Bank's Non-Performing Loans Shrink JPY5.89 Trillion

The Japan Banker's Association announced that all of Japan's banks (132 banks) as of September of 2003 were reporting NPLs (non-performing loans) of JPY28.33 trillion, or some 30% lower than the peak reported at the end of March, 2002, and JPY5.89 trillion lower than six months earlier. As a percent of outstanding loans, the ratio declined by 1.14 percentage points to 6.64% over the past six months. As a result, some 60% of the reporting banks saw profits for the period to September, 2003. Net operating profits increased by 14.2% during the period to JPY3.8 trillion, and ordinary profits soared by over two-fold from year-earlier levels to JPY260 billion.


The major 12 banks (excluding Aozora Bank) saw their NPL balances decline by JPY5.6 trillion over the six months to September, 2003, to JPY14.51 trillion. This means that the decline in NPLs among the regional banks has been much slower. While the regional banks account for nearly half of the NPLs, the balance of their NPLs declined by only JPY830 billion.


(TT's Take) This shrinkage in NPLs is directly attributable to a more stringent attitude by the FSA since Heizo Takenaka took over. Despite all the wailing and doomsday scenario-making of the major banks and the LDP while this was underway, the net result was reduced risk in the financial system, while the economy was staging a recovery. Thus the rating agencies' credit ratings for Japanese companies are now on an improving trend.

Dollar's Slide: How Far Before Investors Panic?

While the "Strong Dollar Policy" has long since been exposed as a myth, investors are beginning to wonder how far the US dollar can fall before an "orderly adjustment" becomes a panicky rush for the exits. US bond markets have so far been protected by the fact that Asian central banks, particularly Japan's, are pumping record amounts of funds into the forex markets to prop up their currencies, and are buying US Treasuries in the process. In addition, there are some who claim that the dollar's depreciation is overblown, as on a trade-weighted basis the losses don't look that bad.
They argue the dollar's downward trajectory is no crisis, but simply an unwinding from overvalued levels that's adding additional stimulus to the U.S. economy, which in turn is lifting growth in the rest of the world.


"On a scale of one to 10, for (the chances of) a dollar rout against the euro I'd say we're at eight," said Peter Morici, Professor of Business at the University of Maryland. "There are too many dollars out there and not enough buyers." He reckons the alarm bells will only really start to ring if the euro hurdles $1.35; this week, it traded at $1.28 for the first time ever. While US officials and economists deny it, the IMF has admitted there is "some risk" of a "disorderly" fall in the US dollar..."large U.S. fiscal deficits also pose significant risks for the rest of the world."


Michael Woolfolk, a currency strategist at Bank of New York, looked at annual changes since 1980 in currencies from the Group of Seven leading industrialized nations. The only times a G7 currency lost 20% of its value against a G7 counterpart in one year - outside of the coordinated dollar devaluation in the wake of the 1985 Plaza Accord - were related to the devaluation of the Italian lira against the dollar and yen during the 1992 crisis in the European Exchange Rate Mechanism, and the 22.8% decline in the euro against the yen in 1999, after the launch of the single currency.
Otherwise, no G7 currency has been allowed to fall more than 20% against another G7 currency in over 20 years," a pace Woolfolk terms the "maximum speed limit."


Some believe the $1.30 line has emerged as a pain threshold for European policy makers, while the pain threshold was long ago passed for the yen, judging from the massive interventions the Bank of Japan is conducting. What US investment fans have to keep in mind is that, towards the end of 1987, the combination of the falling dollar and rising long end interest rates caused Wall Street to crash. Another question that needs to be asked, however, is why stronger US economic growth is not helping the US dollar. The U.S. economy and capital markets remain the largest, most resilient and diverse in the world, which leaves them best able to cope with sharp adjustments.


(TT's Take) A contrarian argument has been offered by Peter Garber of Deutsche Bank. The massive buying of US Treasuries by Asian nations is entirely rational, i.e., they are seeking to support domestic employment and to keep their currencies competitive. Indeed, the fundamental global imbalance is not in the exchange rate, but in the enormous excess supply of labor in Asia. The Asians today are like the Europeans after WWII--using cheap exports to the US to power their economic revival. Thus despite growth US deficits, the system has been stable and sustainable. To quote Jacques Reuff on why the US prospered under the old Bretton Woods regime despite big trade deficits--"If I had an agreement with my tailor that whatever money I pay him returns to me the very same day as a loan, I would have no objection at all to odering more suits from him".


If one looks back to their college Econ 101 book, they find that money has several functions, two of which are a store of value and a medium of exchange. While the store of value for the US dollar is not doing so well these days, the US dollar is still very much the preferred medium of exchange, simply because most people have it and it is readily convertible into other currencies. A weakening dollar implies there are too many dollars floating around vis-a-vis the level that is demanded. But if the US were to suddenly get its fiscal house in order and begin reducing the global supply of dollars, the effect would be to shrink the world's money supply. In effect, the dollar makes the world economy go 'round. Any activity that would work to shrink this "money supply" would work to hinder global economic growth, just as the sychronized global recovery party was starting...

Over Half of "Problem Companies" Have Not Been Addressed

According to the Fiscal White Paper, there are some 132 companies that still need "early corporate rivitalization". It is highly unusual that the government would be so specific about "problem companies", and probably reflects their desire to have financial institutions accelerate the processing of heavily indebted companies.


The numbers were derived by the Cabinet Office using publicly available financial statements, and were based on the 1,141 listed companies still surviving the shake-out of the 1990s. Five-year average balance sheet numbers were used in the calculations, which produced 227 companies that had debts that exceeded their industry average, and continued to have operating earnings insufficient to pay the interest service on their debts. Of these, 95 companies subsequently went through legal liquidation, or debt restructuring, leaving 132 companies still in need of revitalization.


Financial Services Minister Heizo Takenaka insists that this was merely a macro-economic exercise, and that only around 6% of these companies are actually "problem companies" in terms of excessive debts. The number, however, represents some 12% of those continuously listed companies used as the universe.


(TT's Take) the implication however is that over half of the "problem companies" as measured from a top-down perspective have yet to be properly addressed by the banking sector, which means that there is actually more balance sheet clean-up work that needs to be done vis-a-vis the big banks and their big borrowers--i.e., investors have been discounting an improvement in financial sector risk that may be too optimistic given the government's top-down estimates.