These tax cuts weren't quite structured right. The OOOOMMMPPPHHH should occur now and if necessary tail off on later years. Instead there's a small kick now with bigger cuts (maybe) coming.
Have you seen this week's Barron's?
From Alan Abelson's "Up and Down Wall Street" (he's talking about the Enron mess):
Our trader friend finds an uncomfortable similarity between Enron and Hanwa,
a Japanese steel company that decided also to effectively transform itself into a
hedge fund during the glory days of Japan's stock market bubble in the late
1980s. That ill-starred switch led Hanwa, as it may Enron, down the primrose
path to hara-kiri. Like Hanwa, Enron, our pal reflects, was a creature of the
bubble and a victim of the bubble's demise.
Hanwa, he says, was the canary in the coal mine, and its fate foreshadowed the
long winter's night of economic decline and bear market that enveloped Japan.
The U.S. isn't Japan and Enron may not be a precursor of bad things to come,
our friend concedes. Still ...
And from "Asian Trader":
Tora, Tora, Torable
Just when you thought things couldn't get worse for Japan's economy and financial markets, they did last week.
Things started off well enough. The benchmark Nikkei 225 index ended trading
last Monday up 3.4%, at 11,064.30, its highest finish in three months, boosted in
part by investors fleeing from bonds into stocks in the wake of a downgrading
of Japan's long-term sovereign rating by Fitch, a British-based credit-rating
agency, to double-A from double-A-plus with a negative credit outlook.The
agency cited Japan's huge public debt, which is expected to rise to 150% of
gross domestic product by the end of 2002, and the country's worsening
economic conditions as reasons for the action.
But if bond holders thought they had found refuge in the stock market, they
quickly discovered that in a country with an economy and political establishment
as troubled as Japan's, there really are no safe havens. By the end of the week,
the Nikkei had given back all its gains, closing Friday at 10,651.70, down 3.3%
from its Monday close.
What pulled it down was a seemingly unending stream of bad news, negative
economic data and unsettling concerns affecting Japan's financial markets,
including worries of an equity selloff by public pension funds; fears that
government bond prices might be on the verge of collapse; increasing
devaluation pressures on the yen; continued political gridlock and another
downgrading of the country's long-term sovereign ratings, this time by Standard
& Poor's also cutting Japan's debt a notch to double-A.
And adding to that grim scenario were newly released data for October
showing that Japan's seemingly never-ending recession is deepening with
industrial production dropping to its lowest level in 13 years, retail sales falling
4.9% below year-ago levels, housing starts decreasing by 3.3% to their lowest
levels in five months and unemployment rising to a new peak at 5.4%.
Further chilling the market were recent remarks by the official who heads
Japan's administrative reform efforts suggesting that the government might
have to liquidate the entire domestic equity portfolio of the pension investment
fund [PIF] -- the entity that manages public pension assets. The fund has
suffered heavy losses during Japan's stock market slump and there have been
calls to abolish the fund and sell off its equity portfolio, currently estimated at
more than $48.4 billion.
The comments by Nobuteru Ishihara, head of the Administrative Reform
Council, sparked concerns among already nervous investors, prompting
Goldman Sachs' Tokyo office to draft a report to its clients throwing cold water
on the idea, branding such talk as "mere speculation."
"It is highly unlikely the PIF will be forced to sell its domestic equity holdings,"
writes Kathy Matsui, an equity strategist and one of the authors of the report.
"Doing so would not only wreak havoc in the stock market, but would also
result in a sharp reduction in pension benefits and a hike in contribution rates
which would be politically unacceptable."
Maybe so. But other analysts warn that sentiment among some members of the
council is "very strong" in favor of abolishing the PIF and improving the
management of pension assets. Under this scenario, they say, anything is
possible.
Rumors aside, the market this week may have more immediate things to worry
about than the fate of the PIF.
The government will release its latest estimates for economic growth in the
third quarter on Thursday. The numbers are expected to be worse than earlier
consensus estimates of a decline of 0.8%, with the economy perhaps shrinking
by 1% or more. Coming on the heels of October's dire data, such a prospect is
forcing many economists to start revising downward their numbers for the fiscal
year, which ends next March.
"We are currently predicting negative growth for the fiscal year of 1.1%," says
Peter Morgan, an economist with HSBC Securities in Tokyo. "But a 1.1%
decline in the third quarter, which translates into a 4.3% decline at an
annualized pace, would force us to take another look at our numbers for the
year." Currently, Morgan is predicting that Japan's economy will shrink by 1.1%
but admits that could be revised downward further to a negative 1.5%-1.6%,
depending on this week's data.
"These are awful times for Japan," says chief economist Carl Weinberg of High
Frequency Economics in Valhalla, New York. "The country perpetually seems
at the brink of financial collapse. We expect nothing other than bad news in the
months ahead."
Nearly everyone who follows Japan closely expects the country's
creditworthiness to continue to deteriorate in the months ahead. Fitch officials
warned last week that Japan may face more downgrades in the future if the
government fails to make the necessary reforms. A sharply weaker yen will be
necessary for a sustainable recovery in the medium term, they said.
"Economists and analyst are asking themselves almost every day 'How in the
world is Japan going to get out of this mess?' " says Richard Jerram, chief
economist with ING Barings in Tokyo. "And among the various possibilities,
which include cutting taxes, increasing public spending, buying domestic assets
to provide monetary stimulus and encouraging currency devaluation, the latter
appears the most acceptable domestically," he says. "It's no cure-all, but if
authorities want to end the deflationary spiral and get inflation back up to
normal levels of 1%-2%, the yen needs to be depreciated over the short term to
the 170 [to the dollar] level. Anything less won't end the recession," he says.
The dollar fetched about 123 yen Friday.
But Jerram does warn that recent suggestions that the Bank of Japan buy U.S.
Treasury bonds as a way of devaluing the currency is an idea viewed more
favorably by the U.S. than Japan.
"Japanese finance and bank officials are confused about what they want to
achieve and how they can do it," he explains. "But they feel obliged to stand up
every day and say they support yen stability," he adds. "So devaluation is by no
means a given as a solution."
Using yen devaluation as a policy tool poses risks, both economic and political.
A cheaper Japanese currency would pressure other Asian exporters, notably
Korea, Taiwan and China, who would be rendered less competitive. That would
raise the specter of a chain reaction among currencies in the region, such as
that seen in 1997-98. While the U.S. economy is in recession, with
manufacturing especially hard-hit, a cheap yen also would provide ammunition
to protectionists in America.
Other Japan watchers believe devaluation is a short-term expedient at best and
suggest that Japan should pursue other solutions.
"I can't for the life of me understand why they would want to do it," says HFE
economist Weinberg, of the notion of increased Japanese buying of U.S.
Treasuries. "There are plenty of domestic bonds for them to buy, so if they
want to increase the money supply, that's the way to do it."
HSBC's Morgan believes monetizing Japan's debt -- that is, the central bank
printing money to purchase the bonds rather than weakening its currency -- is a
better alternative.
"We estimate that to get back to even zero inflation you would have to let the
yen fall to less than 200 [yen against the U.S. dollar] and I don't think anyone is
ready for that," he says. "And to do that, you'd have to spend hundreds of
billions of dollars, which patently wouldn't be very practical."
In any case, it would be very difficult, Morgan adds, to "create inflation in a
situation where there is already too much debt in the economy." Monetizing the
country's debt, he argues, "would be a much easier way to stimulate growth by
spending money rather than use some kind of asset or currency effect."
Despite its public denials, the BOJ may already be pursing a weaker yen as an
interim measure to help exporters and the economy.
In the wake of the September 11 terrorist attacks, the BOJ intervened
repeatedly in foreign exchange markets in order to weaken the yen. And
according to Larry Jeddeloh, an institutional strategist with the
Minneapolis-based Market Intelligence Report, Japan's central bank already is
buying U.S. Treasuries at an astounding (but obviously unsustainable) annual
rate of $1 trillion, which could devalue the yen to at least the 130 or even 140
level.
There have also been suggestions that the BOJ might even start snapping up
corporate debt as a way of paring borrowing costs and reviving a shrinking
economy.
But HSBC economist Morgan doubts that will be the case. "It's quite unlikely at
this stage," he says. "The BOJ has expressed strong opposition to buying risky
private assets, arguing that this falls under the province of fiscal rather than
monetary policy," he adds. "There is no shortage of JGBs to buy, and given the
choice between government bonds and corporate bonds, I think the BOJ would
prefer the latter."
If yen devaluation does become the preferred option, it would revive investor
interest in exporters and other Japanese beneficiaries of a weaker currency.
"This changes my negative view of the dollar which I now believe will not be
allowed to go down," Jeddeloh writes in a recent report. "The dollar index [the
greenback against a trade-weighted basket of currencies] is a buy and
Japanese exporters can be bought, as those stocks will move up even if they
have no one to export to and exports never rise."
ING Barings economist Jerram believes the securities market has already
factored in much of the recent bad news about the economy and corporate
earnings, and says that "signs are growing that it might be beginning to
anticipate an economic turning point" in the April-June period in 2002.
Barings has recently recommended increased purchases of exporters,
miscellaneous finance companies and pharmaceuticals, including names like tire
maker Bridgestone and auto manufacturer Mazda, pharmaceuticals maker
Takeda Chemical, consumer finance firm Acom and leasing provider Orix.
Companies in securities, banking, electric power and gas, communications,
wholesale trade and electrical machinery would be among the first to benefit
from any upturn, Jerram says. "Overseas assets are also likely to offer better
returns," he adds.
Elsewhere in the region, Asian bourses closed mostly mixed on the week with
Hong Kong, Seoul, Kuala Lumpur, Singapore and Bangkok closing ahead by
less than 1%, while Indonesia, Taipei and Manila ended the week fractionally
lower.
Of course, Barron's has predicted 80 of the last 10 market crashes. |
