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Sunday, May 11, 2003

Nikkei Drifts Lower as Yen Rises


The Japanese markets are drawing the logical conclusion from the weaker dollar: less exports, less profitability, weaker 'recovery' etc.

Tokyo stocks were lower in midday trade on Thursday as the shares of the country's largest exporters tumbled, after the dollar fell to a 10-month low against the yen overnight. The benchmark Nikkei 225 average was 0.7 per cent lower at 8,055.13, while the broader Topix index was down 0.5 per cent to 818.58. The dollar fell to a low of Y116 against the yen in the aftermath of the US Federal Reserve's signal about the risks of deflation. The White House reiterated that its "strong dollar" policy was unchanged but economists said market sentiment towards the currency remained weak. The dollar recovered a little ground in morning Asian trade to Y116.5 from its Y116 low, but shares of Japan's leading exporters - many of which derive the bulk of their revenues from overseas markets - were broadly lower. Sony lost 2.5 per cent to Y2,890 and Canon was down 2.7 per cent to Y4,780. Shares of Toyota, which is set to announce its annual results after the market close, were off 1.3 per cent to Y2,745. Honda was 1.7 per cent lower at Y4,040 and Nissan was 0.6 per cent lower at Y320.
Source: Financial Times
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Yen-Dollar: Japan Loses No-contest Test of Strength


Just a snippet from Reuters about yesterday's yen-dollar no-contest to illustrate what I have been saying in earlier posts.

The dollar hit a 10-month low versus the yen on Wednesday in a rapid sell-off that tested Japan's resolve to protect its vital export sector by keeping its currency weak against the greenback and the euro. "I think the fear of intervention is keeping the dollar above 116 yen at this point," said Larry Brickman, currency strategist at Bank of America in New York.In January and February, Japan's central bank intervened by selling yen for dollars, catching many investors off guard. On Wednesday traders said they could not detect intervention by Japanese authorities to stop the sharp dollar decline, which makes Japan's exports less competitive on the world market. "We do think intervention risks are significant given the pace of the dollar/yen fall," said Rebecca Patterson, global currency strategist at JP Morgan in New York. She said the lack of comments from Japanese policymakers on the yen's strength has emboldened shorter-term investors to sell the dollar. At the same time comments this week from U.S. officials supporting a strong dollar policy did little to slow the dollar sell-off, and some analysts were calling them hollow. The dollar fell as low as 116.10 yen on Wednesday before trimming its losses to trade at 116.41 yen, a loss of 0.85 percent from Tuesday's New York close. The euro was also affected by the silence surrounding the yen's strength, falling 1.66 percent against the Japanese currency to trade at 132.20 yen .
Source: Reuters News
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Japan's Zombie Warehouse


This looks like another non-starter 'jump-start' for Japan's continuing problems. The Industrial Revitalisation Corporation is to spend $84 billion buying up bad loans: this sounds fine, it's the bit about reselling them back to the market at break-even prices that should make you start to wonder. If this was half-way serious it would be buying up the debts to write them off, not to refloat non-proftable companies and send them back in to add to the bloated-capacity problem. Of course here it's more a question of how you see the problem dictating how you read the 'solutions'.

A new public body charged with turning around some of Japan's struggling borrowers plans to buy up loans belonging to as many as 400 companies over the next two years. The Industrial Revitalisation Corporation, which starts business on Thursday, has been licensed to spend up to �10,000bn ($84bn, �74.7bn, �52bn), amounting to almost a quarter of the official estimate of �43,000bn in bad loans that is swamping the banking sector.Kazuhiko Toyama, the corporation's chief operating officer, said on Tuesday that the IRC plans to break even within five years.The new body is mandated to buy problem loans belonging to salvageable companies, repackage them and sell the loans back to the market. It is capitalised at �50bn, but can borrow up to �10,000bn.

Mr Toyama, 42, who has built a reputation as a corporate doctor, said the IRC would have to overcome fear among banks and borrowers that might dissuade them from signing up. "Some people might be scared that the IRC is some kind of aggressive private-equity-style player and that we aim to push the purchasing price down and to make an arbitrage profit, but that's completely nonsense. "Our goal is to revitalise Japanese industry."

Mr Toyama said he aimed to sign up borrowers from several industrial sectors as quickly as possible to establish early success stories that would encourage others to come forward."This is not a profit-oriented company, it's a public company, so we are okay with zero profit," he said. In some cases the IRC, as well as buying loans, would provide fresh investment to build a company's competitive advantage. Turnaround meant more than simply cutting headcount, especially given Japanese lifetime employment practices, said Mr Toyama. Canon, the printer and camera manufacturer, showed that a successful hybrid could be developed between US and Japanese management practices.

Mr Toyama denied that the IRC would become a warehouse for "zombie" companies, saying it aimed to sell on investments within three years of purchase. He admitted that some turnarounds might fail, leaving the IRC - and ultimately the taxpayer - to foot the bill."There is always a risk in turnarounds. The IRC has been established to take the risk that sometimes private creditors cannot afford." Mr Toyama was a founder of Corporate Directions, one of Japan's few corporate turnaround specialists, and helped salvage a number of well-known companies including Japan Lease and Akiyama Printer. The IRC, which has a staff of about 100, will rely heavily on outsourcing to experts inside and outside Japan.
Source: Financial Times
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More Monetary Easing in Japan


The Bank of Japan is increasing its target for current accounts again. This is also known as monetary easing. This means effectively there is plenty of money in the banking system, the big question is whether risk averse bankers, whose own entities are not in-themselves that healthy will be willing to lend much of it. Past evidence suggests they won't, and that the effect of this change will be negligable. On the Industrial Rvitalisation Corporation, I suppose it all turns on how you define "weak, but salvageable".

The Bank of Japan on Wednesday surprised markets by easing monetary policy sharply, citing uncertainty in Japan's financial markets and the possible negative impact on the economy of the Sars crisis. The central bank said it would raise the target for current accounts held at the central bank to �22,000bn-�27,000bn ($184bn-$225bn), from the previous level of �17,000bn-�22,000bn. Under the bank's quantitative easing policy, begun in March 2001, the BoJ has flooded the market with enough liquidity to drive interest rates down to virtually zero. Because of "uncertainty regarding the economic and financial situation, the bank thought it appropriate to raise the target balance of current accounts held at the bank to maintain financial market stability, thereby strengthening support for economic recovery," the BoJ said in a statement. Analysts said the announcement showed that Toshihiko Fukui, who became BoJ governor in March, was willing to be more aggressive than his predecessor, Masaru Hayami. In his short time at the helm, Mr Fukui has called an unprecedented emergency meeting, raised the amount of shares the BoJ can buy from banks and initiated a scheme for the bank to buy asset-backed securities from small and medium companies.

Even so, Mamoru Yamazaki, chief economist at Barclays Capital, said the policy moves would have almost no effect on the real economy or on prices, which have been falling for seven years. He said the supply of more liquidity would, however, reassure the edgy financial markets, which have been battered by a sharply falling stock market...............The BoJ also signalled its intention to help in the workout of bad loans, which have paralysed the banks, by treating loans to the Industrial Revitalisation Corporation (IRC) as collateral in its money market operations. The IRC, which begins business next month, is due to buy up to �10,000bn of loans owed by weak, but salvageable, companies in an effort to get them off banks' books and clear them through the market.
Source: Financial Times
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China to Japan: Pass the Batton Mate

David Pilling, definitely the man to watch at the FT ( sorry Brad ) has some sound sense for us about Japan/China relations. Meanwhile I'm afraid I don't buy at all the thesis that China is good news for Latin America - my god why do I have to be so contrarian, anybody got a good astrological calendar handy, I must have been born under a bad, bad moon:

Japan's economy may still be four times bigger than China's, but some time ago it passed the baton marked "economic powerhouse" to its large northern neighbour. China's economy is ripping along at 8-10 per cent a year. Japan's is shrinking in nominal terms. China is attracting record foreign direct investment, Japan a relative trickle.


Worse, China's gain is Japan's loss. China is swamping Japan with cheap exports, fuelling its seemingly endless deflationary descent. Japanese manufacturers, unable to compete, are fleeing to China, causing the "hollowing out" of domestic industry and pushing unemployment towards post-war highs. Clearly, the future now leads to Beijing, Shanghai and the Pearl River Delta. Tokyo, Osaka and Kobe are of the past. But there's a feeling investors with this view may have jumped the gun. Abandoning Japan for China is too simplistic. Far from being a threat to Japan's economy and companies, China may be Japan's way out of a fix. The two countries, bitter rivals for years, could be highly complementary.

This is the basic thesis of a new note by Goldman Sachs - entitled Friend, not foe - the latest in a series of Japanese research that seeks to redress widespread misconceptions about the Japan-China relationship. Take trade. Quite contrary to common perception, Japan is not being swamped by Chinese exports, but is running a trade surplus with China - about $1.5bn in 2002. Many of these exports are of machinery and inputs to Japanese companies operating there, some of them bound for re-export to Japan or for shipment to third countries. But Goldman's says the pattern is shifting, with more Japanese goods being consumed within China.

China has recently overtaken the US as the largest exporter to Japan. But at about 1 per cent of gross domestic product, many think it is far-fetched to blame cheap Chinese goods for Japanese deflation. To the extent that these imports change the relative price of goods, such price falls may be a good thing. Most imports from China are of labour-intensive goods, with 60 per cent concentrated in textiles, food and basic materials. Japanese exports to China are sophisticated, capital intensive goods. In other words, both countries are producing and exporting according to their comparative advantage - something economists would say is mutually beneficial.

So how can this work for the investor? One way is to buy shares in Japanese companies with smart investments in China. Again, contrary to perception, Japanese companies have been relatively slow on to the Chinese mainland, leaving room for further moves. In 2001, Japanese foreign direct investment into China rose 64 per cent on the previous year to Y181bn; officials think it increased sharply again last year. According to a recent survey by the Japan-China Investment Promotion Organisation 82 per cent of Japanese investors in China say they are already profitable. Robert Feldman, senior economist at Morgan Stanley in Tokyo, says many Japanese companies have been successful at raising profit margins by investing intelligently in China and other low-cost producers. As tariff barriers come down, companies that export to China also stand to benefit. Japanese companies struggling as capital investment slides at home could be in for a big fillip.
Source: Financial Times
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Japan: Yet Another 20 Year Low?


Yes I'm afraid so. The only point of interest seems to be when will it stretch to become a 21 year one. But seriously folks, amidst all the talk that the Japan bubble burst at the end of the 80's it's easy to forget that during the last two years - effectively since Koizumi came to office to put things straight - the Nikkei is down 45%. If there is such a thing as a wealth effect, then this is indeed another enormous deflation in asset values, and still it continues.... It is extremely difficult in the face of this to understand how some commentators (like Morgan Stanley's Robert Alan Feldman, or, in his way, Richard Katz) can continue to be so upbeat on the 'reform' possibilities: by the way I'm in the proces of reading Katz's Japanese Phoenix he makes some interesting points and I'l try and blog something next week.

Tokyo shares fell below their recent 20-year low on Friday as investors reacted with dismay to Sony?s failure to reach its full year profit target. Sony shares were untraded as sell orders piled up at Y3,220, 13 per cent below the stock?s Thursday closing price and at the Tokyo exchange?s limit for a single day fall. The Nikkei average was down almost 2.2 per cent at 7,685.28 by midday, with the Topix index off 1.6 per cent at 781.92. Sony announced on Thursday that it made a loss of Y111.1bn in the three months to March, and fell well short of its profit target for the full year. Some analysts expressed disappointment that the media and electronics giant had not revised its forecast down as it became clear sales at its electronics division were falling away. The gloom surrounding the technology bellwether sent all technology exporters lower. NEC was down 2.3 per cent at Y346 after the company on Thursday it stayed in the red for a second consecutive year, but narrowed its net loss to Y24.5bn and forecast a profit of Y30bn for the coming year. Toshiba, which is set to announce full year results after the market close on Friday, tumbled 4.3 per cent to Y309. Matsushita, the electronics maker behind the Panasonic brand, also dropped 4.3 per cent, to Y885, ahead of reporting on Monday.The motor industry was not immune to the darkening sentiment, with Mitsubishi Motor falling 5 per cent to Y245 even though the company on Thursday reported record net profit of Y38bn thanks to successful restructuring. Honda was down 5.2 per cent to Y3,650 ahead of its earnings report due after the market close.
Source: Financial Times
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Japan: The Rush to Bonds Continues

While the floor continues to fall out of the equity markets, the queue to buy bonds lengthens. Consequence: the yield on ten year bonds hits another historic low, and deflation expectations become more entrenched than ever.

The yield on the benchmark 10-year Japanese government bond hit a historic low on Monday, as investors flocked to the safe haven of JGBs after the stock market closed at a new 20-year low.


The 10-year JGB was up 0.23 at 100.42, pushing the yield down 0.025 to 0.655 per cent, a record low. The key 10-year JGB futures contract was down 0.03 at 143.09. The yield on the 20-year JGB also fell to a record low of 0.995 per cent.

Japanese stocks plumbed a new 20-year low on Monday, as downward pressure was exacerbated by pension-fund selling. The benchmark Nikkei 225 average was off 0.8 per cent to 7,795.49, as shares continued their decline for a fifth straight session.

Investors are looking ahead to Thursday's Y800bn auction of 20-year JGBs, with an expected coupon of one per cent. Demand for the issue is expected to be robust, amid a dearth of other attractive investment opportunities.
Source: Financial Times
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Japan: Nikkei Continues to Plumb the Depths


Another new twenty year low, and five straight sessions going down. Little Easter cheer from Japan.

Japanese stocks plumbed a new 20-year low on Monday, as worries regarding the global economy in the wake of the Iraq war ceased to abate. Downward pressure was exacerbated by pension-fund selling.


The benchmark Nikkei 225 average was off 0.8 per cent to 7,795.49, as shares continued their decline for a fifth straight session. The broader Topix index was off 0.9 per cent to 775.61.

On Friday, the Nikkei fell to a 20-year low, sparked by heavy selling by pension-funds, a trend that continued on Monday. Japanese pension funds are set to return a portion of their poorly-performing assets to the state later this year. Many trustees are opting to hand back cash, exerting a steady downward pressure on the market.

In a report entitled, "The Death of Equities?", strategist Masatoshi Kikuchi at Merrill Lynch in Tokyo said: "Japanese stocks have failed to rise, in spite of what looks like a quick end to the war in Iraq. We had expected the market to under-perform, but at the same time be aided to some extent by temporary rallies in the US market on indications of a coalition victory. It appears we were overly optimistic."
Source: Financial Times
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