Bosco,
FT is free. all you have to do is register. Also one of the best financial papers in the world so worth registering (the price is right). But I will attach the cut and paste here.
Henry
Japan banks hide losses with secret bond deals
By Gillian Tett and Naoko Nakamae in Tokyo
Japanese financial institutions are carrying out unorthodox and secretive securities trades to hide recent losses in Japanese government bond markets.
In particular, some banks have been pretending to "sell" JGBs at artificially high prices to large Tokyo brokers, in exchange for other, low quality bonds "bought" at artificially low prices.
The deal allows investors to conceal losses temporarily because although JGB losses need to be regularly reported under Japanese accounting rules, losses on other securities, such as local government bonds, do not.
The brokers conducting these deals for their clients insist they are not illegal because the Japanese Securities Dealers' Association, the industry body, changed its trading regulations last month, abolishing the rule that all bond trades need to be conducted within 2 per cent of the market price.
However, officials at the Ministry of Finance and Bank of Japan admit that the rule change could encourage banks to conduct a form of tobashi, the traditional Japanese practice of shuffling losses between accounts.
Western banks also believe the unorthodox trades would breach global compliance standards. As a result, several have refused to conduct them, even though they have been under huge pressure from Japanese clients. William Campbell, head of research at JP Morgan, says: "This [change in the rule] is very, very disappointing - it is a big step back."
The JSDA denies that December's rule change was intended to conceal losses. "I do not think the rule change led to an increase in tobashi. It may have allowed those engaged in the practice to do it on a larger scale," says an official.
Many Japanese banks and life assurance companies are struggling to meet capital adequacy and solvency standards at the end of the fiscal year in March. The state of their bond portfolios has recently become critical, since many suffered large losses when 10-year JGB yields more than doubled to 2 per cent in December.
The biggest losses are believed to have occurred on 10-year JGBs issued with a 0.9 per cent coupon in the autumn. However, large Japanese brokers are now "buying" these JGBs from investors at around the par price of 100, even though the actual market price has fallen to around 88.
In exchange, the brokers are "selling" cheap bonds, such as municipal bonds, at inflated prices. The practice has reduced the "spread" between JGBs and municipal bonds from around 20 basis points to 10 basis points since December. One senior official at a large brokerage house said: "It may be legal but it feels as though we're helping these companies doctor their books - it doesn't feel right." |
