To All:
As Friday's announcements from Japan approach Morgan-Stanley thinks it may not be what we want to hear.
If true then IMO Asian markets will retreat further as a result.
Japan: Losing Patience: The Likely
Message in the 2/20 Package
Robert Feldman (Tokyo)
Summary: Investors are now focusing on the Japanese economic package,
to be announced on Friday, Feb. 20, by the ruling Liberal Democratic
Party. (The package will not be announced by the government itself -- see Note 1 for explanation). While some investors are still hoping for direct support measures such as tax cuts or spending, the 2/20 package is not likely to include them. Overall the package is likely to try the patience of the G-7 audience for which it is intended. Investors are likely to be disappointed, rather than to reassured. As a result, the recent weakening of the yen could be extended.
Details: The 2/20 plan is likely to include only the following items.
1.Financial System Measures. A. Revaluation of land holdings (which
could be pushed through the Diet by 3/31). B. Increased lending
limits for the Japan Development Bank and broadening the scope of
JDB lending to larger firms. C. Increase the scope of application of the 10% risk asset weighting given to public guaranteed assets. D. Easier criteria for public sector lending.
2.Securities Market Measures. Increase the scope for own-share
buybacks.
3.Housing Measures. Consider a special law for improved suburban
housing zones.
4.Public-Private Sector Cooperation. Improve scope for public-private sector cooperation on infrastructure projects.
5.Land Measures. A. Consider establishment of a land buy-up
institution, which would acquire land for use in public works projects and disposal of bad assets. B. Increase the scope of activity of urban development agencies. C. Proposed legislation for establishment of special purpose corporations (SPCs) for securitization of land and provide public assistance for creating a market in securities based on liquidated bad assets.
These measures send several unpleasant messages, in my view. First, they say that tinkering with accounting rules is a way to deal with financial sector problems. This method is not likely to gain praise either at the G-7 meeting or by investors.
Second, they say that the public sector financial institutions will play a larger share in intermediation. The public sector's share of intermediation has already grown very large, and it is not clear that a larger public sector will help solve the financial problems. The economy will only become more dependent on government programs.
Third, the government will take bad assets off the books of private
institutions, but then transfer these bad asset to the public sector. It is not clear that the total cost of the clean-up is reduced, because the assets are kept out of circulation, rather than be used by the economy. Moreover, the public is likely to see its wealth position worsened by the tax burden of these takeovers.
Fourth, some of the measures (such as the housing promotion items) seem to be "business as usual" politics, which will only reduce the confidence of investors.
Is there room for a surprise? Well, never say never, but the room seems small. The possibility of making the tax cut of Y2 trillion permanent seems impossible for the 2/20 package, because this would require a change of the initial budget for FY98 -- a change that the Hashimoto administration is unwilling to make at this time. Ditto any mention of a large supplementary budget for FY98.
The G-7 is not likely to be impressed by the package, for several reasons. First, the fact that the package will be a proposal of the LDP, not the government, will naturally raise questions about the willingness of the government to act. The subtleties of the distinction (see Note 1) will likely be lost on the G-7 leaders, and likely backfire in terms of Japan's credibility. Second, the lack of new spending or tax cut measures will make the rest of the G-7 think that the Japanese government still "just does not get it." Patience with the posturing -- generated by domestic political face saving in Japan -- is growing thin. Note, however, that an angry G-7 might be just what PM Hashimoto wants as an excuse to reduce his commitment to fiscal consolidation.
If the G-7 reaction to the package is negative, then investor reaction is also likely to be so. As a result, the recent weakening of the yen back to Y125/US$ could be extended.
Note 1: A package proposed by the party is not the same as one approvedby the government itself. The distinction often confuses foreign investors,but it is important. Some initiatives by the party can be blocked by bureaucrats when proposals are considered by the Cabinet. At the Cabinetlevel, ministers, even when they come from the party, may side with the bureaucrats, and interdict the party proposal. Hence, a party proposal is not necessarily a government proposal.
For a link to this and other interesting articles from Morgan Stanley:
ms.com
Best,
Stitch |
