wmeubank@ocp.kcmo.com
NIKKO MARKET COMMENTS
Prepared by
The Nikko Securities Co. International, Inc.
32nds Over Tokyo
Financial Distress
A major securities firm is closing, imploding due to lost confidence over “tobashi” accounts it claims do not make it insolvent. A “top twenty” bank is closing. A moderate-sized securities firm collapsed. A small-regional bank is going out of business. Other institutions are putting new austerity plans in place. Mostly it's a game of lost confidence, now. It's a question of what BoJ/MoF policy will be. Who or what is “too big” to fail? If something fails, who is protected? Japanese banks, once the most powerful in the world, are paying a premium for their funds in the international banking markets. How many 32nds over the interbank- bid rate are they paying: 24/32nds, 16/32nds? These are large amounts in a market that is so competitive with lending spreads so thin. Such tiering can cause a bank to bleed to a slow, tortuous death. These “small 32nds” are a big problem. And this, for the banks of a huge country (in GDP terms), a country with bulging financial coffers, a country with a massive “balance of payments” surplus each year, a large net lender. It's a bit like reading that Uncle Scrooge went bust. What has happened and what comes next?
32nds over Washington
In the U.S. the main concerns are highly parochial, “How will it affect us?” everyone laments. Concerns are that Japanese investors, holders of large amounts of U.S. Treasury securities, will sell them, sending prices scads of “32nds” lower and yields higher. But most Japanese firms' “bad” assets are in yen. Bonds are “in the money” (in the U.S. and in Japan) and in the U.S. there is the added pleasure of the exchange rate gains to be had. Profit-taking by healthy organizations would not be surprising. But once taken, where would the funds go?
U.S. interest rates are still high by Japanese standards. True, though, the policy posture of the U.S. seems to pose a road block against significant dollar gains from here. As for the BoJ, it has more sources for dollars than just selling its Treasury holdings: it has massive swap lines with the U.S. Concern over Japanese selling in general is overdone. Even if it were a risk, the U.S. fiscal deficit is shrinking so fast it might be “good for the Treasury market” to have more supply, even if it were to come in the secondary market.
A Crisis Of Direction And Of Confidence
It is not surprising that many market participants do not distinguish easily between the problems of Japan and the problems of other Asia. Japan is different. But not in the way some Japanese had claimed in the past: that Japan's rice is different, Japan's snow is different; Japanese financial crises are like anyone else's. Still, they're not as bad as in the developing countries because Japan's crises is borne of a policy dilemma as much as the real shock that caused it: the collapse of land and stock values. But it comes amid vague plans for change that may be destabilizing old relationships. Did Fuji Bank not help its kiritsu group member because it feared making more bad loans, or because it felt it would be better in the post “Big Bang” period without a large group securities firm to compete with? How much does the coming of “Big Bang” and transparency discourage banks from taking a riskier loan now? And what of perceptions? Do other world regulators believe that the MoF knew nothing of Yamaichi's “tobashi” accounts even though they had been so heavily rumored to exist over the past five years? If the MoF reality knew nothing, is that reassuring? What should the rest of the world believe? What is Japan's current policy? Who is at risk, and to what? These questions can be answered with precision in most other G7 countries. Until they can be answered with precision in Japan, price tieriing in the interbank Euro-market will discriminate against Japanese banks, undermining their attempts to be profitable. The Bank of Japan's muddle through and wait for growth gambit failed. There was no fall-back strategy. In retrospect, the blending of good and bad banks was like the mixing of oil and water: the bad loans still float to the top. Japan still needs to chart a true, not an ad hoc, policy course. The fuddle over use of public money must stop. Japan is different. It's bigger. When the sumo wrestler is thrown from the line into the crowd, spectators get crushed, even if he survives to fight again.
Outlook For The Next Week Ended December 5
Monday, the NAPM index (Nov) should fall to 55.0%. Construction spending (Oct) should rise by 1.0%. Car sales are projected at a 6.6 mn. pace, 6.3 mn. for trucks. Wednesday, new home sales (Oct) are expected to be unchanged from last month. Thursday, productivity (97Q3) should be revised lower to 4.3%. Friday, nonfarm payrolls (Nov) should expand by 205,000. Unemployment will hold at 4.7%. Average hourly earnings should rise by 0.3%. Factory orders (Oct) should be unchanged. Consumer credit (Oct) should rise by $2.0 billion.
Robert A. Brusca, Chief Economist
The Nikko Securities Co. International, Inc.
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