Yen Weakens Through JPY110/USD

All of the talk about recession in Japan and the USD rally on falling oil prices has pushed the yen below the 110/USD level, creating a windfall for Japan's major exporters.

The Fed is reporting that "official institutional" buying of US treasuries was recently the largest ever recorded. It appears that centeral banks are again piling back into USD government debt, but this is partially due to a migration out of questionable GSE (government sponsored entity) debt issued by Freddie Mac and Fannie Mae.

Meanwhile, the weak yen has Mom and Pop Suzuki swinging for the fences again in Japan's forex margin trading. Yano Research Institute is projecting that the number of forex margin trading accounts will surge another 46% this year (to 1.79 million) because of the weakening yen, a rush by Japanese financial service firms to offer such accounts. and structurally depressed junior markets for equities, such as the JASDAQ. The Auzzie dollar has been a popular currency because it is offering interest rates of 7.25% and is packaged in such products as the Uridashi bonds (foreign currency-denominated bonds sold to Japanese retail investors). Last year, the number of forex trading accounts in Japan surged 92 per cent to 1.23m, and the balance of these accounts could increase 30% Y906bn ($8.22bn), this fiscal year. These retail investor flows into the currency markets have become a major force affecting JPY-other currency exchange rates. In addition, more stable global credit markets are encouraging a resurgence of the yen carry trade. Japanese corporate executives like Sony Corp.'s ex-chairman Nobuyuki Idei thinks the Japanese currency has been overvalued should trade more like JPY130/USD, and could fall to JPY150-160/USD range on a decent USD rally.

Japan's producer prices (corporate goods) jumped 7.1% yoy in July, the fastest rise in 27 years, as prices of petroleum and coal products surged 43.6% while steel prices jumped 26.7% and the import price index surged 34.8% yoy. While the weak yen will exacerbate this inflationary pressure, weak domestic demand is making it difficult to pass on these rising costs, and because Japan's economy has slipped into recession on faltering exports, the BOJ is not about to get off its collective derrier and push short-term rates higher. Thus there does not appear to be any policy response in the works that would support the yen.

FT.com Link:
http://www.ft.com/cms/s/0/8f425d3c-67cb-11dd-8d3b-0000779fd18c.html

Japanese Real Estate Hit by Credit Squeeze

Credit availability in Japan's property market has essentially dried up, and the squeeze is particularly severe for the JPY9.8 trillion highly leveraged private placement real estate funds, which had been the most dependent on non-recourse and other financing for foreign banks. These funds are now having trouble rolling over loans and are facing severe cash squeezes, which is leading to an increase in bankruptcies-real estate comapnies Reicof and Zephyr as well as construction company Tada Corp. being recent examples. Those still standing have seen their stock prices plumment. Shares of developers including Urban Corp have been in a free-fall. Urban has lost 96% since its peak in December 2005. Condo developer Haseko has fallen 77% from its 2007 high.

Japan’s bankruptcies climbed to the highest level in five years in July, foreshadowing what one research group predicts could be the worst year since Japan’s banking crisis as more property companies go bust. Nationwide corporate bankruptcies rose to 1,372 cases in July, the highest since July 2003, according to Tokyo Shoko Research . Real estate and construction companies are leading the recent wave of failures, and that trend is could accelerate. In the first half of 2008, six listed companies filed for debt protection, while another five have joined that list since the start of July. The number could approach the record 29 set in 2002 when the nation’s banks were forced to clean up their balance sheets amid spiraling levels of bad loans, Shoko predicts.

Japan's fledgling CMBS (commercial mortgage-backed securities market), which saw issuances of JPY1.0 trillion in Q4 2007, has shrunk to 1/10th this level. Investment banks, who accounted for about 90% of these securities, have curtailed loans to the real estate sector.

While some point out that Japan does not have the problems currently afflicting the US, i.e., an imploding housing market, condominium prices in the Tokyo area are down 7% this year, Meanwhile the contract rate for Tokyo apartments has exceeded 70% in only month so far this year, according to the Real Estate Economic Research Institute. The rate must be over 70% for developers to turn a profit.

The other issue unique to Japan is real estate and links to organized crime. When central Tokyo property prices began bottoming in 2003, some developers resorted strong-arm tactics to gain possession of booming properties. Yakuza groups and their cronies are again scouting the capital's real estate market for lucrative opportunities to make fast money through shady business deals. For example, the president of Koyo Jitsugyo (believed to be affiliated with the Yamaguchi-gumi Yakuza group) was arrested along with 11 others were negotiating with a buildings tenants over eviction terms. In Japan, only lawyers are legally able to conduct such negotiations. Koyo was asked to force the tenants to leave by Suruga Corp., a real estate/construction company listed on the TSE 2. Suruga allegedly paid a princely sum of JPY15 billion for the service.

According to the chief executive of developer major Mori Trust, "The boom we've enjoyed for the past few years is over,'' "Investors were convinced that prices would keep rising, so in about six months, they'll probably rush to get out regardless of price.'' According to Colony Capital Japan's president Masui, "People who bought properties last year at a very high price, they're in trouble. "People with a bunch of stuff in their portfolio are now running around trying to get refinancing, and they won't get it.''

However, what looks like a train wreck for highly leveraged players smells like opportunity for well-capitalized foreign players. General Electric Co. and Morgan Stanley sense a buying opportunity. GE's real estate unit may buy as much as $10 billion of Japanese property this year, anticipating tighter credit and rising borrowing costs will prompt local trusts to accelerate asset sales and drive down prices. GE uses its own cash to invest in property, unlike REITs and private funds that borrow money. Morgan Stanley has invested more than 2 trillion yen in Japanese property, spending more than a 10th of that amount last April to acquire 13 hotels from All Nippon Airways Co. in Japan's largest real estate purchase. Morgan Stanley also bought office buildings from Citigroup Inc. and Shinsei Bank Ltd. .

FT.com Link:
http://www.ft.com/cms/s/0/7bc820f4-f9ce-11dc-9b7c-000077b07658.html?nclick_check=1
Economic Times Link:
http://economictimes.indiatimes.com/International_Business/Japan_bankruptcies_hit_5-year_high/articleshow/3343843.cms
Asahi Shimbun Link:
http://www.asahi.com/english/Herald-asahi/TKY200803110066.html