The Daiko Henjo Rush Will Continue to Depress Stock Prices


Japan's corporate pension funds are rushing to return the portion of corporate pension funds (the Welfare pension portion) that is managed for the government in a practice known as daiko henjo. Of the some 1,700 corporate Welfare Pension funds, over half of them are eventually expected to opt for daiko henjo. A Nikkei survey of 89 such funds with total assets of JPY7.99 trillion showed that about half, or JPY4.7 trillion, represented Welfare Pension funds managed for the government. Of the amount subject to daiko henjo (JPY4.7 trillion), JPY1.94 trillion was in Japanese stocks, of which JPY740 billion had already been sold in preparation to return the funds to the government.


(TT's Take) Essentially none of these pension funds opting for daiko henjo plan to return the funds in the form of stock. That is because the Health, Welfare and Labor Ministry's rules on the return of these funds have made it nearly impossible to do so. In other words, the HWLM's rule change (first allowing the funds to be returned) and restrictions on how these funds are returned, has essentially ensured that companies will liquidate their portfolios before returning the money. With the nation's largest corporate pension funds (including NTT's giant JPY1 trillion pension fund) opting for daiko henjo, the stock market is beign hit two-fold, i.e., not only are one group of investors (corporate pension funds) now not only failing to support the market (they and foreign investors have essentially been the only buyers of Japanese stock during the Heisei Malaise), their selling is accelerating the selling of others, particularly the banks' and the corporate's unwinding of cross-held shares.


The most ironic part of this is that it is the government who instigated this selling, and it is the government (the ruling coalition) that is now panicking about this selling and are scrambling to patch together a package of stock price support measures. The boondoggle is very indicative of the "who's on first?" policies we have seen over the last several years--i.e., efforts by one part of the government to reform the system are shot in the foot by policies in another part of the government. The classic case is the raft of stimulus packages seen over the years that were not supported with tax cuts, simply because the MOF would refuse any such proposals. As the BOJ was buying up stocks from the banks, the pension funds were dumping stocks in the market--HWLM' policies were forcing corporate pension funds to dump stocks into the market. Meanwhile, the newly privatized Japan Post is refusing to bend to political pressure and agree to support the stock market with their funds, as they did repeatedly whenever the LDP panicked about stock market levels on previous occasions. The BOJ also thinks its a bad idea for them to buy bank stocks, even as they are buying cross-held stocks from the banks--even they realize that one of the surest ways to lose money in Japan in the last few years was to buy stock in the major banks.

Credit Guarantee Association Pays off JPY1.26 trillion in Small Company Loans in 2002



(TT's Take) The National Federation of Credit Guarantee Corporations, which is affiliated with the government's Small and Medium-Sized Enterprise Agency (SME), paid off unrecoverable loans by private banks to SMEs to the tune of JPY1.26 trillion in 2002, mainly loans that were made under relaxed conditions as part of a program to support SMEs between 1998 and 2001. At the time, the government claimed that MEITI's SME program of special funding for such firms would act as a stimulant to the economy. With greatly relaxed loan conditions, SMEs in cash flow trouble flocked into the program, and analysts at the time (including your's truly) pointed out that these loans were yet another source of NPLs, albeit guaranteed NPLs in that the government at the end of the day would be picking up the tab through the nation's Credit Guarantee Corporations. The head of the NFCGC however claims that loans made good by the association (i.e., loans that SMEs could not pay) have peaked. Given the current economic climate and the fact that the major banks are scrambling to clean up their balance sheets, however, that is not likely. Indeed, some 70% of the outstanding loans on the books of the banks are to SMEs, and the banks. Thus any major clean-up of NPLs will be definition mean an increase, not a decrease of SME bankruptcies, and/or default on these loans.