Japan Government Pushing Ahead With Stock Purchase Plan

While rumors have been circulating for some time, Japan's ruling coalition (LDP and Komeito) continue to press forward on establishing a means whereby the government can intervene directly in the stock market to buy stocks. The just-announced JPY15 trillion stimulus package will be based on a fiscal 2009 supplementary budget, and ostensibly will likely include JPY50 trillion yen in government guarantees on money raised by the stock-buying entity, according to the Nikkei.

The government and coalition partners have apparently already decided to create a special committee chaired by the Prime Minister that would convene in extraordinary market circumstances, such as when the stock market's ability to smoothly price equities becomes dysfunctional. The committee, which ostensibly will include the BOJ governor, the finance minister and other Cabinet members in charge of economic and fiscal policies, would have the power to decide if intervention is warranted. The composition of the committee would ostensibly ensure its independence and ability to resis pressure from politicians to prop up stock prices.

In addition, the LDP is also exploring the setting up of a separate entity to actually carry out the purchases, such as two organizations that were created to sop up the excess supply of stocks during the Brokerage Crisis in the 1960s.

The plan raises a number of thorny issues regarding government intervention in private enterprise, but Japan has traditionally been much less adverse to government intervention/nationalization. While not mentioned in the latest update by the Nikkei, the issue of direct government intervention into individual companies ostensibly would be solved by the government issuing guaranteed bonds to be bought by Japanese individuals, with the funds from these issues being invested in index ETFs (exchange-traded funds). Individuals ostensibly would be protected on the downside, while having an option to convert these bonds on the upside. This would also ostensibly address concerns about insider trading.

As usual, any grand stimulus plan cooked up by the LDP takes an inordinate amount of time, while details of the program are leaked to the Nikkei who dutifully publishes them as a kind of "ad ballon" to judge public reaction. Not clear is exactly how and under what circumstances these purchases would take place. Having to issue bonds to procure funds for the purchases would seem to negate the object of the exercise, i.e., prompt intervention in the stock market when panic selling threatens the very viability of some companies.

If past experience is any guide, the program may finally be rolled out just as the stock market is undergoing a recovery in discounting the end of the current historically severe recession.

Balance Sheet Duress at Japan's Shikin Banks and Economic Stimulus

Japan's credit associations (known as shikin banks) are having balance sheet problems. The central bank for Japan's nationwide shikin banks, the Shikin Central Bank, has injected JPY40 billion of capital into five member shikin banks.

Two of these banks have received financial support from the credit association central bank for a second time. The issues affecting the balance sheets of such banks center on undercapitalization under the Bank of Japan's tough assessment of bad loan write-offs, and losses on investments in securitized and other financial products. Currently, there is no "selection mechanism" to force distressed credit cooperatives out of the market. Capital injections by the central bank for such credit associations implicitly assumes that management will be improved/restructured through consolidation, but as other members have declined to step up to the plate, the troubled institutions remain in business.

During the Heisei malaise, Japan resorted to forced bankruptcy procedures for financial institutions, with 181 such bankruptcies occurring since 1991. But no action has been taken on a financial institution since regional bank Ashikaga Bank was nationalized in 2003. Since then, a soft landing approach has been taken.
Current Financial Services Minister Kaoru Yosano is reluctant to forcefully close such associations, believing that an upper limit on deposit funds in the case of a bank failure would be too disruptive.

A revised bank recapitalization law became effective at the end of 2008 that does allow for preemptive injections of public funds. Since then, the government has injected JPY121 billion into North Pacific Bank (subsidiary of Sapporo Hokuyo HD, 8328.T) as well as Minami Nippon Bank (8554.T) and Fukuoka Bank. These capital injections however are no guarantee of lasting reforms in operations.

Given the current still-fragile global financial system, there is considerable caution about allowing shakeouts in Japan's second and third-tier banking institutions, but the fact remains that Japan is over-banked, with financing capacity that is much larger than actual demand for funds. As long as the government continue to avoid the needed clean-up, Japan's regional banks will remain inefficient and vulnerable to future crises.

From the big picture perspective of the Financial Services Agency or the Bank of Japan, however, these institutions are not central to the viability of Japan's banking system.

The irony is that Financial Services Agency is also examining about 30 financial institutions, including nine major banks, to see if they have improperly denied credit or reduced existing loans to businesses, as the BOJ's Tankan survey shows that credit availability in Japan remains tight, especially for smaller firms. The FSA is focusing on regional banks and credit associations that have been named frequently in complaints filed by borrowers. According to the Bank of Japan, outstanding loans to small and midsize businesses totaled 182.27 trillion yen as of Jan. 31, down 0.6% from a year earlier. The balance has declined for 17 straight months since September 2007, when the subprime mortgage crisis started to surface in the U.S.

While visitors to Tokyo may not notice the depth of the current recession, the regional first-tier and second-tier (Shikin) banks are bearing the brunt of depressed economic conditions in regional areas, while taking measures to provide support to their constituencies whenever possible. For example, Tokyo Tomin Bank (8339.T), Keiyo Bank (8544.T) and other regional banks are taking action to ensure that individuals make scheduled mortgage repayments as the job market and corporate profits weaken.
Kagoshima Bank (8390.T) and Yamagata Bank (8344.T) are preparing to offer consultations on repaying loans. Chiba-based Keiyo Bank is letting customers increase repayment amounts on mortgages for a limited period. Ehime Bank (8541.T) is adding unemployment insurance to its loans. The insurance covers monthly repayments for up to six months when borrowers lose their jobs because of situations at their employers, such as bankruptcy filings and shutdowns by the firms. Insurance premiums are paid by the bank. But company profits have imploded, especially in manufacturing, and companies are cutting or pressuring their suppliers to cut prices and cutting employee wages as well as head counts.

Here is where the Japanese government's stimulus efforts should come into play. The government says it is readying yet another stimulus package, this time with real fiscal expenditures of JPY15 trillion, including a six-fold expansion in tax breaks for new housing and new tax breaks for small and medium-sized businesses, as well as support for purchases of energy-saving consumer electronics and eco cars, and front-ended public works expenditures. If the outlook for small and medium-sized businesses and regional economies improves because of this stimulus, the regional banks will directly benefit.

WSJ: Japan Woes Deepen: That's Old News

The Nikkei is reporting that business confidence as measured by the Cabinet Office among shop owners, taxi drivers and others in businesses with high sensitivity to the economy improved for the third straight month in March. The survey's index for current conditions improved 9 points to 28.4, while it is still far below 50, the boom/bust line.

The WSJ title of an article talking about Japan's February balance of trade talks about Japan's woes deepening, with February exports plunging 50.4% YoY and imports falling 44.9% YoY, the worst drops since comparable data was available from 1985.

While signs of life are emerging among manufacturers and exporters, there are three major risks that threaten to plunge Japan's economy further into the abyss. After retreating for five straight months through February, the industrial output index is expected by the Ministry of Economy, Trade and Industry to rise in March and April.

The factors that could nip Japan's recovery in the bud are;

a) A persistent global economic downturn. While even George Soros thinks the danger of a financial system collapse has passed, there are still signs of balance sheet stress, such as the strong USD. The World Bank and World Trade Organization's forecasts for world trade in 2009 are -6%~-9%--i.e., not encouraging whatsoever.

b) The credit crunch could worsen. The IMF is coming out with new "over the top" estimates of toxic debts, which they reportedly believe will now reach $4 trillion, with US banks having $3.1 trillion of this total, up from a prior estimate of $2.2 trillion. Keep in mind that the original estimate of the problem by the Fed was more like $500 billion, and even uber bear Noriel Roubini was "only" forecasting some $3 trillion of toxic assets.

c) Employment and spending could noticeably worsen. Almost amazingly, Japanese consumers are still spending, albeit very selectively, such as basic PCs priced at around JPY50,000, older household appliances, and private-label, everyday clothing. In other words, Fast Retailing's Uniqlo shops are packed on the weekends, while nothing is moving at the department stores. Despite the lousy economy, some products and services continue to attract buyers. Do retailers of such products have a secret formula? Not really, its mainly about low prices and trading down.

The Japanese government is expected to draft an additional stimulus package as early as April 10, and the big question is whether we can expect any sensible policy measures. The BOJ has upped its balance sheet again as the March Tankan showed that credit conditions were still tight for companies, particularly smaller companies. Stimulus efforts so far, which began in October last year, have so far had no visible affect.

But the shocking number given the pervasive bearishness about Japan may be what Action Economics' David Cohen sees as an actual increase in Japan's seasonally adjusted exports in March, the first in 10 months. Based on trade data for the first 20 days of the month that is released by the Ministry of Finance, Mr. Cohen calculates that March exports from Japan probably climbed 1% month-to-month. The official trade numbers for March won't be out until April 22.

We suspected as much when the Nikkei 225 started to perk up despite absolutely abysmal economic news. Granted, it will be touch-and-go for a while, with a sprinkling of only modestly positive economic news and continued investor bearishness. Trading should continue to waffle between dispair and "the cup is half full" sentiment, while the stock market has "been there, done that" for the Jan-Mar 2009 economic numbers. Even incremental improvement from Oct.-Dec and Jan-Mar lows would be enough to backstop prior market lows and set the market up for a "golden cross" between the 13-week and 26-week MAs. Not a major new bull market mind you, but possibly a decent move nonetheless.

Lone Star REIT Transaction Could Unfreeze Japan's Distressed Property Market

Lone Star Funds had the winning bid for the failed New City Residence Investment Corp., which toppled last October. The bid beat out rivals Daiwa House and Oaktree Capital. The transaction gives an indication of value for Japan's frozen distressed property market, and could help to unfreeze it. New City manages more than 6,700 rental properties for which the firm paid JPY184 billion. About 80 percent of the properties are in the Tokyo metropolitan area. The transaction has stimulated Japan's moribund J-REIT market, at least temporarily.

At the same time, the BOJ felt compelled to broaden the scope of assets they would accept as collateral for loans to include municipal and government bonds sold directly to investors (private issues) because financing access in Japan remains the tightest it has been for decades, and analysts believe the BOJ needs to do more to loosen credit, even though they have taken action every month since Lehman failed last year. From the BOJ's perspective, they believe it is time for fiscal stimulus to take the lead.

Orix Corp., Japan’s biggest non-bank lender but also a big real estate player itself is borrowing from the government as more loans to real estate companies turn bad and the cost of selling bonds rises. The yield premium investors demand to buy Orix’s 2.18 percent bonds maturing in July 2014 has more than tripled since before the bankruptcy of Lehman Brothers Holdings Inc. in September. On the other hand, the company’s share price fell 77 percent in the year ended March 31 as it issued convertible bonds, sold assets, increased borrowing and forecast its lowest profit since 1997. The firm, usually a big source of real estate funds, now can’t offer real estate loans to other companies at present. It is instead concentrating its resources in its own real estate projects.

On March 30, Azel became the eighth listed property company to fail this year in filing for bankruptcy with 44.2 billion yen ($457 million) in debt, citing a slump in condominium sales, difficulty in getting loans, and failures among construction companies. Bankruptcies among Japan’s listed corporations reached 33 last year, a postwar record, according to Tokyo Shoko Research Ltd., with many of them being real estate companies.

But finding a bottom in real estate prices in Japan could hinge on restoring life to the near-dormant J-REIT market. Listed and private J-REITs were a major driving force behind real estate gains from post-bubble lows, as J-REITs were the most aggressive buyers of properties through 2006. Now unable to roll over loans, a growing number of these REITs have turned to selling their property holdings, which is increasing the supply of distressed property.

The LDP's talk of outright purchases of Japanese stocks to support the market ostensibly includes purchases of J-REITs, and the conjecture that a healthy J-REIT market will support property prices as a whole.

Bloomberg

HSBC: Asian Economies Will "Spring Back"

HSBC believes that Asian economies will "spring back" because“every time Asian growth has suffered a serious setback in the past it has come back with a vengeance and not because the region has been bailed out by improving demand from the developed world,” an HSBC economists said. “Contrary to conventional wisdom, Asia’s post-crisis recovery was led by consumer demand which then triggered an improvement in the regional trade cycle.”

The Asian Development Bank thinks Asian economies will shrink 10.3 percent this year after growing 14.7 percent in 2008, the Asian Development Bank said last week. Overseas shipments account for about 32 percent of Asia’s gross domestic product, according to the World Bank, and given that world trade is expected to decline by 6%~9% this year, Asia (including Japan) is being hit relatively harder.

But HSBC believes that lower interest rates, government stimulus in the region of some $700 billion, tumbling commodity prices and a gradual return of financial confidence will do the trick. Since Japan now does most of its trade with Asia and greater China in particular, a "springing back" of Asian economies will be very welcome news for Japan's economy as well.

Bloomberg

Global PMI Is Bottoming, But Shipping Traffic Still Depressed

The World Bank is forecasting a 6.1% decline in world trade this year, while the World Trade Organization is forecasting a 9% contraction. This contraction is the first in the post-war period, and compares to a 25% plunge in world trade in the aftermath of Black Monday in the 1920s. Then, protectionist "beggar thy neighbor" trade policies including the Smoot Hartley Act were blamed for the sharp contraction in global trade. This time, the G20 and developed countries have taken great pains to warn against a repeat of the 1930s disaster.

Japan is being hit particularly hard by the shrinkage in global trade, but is not the only country, as flagging overseas sales are also depressing US as well as European growth.

But there appears to be a sliver of hope in the global PMI (purchasing managers indices) as measured by JP Morgan and discussed by Edward Hugh. Edward Hugh on Global PMI The JP Morgan global PMI for March shows a definite slowing in the speed of contraction, i.e., continued improvement from a bottom last December, when business around the world virtually ground to a halt because banks were not dealing with each other because of the credit crisis. The stabilization of the global banking system was an important first step in healing what has become a very sick global economy.

At the G20 summit, group of industrial and developing nations promised $1.1 trillion to the International Monetary Fund and other development bodies to lend to struggling countries reeling from the global economic turmoil. They also vowed new efforts to clean up banks' tattered balance sheets, shut down tax havens and tighten financial regulations. Investors cheered the development as a renewed commitment by governments everywhere bring unprecedented resources to bear against the worst economic slump since the Great Depression.

On the other hand, the benchmark proxy for global trade, i.e., the Baltic Dry Index, is having trouble following through on a "dead cat bounce" from The gauge has fallen for 10 straight days, its longest run of losses since the 13 trading sessions to Dec. 5. The BDI hit 11793 in mid-2008, then plunged to a mere 663 as the credit crunch literally stopped all letters of credit and ship financing. The index then bounced (a dead cat bounce) back to 2298 but has since been struggling. Shippers are now scrapping ships and cutting back on global capacity on a sharp reduction in shipping traffic, as no bottoming like being seen in the PMI has yet emerged in shipping.