Somethin' to ponder as you sniff your morning coffee. I've always enjoyed a good snowball.
Japan Stock Market's Plunge
Threatens Its Crucial Economy
TOKYO -- Japanese stock prices extend a three-session plunge t11%, threatening the health of the world's second-largest economy andperilously draining confidence in its financial system.
By Wall Street Journal Reporters Jathon Sapsford, Norihiko Shirouzu and Bill Spindle
The stock-market rout underscores a deeply unsettling message: Despite enormous cash reserves and consistent trade surpluses, Japan isn't immune from the economic sandstorm besetting many of its Asian neighbors.
Like its neighbors, Japan suffers from a weak banking system, a heavy dependence on foreign capital in its markets, a sunken property market and now a shortage of credit that has corporations gasping. Worse, just asthe financial markets rejected half-measures aimed at shoring up South Korea, Thailand, Indonesia and Malaysia, the skittish markets are signaling a flat rejection of Tokyo's trumpeted package last week to slash taxes, sponsor loans to small businesses and throw $77 billion at the banking
problem.
"We're in a very dangerous state," says Okiharu Yasuoka, a senior member of Japan's ruling Liberal Democratic Party and chairman of the government's financial stabilization committee.
Even the country's powerful central bank is stymied by market conditions. With the yen edging lower, echoing the currency slides elsewhere in Asia,the Bank of Japan last week spent as much as $5 billion, according to estimates in the market, to support the Japanese currency, with only limited success. The intervention, according to senior bureaucrats, is meant to ward off criticism that Japan was allowing its currency to slide to boost competitiveness against Asian exporters.
Global Implications
Unlike the other economies that have slumped as the so-called Asian contagion has spread, Japan's economy is a powerful world force. In a report released over the weekend, the International Monetary Fund warned that a serious slowdown in Japan could set back global growth.
It certainly would compound Asia's problems mightily. Joseph Yam, the chief executive of the Hong Kong Monetary Authority, said over the weekend that the speed of Asia's recovery depends in large part on how quickly Japan can reinvigorate its banking industry. Senior LDP officials say other Asian leaders are pleading with Tokyo to keep the money flowing from its banks, which had more than $250 billion in relatively inexpensive loans outstanding in Asia at the end of last year.
If the banks were to start pulling those loans out of Asia, it could devastate already hobbled economies around the region. The alternatives aren't much better: Japanese financial institutions own some $350 billion in U.S.Treasury bonds, which they could liquidate to raise money -- but at a cost of higher U.S. interest rates.
The pressure on Japanese banks and insurance companies is escalating rapidly, though. The benchmark Nikkei Stock Average fell 3.4% Monday to 14799.40, bringing its cumulative loss over the past three trading sessions to 11% and leaving the index at its lowest point in more than two years.
In a sign that investors are pinning the blame for the markets' problems on the financial sector, bank shares are losing value faster than any other sector. Japan's banking sector amounted to 23% of the country's stock market a year ago. It was 17% three weeks ago. On Monday, banks amounted to 16% of Japan's stock market. Since Friday, the overall market has lost $148 billion in value.
Vicious Circle
Japan is caught in a vicious circle. Deep problems in the banking sector are driving share prices lower. But Japan's banks themselves are among the country's biggest shareholders, and as the value of their portfolios falls, so does their ability to lend, thanks to a rule that allows them to count stock holdings as capital.
Shrinking capital means banks would have to cut back on loans to squeeze into internationally agreed-upon levels of capital reserves equal to 8% of loans. Less lending means more bankruptcies and further declines in stock
values. "We're very worried about" the cycle, says a senior Finance
Ministry official.
Indeed, HSBC James Capel (Japan) Ltd. figures the stock portfolios of nearly half of Japan's big banks are worth less than the banks paid for them. That means the lenders, including Daiwa Bank Ltd., Fuji Bank Ltd. and Sakura Bank Ltd., can no longer sell those stocks and use the profits to write off bad loans. The only solution is to cut back on lending, bankers say privately, and tighten Japan's credit crunch.
"We're watching this with a sense of crisis," said the LDP's Mr. Yasuoka.The stock market's fall is especially unnerving, he adds, because it shows that the government's plan to inject 10 trillion yen ($77 billion) into the banking industry is doing little to improve sentiment.
Sense of Paralysis
Still -- in a spooky reprise of other Asian countries' early failures to deal effectively with their problems -- the government seems paralyzed, slow tofollow through with more-specific measures the markets are demanding.
Fears of a credit crunch caused Hiroshi Mitsuzuka, Japan's minister of finance, to call in Sanwa Bank Ltd. President Naotaka Saeki in an attempt to scold him and his industry into lending more.
"Understood," Mr. Saeki responded, according to officials familiar with the situation, and promised to spread the word as he left.
"What a farce," said one banker, on hearing the news.
As policy management, it may indeed seem extreme. But these are extreme times. Officials and many business executives fear a rash of bankruptcies if a credit squeeze sets in and stays. "Any company that's dependent on short-term bank financing might become a candidate for bankruptcy," says Jason James, equity strategist at HSBC James Capel (Japan) Ltd., "even if it's perfectly healthy."
Yet bankers are under pressure to clean house. Credit-rating agencies are downgrading the banks as the market falls. Global money markets raise the banks' funding costs each time their capital threatens to fall below international standards. Even Japan's strongest banks, like Bank of Tokyo-Mitsubishi Ltd., Sanwa Bank Ltd. and Sumitomo Bank Ltd., are paying a premium over rivals for short-term funding. Thus, international markets are forcing Japan's banks into more prudent lending. "The markets have caused them to do this," said the senior Finance Ministry official.
The Ministry of Finance, meanwhile, said Japan's level of problem loans edged up from 28 trillion yen as of March 31, to 29 trillion yen as of Sept.30. Yet even ministry officials now concede that their numbers underestimate the problem, and plan to come up with new guidelines for disclosure in January. But the problem, bankers say, is that the timing is wrong. "They should have done this at the beginning," says one banker. "Not now, when the problem could get really bad and hurt confidence."
Merry Christmas to All ! |
