Ken... since you mentioned Japan and the yen.... thought you might be interested in this item from TheStreet.com
The Invisible Mouth: Japan Is the Key
By James Padinha
Economics Correspondent
10/6/98 4:26 PM ET
Pen Pals
JACKSON HOLE, Wyo. -- Japan is really the key to
everything. And, thankfully, your narrator gets to play
God to all kinds of informed market Margarets (all
apologies for the obscure Judy Blume reference).
Here's a recent (one-sided) correspondence with one
of them herewith:
Dear James (Sept. 28):
The Japanese are running a little more scared from
events over the weekend. The collapse of LTCB's
subsidiary, Japan Leasing Corp., forced an
agreement on banking reform. JLC's creditors pulled
back financing as it appeared that the Diet would
deny new funding. This collapse will cause at least 20
creditor banks and insurance companies to absorb
significant losses. That will aggravate the credit
crunch. Also, LTCB has two more subsidiaries just
like JLC -- as do several other large banks -- that are
likely to face the same fate. Note that the share prices
of Mitsubishi Trust & Banking and Toyo Trust
both fell sharply today (by Y79 and Y62!).
While it is positive that the opposition has agreed to
injections of capital into "solvent" institutions to
recapitalize, this came at the expense of the current
Y13 trillion ($98 billion) plan, which is to be scrapped
with the creation of a more stringent law. With the
Tankan likely to emphasize the dark side of the
economy again on Thursday, legislators are running
out of time.
Troubled in Tokyo.
Dear James (Sept. 29):
Don't put much credence into the rumors about joint
intervention. Rubin does not want to make things
easier on Japan. It seems the only thing the
government reacts to is market-induced pressure.
Not only will intervention not work long term, it will
likely have limited near-term value as well. Just look at
what is going on in Japan. The failures of these
leasing companies and other businesses are further
intensifying the credit crunch. Credit demand is
increasing while capital is being destroyed. The only
way for the Bank of Japan to satisfy this demand is
to circulate more yen -- and that is exactly what it is
doing. This process will continue to chip away at the
currency's value.
Troubled in Tokyo.
Dear James (Sept. 29):
Came across a perfect passage in The Far Eastern
Economic Review:
The analogy of a sick patient needing
medicine no longer suits Japanese
banks; for the most part they more
closely resemble crumbling buildings that
need to be torn down and rebuilt.
Troubled in Tokyo.
Dear James (Sept. 30):
Recent yen jawboning from Rubin and other
authorities speaks to a fear of substantial downside
for the currency over the coming weeks. Officials
hope to slow the pace of decline in the yen rather
than signal a new policy shift. Look at what is coming
up this week -- Tankan and unemployment. Both are
expected to speak volumes about a weak economy.
The tactical verbal campaign is likely an attempt to
prevent a swift run for the exits once these reports
come out (and once Japanese corporate books close
today). But there are still plenty of bearish yen
factors.
Only a 25-basis-point cut in American rates.
Disappointed the market and kept a floor under the
dollar. Rubin knew the likelihood of only 25 basis
points two days ago when he made his comments.
Tankan report will provide further proof of how deep
Japan's recession is becoming.
The failure of Japanese Leasing Corp. is a bigger
event than most market participants realize. The
possibility that banks will call in loans to JLC -- despite
strong opposition by the Ministry of Finance --
could signal a new trend and provide other financial
failures as well as worsen the credit crunch.
Global deleveraging (due to LTCM), repatriation of
Japanese assets (due to half-year-end), and the
Clinton crisis have all led to yen strength. These
factors will all dissipate.
Under the new rules scheduled to go into effect on
Jan. 1, 1999, it will be even easier for ordinary
citizens to invest their savings abroad.
Look at the bank stocks. Yasuda is at Y70 -- that's
about 53 cents! -- and Mitsui is at Y121.
Greenspan surely (and Rubin probably) welcomes
a gradual yen weakening on the way to solving the
banking crisis and restoring economic growth in
Japan.
The opposition parties are pressing to force banks
and insurance companies to value their securities
holdings at market price rather than purchase price.
Can you imagine the effect of this?
Credit lines are drying up for Japan's banks. Some
companies are being charged four times more than
others to borrow money overnight. Lenders with low
credit ratings are paying twice as much on
three-month CDs. Earlier this month Japan's central
bank governor claimed that "only three or four"
Japanese banks are still able to borrow in overseas
markets. The Japan premium has risen to 0.583%
over for three-month Libor (up from 0.375% in July).
(Narrator's note: This means that Japanese banks
have to pay 0.583% over what other banks pay on
three-month dollar borrowing in the Libor market.
Today the Japan premium rose to 0.6146% over.)
Shoji Kitta, president of Totan Research, an arm of
Japanese money broker Tokyo Tanshi, reports that
only three or four banks can borrow in Japan's
overnight money markets at the government's target
rate of 0.25%. Some have to pay as much as 1.0%.
Troubled in Tokyo.
Dear James (Oct. 1):
The Tankan survey was obviously bad. Large
companies are planning to reduce capital investment
by 2.3%, and small firms, the heart and soul of
Japan's economy, are thinking about retrenching
capital investment by 16.7%. Also note the vanishing
access to capital that the survey hints toward -- and
note that the survey was taken in early September,
before the harsh bank reform bill and subsequent
plunge in the Nikkei. In short, hard as it is to believe,
this sinister-looking Tankan paints a more optimistic
picture of Japan than the quickly deteriorating
economic reality.
Meantime the financial sector has grown more dour
on the economy's prospects (if you can believe this is
possible) as a result of political dithering and a lack of
understanding by the opposition parties regarding
bank reform. Banks, for example, will now have an
incentive to maintain a capital-adequacy ratio above
8%. But to do this they will call in loans and reduce
risk-weighted assets, and that introduces the
possibility of further credit crunch intensification.
Troubled in Tokyo.
The latest out of Japan? (1) The Economic
Planning Agency reckons that GDP will fall 1.8%
during fiscal 1998 on the heels of a 0.7% contraction
during fiscal 1997. (2) Household spending was
declining at a 2.4% year-over-year rate as of August.
Such spending has now fallen for 10 straight months.
As for Happy Monday, well, why not skip all the
pussyfooting and proceed directly to soma?
© 1998 TheStreet.com, All Rights Reserved.
|
