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Strategies & Market Trends : JAPAN-Nikkei-Time to go back up? -- Ignore unavailable to you. Want to Upgrade?

To: fut_trade who wrote (446)	11/19/1997 12:16:00 AM
From: Philip H. Lee	Read Replies (1) \| Respond to of 3902

Implications of the Japanese banking situation. Many of Japan's banks are teetering on the edge with the Southeast Asian crisis incrasing default risk. All of Japan's banks have suffered from the declining Nikkei, and any continued deterioration in the Nikkei could be the final straw. The Nikkei was down 400 points to 16,300 last I checked, mainly on news that Prime Minister Hashimoto denied that he'll use public funds to bail out financial institutions. As I see it presently, Japan has 3 options to finance the bailout of its financial institutions: 1) Sell U.S. government bonds - Unlikely since there are better alternatives. Risks slowing U.S. growth and, if serious selling occurs, could be a catalyst for a U.S. recession. 2) Use public funds - Politically dangerous, and possibly suicidal to one's political career. Japan's large generation of retirees does not want their pension/benefits money diverted to repair incompetent lending practices, which originated in the 80's bubble economy. Hence, Hashimoto's backtracking today. Japan doesn't have much public money to spend, anyway. Right now, the public money is being used to buy Japanese govt bonds, thus artificially supporting ridiculously low govt long bond rates of around 1-3%. 3) Print money - This could be accomplished through some sort of mechanism. The U.S. Fed did this during our own banking crisis in the 80's, when bellwether banks like Citicorp and Chase Manhattan were trading in the single-digits. The Fed loaned the banks money at low fed funds rates (around 3-4%), and the banks made free money by buying U.S. govt bonds at higher rates (approx. 7-8%). Japan can't do this since their govt bond rates are so low, but perhaps the govt could make a low interest rate loan to the banks like the U.S. did to Mexico. With deflation and negative GDP growth in Japan right now, a higher money supply shouldn't be a major problem. This would in turn weaken the yen, which would boost exports. However, there's at least 2 disadvantages. First, the weakening yen would could pressure yet more competitive devaluations in Asia; and second, easy money could exacerbate the core problem that started the whole mess - bad loans. Just recently, Japan was lending a ton of money to SE Asian industries, despite serious signs of industrial overcapacity. Philip