Japan sends sell message

By Neville Bennett

Friday 27th September 2002

There are occasions when the gods smile on the wealthy. Mostly the envious and the ever-present tax collector surround them. Sometimes they get a break. They see a window of opportunity.

Perhaps they can profit positively from the chance; equally often they have the chance to limit their risks and revise their portfolios. Risk management is complementary to pursuing profit.

The Bank of Japan has announced it will buy shares. This signal should be considered by the wealthy. It signifies a depreciation of the yen.

Bonds can also lose their aura of security. If the sharemarket needs a lender of last resort to shore it up, is that not a signal the authorities expect the market to plunge further than its 19-year low? And is not buying shares the path to state ownership and being the employer of last resort?

Japan is turning socialist. The prudent investor should consider a speedy exit. This is not a development out of which most people can make money. But they can limit their losses.

The hedge funds will be licking their lips as they will be betting on an apparent certainty. One play will be to short sell yen and buy it when it has fallen.

Japanese speculators can make money by going long on foreign currency or assets denominated in foreign currency. These are safe havens. Gold might be a good play as it should appreciate in yen terms.

There are excellent reasons for foreign investors to avoid holding Japanese assets. Foremost is that Japanese markets are manipulated by the government and sometimes downright rigged. This makes it hard for the investor to make an honest dollar.

For example, Japanese sharemarkets always rise at the end of March and September. The Nikkei is periodically boosted as Japanese corporations balance their books. They buy small parcels at silly prices to set a higher price level for the stocks in their portfolios.

The Bank of Japan is playing an earnest role in window-dressing. Its decision to buy shares is nicely calculated to lift the Nikkei before September 30. In March it played its part with a ban on short selling (selling shares you do not have but will buy when their price has fallen).

Window-dressing is an important exercise but it cannot conceal a catastrophic decline in the sharemarket. On March 30, the index was manipulated up to 11,000. This is a far cry from its 1989 39,000 peak.

More recently, the index has fallen to about 9500. It actually plunged to 8969 on September 6. So after September 30, corporations will have to mark down in value their equity holdings a sizeable chunk of their capital.

The banks are basket cases. In recent years, they have written off ¥52 trillion ($420 billion) in bad loans and their capital adequacy, as required by the Bank of International Settlements, is in jeopardy. Moody's said investors' money was safer in Botswana and got carpeted by the Japanese parliament for being too forthright.

Besides dreadful share portfolios, the banks are also stuffed with property holdings. They have reluctantly accumulated these assets as forfeited collateral on silly advances they made in the heady days of the 1980s. Land values have fallen for 11 straight years. That hurts.

No wonder the Bank of Japan says the risks of the bank's share portfolio are "a significant destabilising factor" for the whole financial system. It says reducing the risk is "urgent." Moody's wickedly adds the comment: "The solvency of even the most important banks has deteriorated to a level where they are highly vulnerable to additional losses."

In short, the Bank of Japan is so desperate it will nip and tuck as did Southeast Asian, Russian and Argentinian banks in their crises. It could be considered in breach of its own rules.

These state that intervention will take place when systemic risk may materialise; when there are no alternatives to Bank of Japan funding; when there will be no moral hazard; and when the bank's own financial soundness may not be impaired.

It now admits systemic risk and ignores the possibility of another bailout when the government recapitalised the banks three years ago.

It has done nothing to limit moral hazard. For example, it could have ordered the number of directors in merged banks be reduced. It may be risking its own soundness this is hard to assess as the scope of its operations have not been revealed.

It can always issue as much credit as is deemed necessary. But it has recently been embarrassed. Its standing in the bond market is a joke. It often has to buy 40% of the bonds it auctions each month. It got egg on its face last month when no other buyers emerged to bid for its 10-year paper.

My hunch is the Bank of Japan is entering a maze from which there is no obvious exit.

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