Row Over Resona Bailout

This is obviously part of the backdrop to the election campaign, and it is always hard to judge the significance of things in this context. But Resona is interesting, since it is a strange case, and it could give us some clues as to the real determination for serious reform in Japan. On the face of it, not encouraging.

The Democratic Party of Japan, the country's main opposition, is accusing the government of Junichiro Koizumi of "state-sponsored window dressing and fraud" when it bailed out Resona, the Japanese bank. DPJ officials will meet representatives of the Financial Services Agency, the banking regulator, on Monday and will argue that the government was aware that Resona was insolvent when the FSA decided to inject Y1,960bn ($17.9bn) to prevent the bank collapsing. The opposition's decision to accuse the government of acting illegally escalates the potential political fallout from the Resona rescue and is designed to put pressure on the prime minister and his ruling Liberal Democratic party ahead of a general election in November.

The DPJ will argue that the government deliberately used an inappropriate clause of the Deposit Insurance Corporation law to avoid the stigma of an embarrassing nationalisation as well as protecting shareholders from having the value of their holdings completely wiped out. Following the bail-out, Resona's share price rose sharply.

When it bailed out Resona, the government cited a section of the DIC law that can only be used for banks with a positive net worth. Other sections, however, are for use with "bankrupt financial institutions or financial institutions where assets are unable to fully repay liabilities".

An official at a credit rating agency who asked not to be named said: "In Resona's case, if it did have negative net worth at end-March 2003, as is suggested by the subsequent independent audit, it should have been declared insolvent and dealt with either under [sections] 102(2) or under 102(3)." Section 102(2) allows for the failed institution to be merged with another company, while section 102(3) allows for the full nationalisation of the bank, which would result in shareholders' equity being written down to zero.

Controversy over the Resona bail-out intensified after it was announced this month that the bank would report a far higher than expected loss of Y1,760bn for the first half of the year - a figure almost equal to the Y1,960bn injected by the government.
Source: Financial Times
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Japan Still On the Deflation Trail

Japan economy minister Takenaka tells us Japan will triumph over deflation. Just one last question: how? No, this isn't fair, he does offer some pointers. But it still remains to be seen what these actually mean in practice......

Heizo Takenaka, Japan's economy minister, said on Thursday that the country could overcome its persistent deflation because the central bank is working more closely with the government. The key reforming minister of Junichiro Koizumi's government said in an interview with the Financial Times that the co-operation followed the appointment of a new governor of the Bank of Japan in March.

On the eve of US president George W. Bush's visit to Tokyo, Mr Takenaka said the BoJ would aim to raise money supply growth from its current 2 per cent to between 3 per cent and 4 per cent. For its part the government would increase demand through deregulation and clean up the banking system so that the BoJ's looser monetary policy was transmitted to the economy as a whole. Mr Takenaka said: "By combining these two, our calculations say that we will be able to overcome deflation."His suggestion that the BoJ was co-operating with government policy comes after years in which many saw the central bank as a stubborn opponent of price stability............

With the economy growing in the second quarter at an annualised 3.9 per cent according to official statistics, now was the time to press home the advantage. The economy minister said: "We hope to create a virtuous circle."

Mr Takenaka praised Toshihiko Fukui, who became bank governor in March, suggesting that he was more determined than his predecessor to halt deflation. "Since Governor Fukui took office BoJ policy is, in my opinion, moving in a good direction," he said.

The consumer price index for August fell just 0.3 per cent from the previous year although, measured by the gross domestic product deflator, prices are still dropping by about 2.5 per cent a year.

Mr Takenaka said that, "even with the CPI nearing zero", the BoJ had signalled its commitment to easy monetary policy for as long as necessary. The BoJ was "contemplating right now" how to signal its long-term commitment to price stability, with some BoJ members advocating a reference rate, a goal just short of an inflation target, he said.
Source: Financial Times
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Japan: Conflicting Signals?


Along with the renewed pressure from the Bank of Japan against the rise of the yen, here is one more small piece of evidence that all may not be as well as the markets imagine:

Machinery orders placed by Japanese companies fell by a bigger-than-expected margin in August, according to official figures released on Wednesday, indicating an uncertain outlook for capital expenditure which has fuelled Japan�s nascent economic recovery. Orders for machinery made by private Japanese corporations, seen as an indicator of capital expenditure about six months ahead, fell 4.3 per cent in August from July, the Cabinet Office said. On a year-on-year basis, they rose 12.2 per cent, a smaller increase than expected. The weak data, together with the strong yen that on Wednesday traded at Y109.5 against the dollar, accelerated the decline in the Tokyo stock market, which fell for the first time in five days. The Nikkei 225 ended 2.6 per cent lower at 10,542.20.
Source: Financial Times
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Japan: Thrice Fooled?

Why do you blog. Sometimes for the simple comfort of knowing you are not alone. This time the case in point is Japan. I can't remember when I last saw anyone come out and say it straight as Richard Katz is doing here. His reasoning is fairly sound, the NPL problem is still there, structural reform has not gone as far as some claim, and the banking situation only seems sounder because all the speculation about recovery has seen the value of equities rise, and this of course has boosted the value of bank reserves. But I am convinced for another reason which Katz doesn't mention (in fact in the course of two books he manages to mention that Japan has a demographic problem about twice). This is why I'm convinced even his ten year horizon could be way too optimistic. Without a change in mentality towards immigration Japan is unlikely to go anywhere particularly attractive, and this change is the one I definitey don't see coming.

Fool me once, shame on you. Fool me twice, shame on me. How about three times? Japan is now experiencing its third cyclical upturn in the last decade. Once again, we hear that "Japan is back". Once again, investors are betting tens of billions of dollars that this recovery will last. Doubtless a skilled market player can get rich in a stock market that doubles and halves every few years. But unfortunately, this time is not different. One reason we know this is that the arguments being handed out today are the same premature declarations of victory handed out in the previous false dawns: that the non-performing loan (NPL) problem is being solved and that companies are rapidly restructuring. One new rationale is that Junichiro Koizumi, the current prime minister, is a reformer.

But Mr Koizumi was at the helm when, not so long ago, alarmists insisted that Japan was about to crash. Indeed, some of today's born-again bulls are yesterday's doom-sayers. There is also a more fundamental reason for scepticism: Japan cannot recover without structural reform. Japan's long-term potential growth is still about 1.25 per cent. This rate cannot be raised without a productivity revolution born of structural reform. Meanwhile, structural defects that depress household income continue, causing a chronic shortfall in private demand. Certainly, some reforms have been made but not enough to restore vibrancy in the near term.

Bulls point out that NPLs declined in the 2002 fiscal year for the first time in six years. Nonetheless, NPLs still remain higher than in any year except one. More importantly, Japan has done little to weed out the non-performing borrowers behind the debt crisis. Bankruptcies are not rising, but falling. Japan continues to keep zombie companies going via government loan guarantees, sub-market interest rates and debt waivers. Among publicly listed companies, 16 per cent of the debt is held by companies that do not earn enough to pay even today's ultra-low interest rates. Another 14 per cent is held by companies that earn just a tiny bit more. To keep these companies afloat, 10 per cent of all loans charge less than 0.5 per cent, up from 5 per cent a few years back.

As for corporate restructuring, there is less than meets the eye. Most of the improvement in financial indicators is due to cost-cutting measures such as wage cuts - which hurt consumer demand - not genuine increases in efficiency. The average return on assets halved in the 1990s to just 3 per cent. The data to June 2003 show no trend recovery in returns, just another cyclical bounce.Company inefficiency is, in turn, the product of weak competitive pressures. Here some trends are moving backwards. Business start-ups and closures are both down. In most industries, the market share of the top three companies is increasing, partly because of the merger and acquisition activity that some mistakenly hail as reform.

Worse yet, most of the good news is limited to Japan's biggest companies. In the 2002 fiscal year, which ended in March, the 1,200 biggest publicly listed companies enjoyed a 38 per cent increase in operating profits. But they produce less than 10 per cent of Japan's economic output. By contrast, the small and medium-sized companies that produce most of Japan's output suffered a 12 per cent drop in both sales and operating profits. Mr Koizumi does seek reform. However, his priority is not the economy. It is destroying the corrupt nexus linking party bosses in the ruling Liberal Democratic party (LDP), state enterprises in construction and elsewhere, and their bureaucratic protectors. He has split anti-reform factions of the LDP and is now ousting Haruho Fujii, the Highway Corporation president, for allegedly cooking the books.

Time will tell whether Mr Koizumi can go on to privatise some of the main state enterprises, such as the Highways Corporation and postal savings. Some of the new allies he made to secure his re-election as party leader oppose these reforms. Even if he succeeds, privatisation alone will have a marginal impact on growth so long as the resulting entities remain virtual monopolies, as when Nippon Telegraph and Telephone (NTT) was privatised in the 1980s. Markets must be open to new competitors. Reform will eventually return Japan to sustained growth of 3 per cent or so. But that will probably take another decade. As for this year, it takes more than a few swallows to make a spring.
Source: Richard Katz, Financial Times
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