell their US Treas holdings to buy pref stock, IMO, as I have posted in another piece. The US stock market will not see the impact until US Treas are sold heavily (this may trigger a sell-off of US Treas elsewhere) and US$ yields rise substantially. Until then, US market may continue to drift along with the SE Asian and European markets (herd mentality) since markets are at the peak of fundamentals.
What is the approximate size of these holdings and are these mostly T bills, notes, or bonds? How significant are BOJ's holdings of gold? Why does BOJ need to infuse its reserve at present?
The size of total holdings is about $880 bil. I do not know the mix. BOJ is unlikely to change its gold holdings now because they cannot buy more US Treas. BOJ is not infusing any reserve. Jap Banks must increase their equity position as per BIS guidelines to operate internationally and to have even Japanese faith in their own banks. These banks can be (and will be, if they do not increase capital) legally barred from doing international banking. This will be a near-death of Jap, Inc. So the govt decided to move and the market believed, IMO.
If Japan exports more than it imports, will that increase its reserve, all other things being equal?
In general yes. Japanese hold more of their resources in the US stocks and bonds. They can liquidate these to buy Jap Stocks if the Nikkei falls below 14700 (some one commented today). But, this will not improve Jap Banking system.
Sankar |
