Seems Japan's economy has CEO'S that refuse to restructure/admit error

[papau]

http://quote.bloomberg.com/apps/news?pid=10000039&cid=pesek&sid=atO77gj8fAgI

Japan's Kanebo Hurts Taxpayers and Economy: William Pesek Jr.
Feb. 20 (Bloomberg) -- <snip>Instead, Kanebo -- surprise, surprise -- opted for a state- backed bailout. It means taxpayers will bear the burden instead of executives who drove the debt-laden company into the ground.

That's not what you read or hear in media reports. You'll find many glowing tales of how, this time, banks really are repairing balance sheets. This time, corporate restructuring is putting Asia's biggest economy on solid footing. This time, Japan has a central banker who will end deflation. And this time, the fastest growth rate in 13 years is here to stay. <snip>

Offering Kanebo a handout is the Industrial Revitalization Corp. of Japan. Created last April as a kind of hospital for ailing companies, its charge is to take in a few patients, put them on life support, rid them of overcapacity and debt, and release them back into the economy with a clean bill of health. <snip>

It's not unlike government policy makers. The only consistent economic strategy here is a weaker yen. News the economy grew 7 percent between October and December compared with 4 percent in the U.S. didn't change Japan's mind that the yen is overvalued.<snip>

While most Asian governments are working to weaken currencies, Japan is doing so with unprecedented aggressiveness. It sold a monthly record of 7.15 trillion yen in the four weeks through Jan. 28. It spent a record 20.4 trillion yen last year, five times the amount sold in 2002.

Why? A weak yen helps put off painful reforms necessary to restore stable growth. Japan needs to deregulate many sectors of the economy, push banks to dispose of bad loans more aggressively and let dodgy companies with little hope of survival fail. <snip>

GEE - A WEAK CURRENCY TO COVER UP FOR MISTAKES - WHAT OTHER COUNTRY IS USING THIS APPROACH?

[Art_from_Ark]

1. I always get a kick out of Westerners trying to critique Japan's economy

Ever since I can remember, it's been "Japan must do this, Japan must do that, Japan must follow the Western model, Japan must sit when Reagan says "Sit!", Japan must heel when Bu$h says "Heel!", blah blah blah, ad nauseum.

The hard truth is, Japan's economy is one that is on the cusp between Asia and the West, and, like everything else in this country, it has been tailored to fit the eclectic model that the Japanese are always improvising on.

[papau]

2. The "human right" of employment in Japan is great - but like our own

bad management that sucks down Gov handouts and subsity and special trade laws while losing money and increasing their compensation, the management in Japan seems afraid to clean up the banking system (all other free market ideas seem just our culture speaking - but they need to clean up the loan portfolio and the process that got them in trouble - if they want a fiscal and monetary policy with enough flexibilty that it can actually guide the economy).

I've watched for over 10 years as little government based changes make zero change in economic direction, and currency games are the main lever on the economy.

[Art_from_Ark]

3. Japan has played with restructuring before

with the result that there are more "blue tent cities" in Tokyo and elsewhere populated by former company workers who were forced out and cannot find other, meaningful work because of their age.

Screw that. If the people in the Japanese government want to take a more creative approach to preventing an even worse homeless problem, then more power to them. In such a case, I will feel that my tax money is being used for the public benefit. I cannot say the same thing about using it to send soldiers on a useless excursion to a country that never did any harm to Japan.

I will also note that problems with Japanese companies are not always the result of bad management. The topsy-turvy exchange rate, in which, for example, the value of the yen vis-a-vis the dollar decreased by half in just 4 years, then rebounded by 25% in two years for no apparent reason, has caused more trouble than Peter-principle directors. Yet you will almost never find any discussion in the West about the tremendous effects of exchange rates.

4. Japan....-- denial

The IMF chief is visiting Japan next week. It was just announced.

Also...some guy on my DU thread in "latest breaking news" made the admin shut it down after adding a final comment that Japan knows what it is doing in regards to its exchange management. This other guy also claimed my analysis is incorrect--but has no comment on any of the facts, nor the 100b bond move.

Complete denial.

Very Japan-like.

[Art_from_Ark]

5. Or maybe we could turn it around and say

"complete blame-laying-- very American-like"?

6. The currency thing in Japan

What exact percentage of Japan't GDP is 70 billion dollars a month (840 bill US a year)?

I am being scolded by some for calling my article "Japan Foreign Exchange on Edge of Collapse" instead of "Japan Foreign Exchange Unsustainable"

Was not Nasdaq 5000 both "unsustainable" and "on the edge of collapse"??

Also "On edge of collapse" gets peoples attention on this very important matter.

Why, I'll just bet the IMF boss will talk about this very subject next week when he visits.

It's just like the damn voting thing I worked on last year--no one would run stories on problems, and the damn things still are not fixed right. Why doesn't someone print the headline:

"US electronic voting machines don't work and are not tested"

Then it might get fixed?

[Art_from_Ark]

7. By the way, your assertions wrt $100 billion/month

were based on, what, exactly? That figure is equal to Japan's national budget. I explained how funding for that was derived.

I also pointed out that Japan's buying of dollar bonds amounted to approximately $200 billion last year-- hardly equal to $100 billion/month. The recent plan called for the Japanese government to sell 5 trillion yen ($50 billion) worth of US Treasuries to the Bank of Japan to get yen to prop up the dollar, which it did in January.

You also said something about Japan not making public offerings of its bonds, and yet yen-based bonds are offered twice a year (June and December) to the general public. I could also walk into my bank or securities firm and buy all the dollar bonds I could afford, if that is how I wanted to go.

And finally, if you think I am the one who alerted the moderator, you are sadly mistaken. Even if it wasn't "latest breaking", the thread had more relevance as "real news" than articles about Janet's tit or the latest in the Laci case.

8. The two most recent months Dec and Jan

No I don't think you are the one who made the moderator kill that thread. What made you think that?

The months of December and January were both reported at a record pace of Japan currency intervention (65+billion US a month). That far exceeds the pace of 200bill for 2003.

At that point, then Japan did the US bond thingy.

But at the same time, there was a story that came out from a reporter suggesting the recent pace would continue, and that (because most of the money ends up in US bonds) would "make the housing market better in 2004 than 2003". After which I pointed out, that rate was impossible because it was more than the current entire reserves of Japan(65*12=780b>>650b). Obviously, there are a lot of clueless people out there if they think Japan is an eternal fountain of Yen to buy US bonds.

[Art_from_Ark]

10. I don't know where you got that $65 billion figure,

but it's way off base. The actual December 2003 total for dollar buying was slightly more than 2.2 trillion yen, or a little more than $20 billion, not much different from the monthly average of 1.7 trillion yen.

http://www.central-tanshi.com/market-topics/pdf/MarketTopics544.pdf

11. That is the January figure - Bloomberg

I meant to say January.

7.15 trillion yen from Bloomberg--yah that is right

http://quote.bloomberg.com/apps/news?pid=10000101&sid=a.18OeRt_ljw&refer=japan

I have netted everything out now in the story, allocations and expenditures, and at the most recent pace, they have only weeks left yet again.

I don't want to be accussed of "bad math" like GW.

[Art_from_Ark]

12. If you limit yourself to January, then you are correct

There was a significant burst of buying in January which is close to the $65 billion figure you cite. According to Yomiuri Online, most of that amount was used to buy US Treasuries, such as the 10-year bonds that pay 4%/year interest.

The money that has been earmarked for market intervention for the fiscal year starting this coming April is a whopping 79 trillion yen, or about 770 billion US dollars at current rates. Some members of the Japanese Parliament even want to raise the ceiling to 100 trillion yen-- nearly 1 trillion dollars! I wouldn't have believed it if I hadn't seen it from a reliable Japanese source. So I will retract my original suspicions and give you credit for pointing this out.

http://www.yomiuri.co.jp/atmoney/special/47/naruhodo124.htm

However, whether or not all this money will be spent for dollars is another question. If the currency market stabilizes and there is no further yen strengthening, then Japan keeps its yen. If there is a threat of further dollar weakening, Japan buys cheap dollars and gets 4% interest to boot, so Japan will make out very well-- 4% interest on one trillion dollars comes out to $40 billion/year. And that does not include the $465 billion in US debt that Japan already owns.

On the other hand, the US's stupid war and tax cuts, which have led to the greatest one-year and cumulative budget deficits in history, will sap even more money from Americans for unproductive purposes.

15. But at the current rate

(you said)

the fiscal year starting this coming April is a whopping 79 trillion yen, or about 770 billion US dollars at current rates

***

As far as I can tell, they don't necessarily have enough at the current rate to last until April.

16. The first time I saw that number

It was sooooo big.

I thought it included BOTH december and january....

[Art_from_Ark]

13. It just dawned on me

The Japanese government has been busy buying up long-term Treasuries offering 4% interest, but you say the government hasn't been offering these bonds on the market. However, it has just occurred to me that the Japanese government does not want to sell these bonds, but it does lend them out. Here's how I figure:

1) Japanese bank interest, for all intents and purposes, is zero. I think I made about 16 cents last year in interest on a passbook account that had a balance that was always in the low four figures.

2) My Japanese bank has been cold calling me to get me to buy a three-month US dollar bond fund which pays about 4% annualized interest. The unusual thing about this fund is that even if the yen is stronger when I cash in the fund, I would not lose any *principle* unless the exchange rate was more than 9 yen stronger than when I originally bought. If the yen was 1-9 yen stronger at maturity than when I bought the bond, the only thing I would lose would be a corresponding proportion of the interest.

How could my bank offer such a deal? I wondered. Then, it finally occurred to me that the bank is actually borrowing the bond from the government. The government is holding on to these bonds long term, and at 4% interest (assuming simple interest) will come out ahead in 10 years, unless the yen is somehow 40% stronger than it is at the purchase time. In other words, my bank is assuming no risk! The Japanese government is loaning them the bond on the short term, with the expectation of making a profit on the long term. Meanwhile, the yen I use to buy the bond would be either put in the treasury, or be allocated for more bond purchases. At the same time, the Japanese government automatically takes 20% out of whatever interest I might earn.

I would assume that other Japanese banks, as well as brokerage firms, are making similar deals.

Then there are the postal savings accounts. There is probably a trillion dollars sitting around in these accounts that is making next to nothing in interest. I would not be surprised if the government were dipping into these accounts to buy dollars. 105 yen has been the best price for dollars in a long time.

And then there are the semi-annual bond sales. Once again, Japanese bonds offer next to nothing in interest-- but converted into dollars when the dollar is weak, and earning 4% interest to boot-- sounds like a winning proposition for the Japanese government.

14. Great analysis

What you are moving towards is my concern about "multiple levels of credit dependency" and "concentration of risk." What if, for example, the dollar were to weaken significantly?

I suspect the IMF will slip this into their conversation with Japan next week...

Consider that some of the money then comes to the US to enter the mortgage market, and then after that, yet another loan can be taken out to cash-out from that mortgage.

Stand back and tack the ten-thousand-foot view.

How many layers of credit would that be, start to finish, all dependent on the US economy generating income to pay for the end-loan in the long term (which it is not)?

Now, consider this layering trend has picked up in volume recently.And consider marked differences in perceptions of risk and reality along the way.

I am not at all sure that this trend will continue. Nor as you say, are you.

***

The government is holding on to these bonds long term, and at 4% interest (assuming simple interest) will come out ahead in 10 years, unless the yen is somehow 40% stronger than it is at the purchase time. In other words, my bank is assuming no risk! The Japanese government is loaning them the bond on the short term, with the expectation of making a profit on the long term. Meanwhile, the yen I use to buy the bond would be either put in the treasury, or be allocated for more bond purchases. At the same time, the Japanese government automatically takes 20% out of whatever interest I might earn.

17. On a slightly different note

I noticed inflation is starting to show up, even the CPI (today's news).

If Japan has all this money to put into bonds, why not wait until the interest rate goes up just a tad, if they are wanting to hold onto bonds for a long time?!?

[Art_from_Ark]

18. Waiting for interest rates up to go up

Have you looked at today's yen/dollar rate? The dollar jumped by more than a whole yen-- or by slightly more than 1%-- on Friday. The dollar is already up about 2 yen from its recent low. A "tad higher" interest rate on dollars bought at 108 would not make up for the 2% difference between the lowest dollar rate and today's rate.

[Art_from_Ark]

19. Tying it all together-- the topic of this thread, exchange rates, etc.

This is high stakes poker, and Japan has just placed a humongous pile of chips in the pot

Let's bear in mind the following:

1) Japanese export-based companies were creamed when the yen was below 100, largely through no fault of their own. At that time, Japan apparently did not take drastic measures to intervene in the currency markets, in part because everyone was caught off guard. But they have had many years to prepare for the next scenario.

2) The Japanese economic system is eclectic, but the main underlying theme is maintaining employment. Thus, the government is willing to help out companies like Kanebo, because having people doing productive work is far better than having the same people collecting unemployment. Furthermore, such companies can be suffering just because of unstable exchange rates.

3) It is a social stigma for able-bodied men to be unemployed in this country (Japan). This is exemplified in the old folktale "Monogusa Taro", about a young nobleman who is so lazy that he has everyone do everything for him, just because he can. But he learns that even members of the privileged classes must do some work to contribute to society. The long-held notion of employment=social status explains why there are so many victims of restructuring who are now living in "blue tent cities" in Tokyo and elsewhere-- they could probably live at home if they wanted to, but having no job, and no prospects of a job, while living with a wife, parents, etc., who are constantly reminding them of that, is too much to bear.

4) Interest rates in Japan are zero, but Japanese are the world's Number
One savers. So, there is a LOT of money gathering dust in banks and postal savings accounts-- literally TRILLIONS of dollars-- that is just waiting to be deployed.

5) American rates, even at 4%, are extremely high by Japanese standards, making dollar bonds attractive as an investment-- but only if the exchange rate is agreeable.

Soooooo

The Japanese government plays a gambit by buying up dollar bonds-- a "little" at first-- to both gain some interest income, and to try to weaken the yen to assist export-based companies. But the amount the government uses for intervention is relatively peanuts, so the yen continues to rise toward that apparently psychological threshold of 105. What to do? The answer, I believe, is to show the world that Japan won't be held hostage to currency traders like it was in the 1990s, by making the largest one-month purchase of dollar bonds by a single entity in history. The dollar is low, so the yen buys even more dollars, and the Japanese government gets 4% a year to boot.

But, in order to ensure that the 105 (or whatever) threshold will not be breached, the Japanese government threatens to use as much as 1 trillion dollars worth of yen to buy dollar bonds. And with all that money sitting around in its banks and postal savings accounts (and elsewhere), Japan is actually one of the very few countries, if not the only country, in the whole world that could follow through on this threat. Moreover, this amount is so huge that it makes even currency traders think twice about risking their money on something that might not be as much of a sure thing as they had initially believed. So the currency traders back off, and the dollar suddenly starts to rise. Meanwhile, the Japanese government has plenty of cheap dollars earning 4% interest.

A truly brilliant strategy, I would say.

[54anickel]

20. Great summary Art! And don't forget there is now the Asian Bond

Fund reality. Several countries have contributed now.

On edit add: I had just stumbled upon the latest on the fund this week. Posted the following in the Stock Market Watch.

http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=102&topic_id=372937#373306

9. Janet's tit

I didn't see it, but I heard the nipples are inexhaustable fountains of Yen to buy dollars with.