PC:
Indeed in one (or more) of my earlier posts, I made the point that our stock markets currently benefit from a new "add-on" flow of funds, emanating from frightened Japanese citizens who are extracting their savings from their native banks, converting same to U.S. dollars, and depositing same in U.S. branch banks. This essentially got underway on April 1,1998, as a result of the deregulation of the Japanese markets, an event that most experts were sure would be postponed, and wasn't.
I made the further point that the funds involved were very large ($22.8 billion in the first month if memory serves me), and that the Japanese central bank would likely do whatever might prove necessary to curb this exodus, as it is simply unsustainable (from a central bank point of view). I further suggested that an interest rate increase appeared the only possible weapon, and that the Japanese Prime Minister had suggested that this would likely happen right after the election.
How big an interest rate bump might be required to slow/curtail the exodus? I don't know, nor does anyone else as it is a new situation and it will have to be tested. Japanese investors have put up with very low interest rates for many years, apparently an article of faith in their "nation-as family" cultural perspective, so it might not require a big boost..
My concern related to the fallout from this situation on two fronts; what happens to our stock markets IF this flow IS successfully slowed or terminated, and, what might be the implications of the BOJ, having metamorphized from being the largest buyer of treasuries to a seller.
Certainly the new Japanese accounts now ensconced within the U.S. banks both hunger for and have been provided with light-speed access to the stock and bond markets. This "add-on" has provided the exuberance that has defied the earnings declines and warnings in my judgment. If this flow is curtailed, (by interest rate increases, or perhaps by currency controls or what-have-you), our markets would respond to its absence.
I agree with your assessment of the typical Japanese investor's expectations with respect to participation in this mania. Many pros view their participation at this juncture as proof that the top is in or near at hand. Time will tell.
Best, Earlie |
