I was surprised by Japan's central bank decision to cut their current rate of 0.5% to 0.3%.
It's true the domestic market never completely recovered from the 1990s. The rate cut was explained as a way to ease the credit crunch (small business has complained of difficulty in getting loans) and as a sign to global markets that they were a player in the world response (the US S.Korea, China, Hong Kong and Taiwan also cut rates this week). But 5% drop in the Nikkei on Friday seemed to deem the gesture ineffective, although the market had surged 10% on Thursday in anticipation of the news.
What is likely to do more for the economy is the 27 trillion yen ($275 billion) stimulus package announced Thursday by Prime Minister Aso. The credits for small businesses and a cash payback to every household should have a short term effect.
Yet Japan has to do something to respond to the rising yen, which drives their export-driven economy down. The reason I was surprised by the interest rate drop is because the rise of the yen correlates to investors borrowing yen at its perennially low interest rates* and then make a killing investing that same money in other currencies. This works when the markets are stable, but now they are divesting those other currencies and buying back yen, thus the surge in value.
Japan's banks are still sitting on a big stash of cash, but interestingly, one weak spot is their traditional practice of "cross shareholding", "where banks and their borrowers hold stakes in each other to cement ties" (WSJ 10/28/08). These holdings by Japanese banks are 3% of the stock market and were hit by the huge decline in stocks (40% since June). Yet Japanese banks are not expected to report losses and recently bought stakes in Lehman Brothers Asia and Europe, Morgan Stanley and Union BanCal Corp.
I've been hearing that the next US shoe to drop will be credit card debt. This would not be an internal Japanese problem because individuals rarely use credit cards. To function best in Japan, you need travel with cash.
* The interest rate was only raised to 0.25% in July 2006 and to 0.5% seven months later in February 2007. Today's rate cut is the first time since March 2001. There was a five year stretch when the interest rate was held at zero.
Sources: Sources: http://www.nytimes.com/2008/11/01/business/worldbusiness/01japan.html
http://hosted.ap.org/dynamic/stories/A/AS_JAPAN_CENTRAL_BANK_ASOL-?SITE=YOMIURI&SECTION=HOSTED_ASIA&TEMPLATE=ap_national.html
Thursday, October 30, 2008
Saturday, October 25, 2008
New strength - the yen and dollar
The result of the global stock markets dropping like a rock (the Nikkei hit its lowest level since April 2003, falling 9.6 percent to 7,649) is that investors are running to the dollar and yen as safe havens.
Being dumped are the emerging-market currencies. South Korea is looking particularly vulnerable (the Kospi lost over 50 percent of its value this year).
The new strength in the yen is not good for the export-reliant Japan and many companies (notably Sony) slashed their projections for the year. Exports were a bright spot in the U.S. economic picture and a strong dollar is going to spell trouble for that as well.
But the real concern is the flight from other currencies.
“When a developing country’s currency loses value rapidly, it impedes the ability to pay back loans from Western banks. That could cause a rash of corporate or even government defaults — a feature of previous financial crises in Asia and Latin America.” http://www.nytimes.com/2008/10/25/business/25currency.html
These concerns are leading industrial country policy makers to talk about a coordinated effort of central banks to sell dollars and yen and buy other currencies.
Being dumped are the emerging-market currencies. South Korea is looking particularly vulnerable (the Kospi lost over 50 percent of its value this year).
The new strength in the yen is not good for the export-reliant Japan and many companies (notably Sony) slashed their projections for the year. Exports were a bright spot in the U.S. economic picture and a strong dollar is going to spell trouble for that as well.
But the real concern is the flight from other currencies.
“When a developing country’s currency loses value rapidly, it impedes the ability to pay back loans from Western banks. That could cause a rash of corporate or even government defaults — a feature of previous financial crises in Asia and Latin America.” http://www.nytimes.com/2008/10/25/business/25currency.html
These concerns are leading industrial country policy makers to talk about a coordinated effort of central banks to sell dollars and yen and buy other currencies.
Tuesday, October 21, 2008
China's ability to fill the gap
A lot has been said about China's recent growth. Some have been hoping that with the U.S. slowdown that demand from China would be enough to fill the gap and keep the global economy humming along. But China's not there yet. Far from it.
Last year, China's 1.3 billion population individually consumed $ 923 (on average).
In the same time period, the U.S. population of 300 million individually consumed $32,000 (on average).
That's a $31,077 difference. That's like hoping my kid will use his allowance to make our mortgage payment.
Last year, China's 1.3 billion population individually consumed $ 923 (on average).
In the same time period, the U.S. population of 300 million individually consumed $32,000 (on average).
That's a $31,077 difference. That's like hoping my kid will use his allowance to make our mortgage payment.
Monday, October 20, 2008
China's slowing economy
China is experiencing the slowest growth in five years, the New York Times reported this weekend (Oct 19, 2008). Declining exports, a weak real estate market and closed factors due to the Olympics contributed to the 9 percent third quarter slump.
"But China has more options than most countries to cope with slower growth. For starters, inflation is slowing at the consumer level — the government said on Monday that it was 4.6 percent in September, down from 4.9 percent in August and the fifth monthly decline.
With less to fear from rising prices, China’s central bank has already begun reducing regulated interest rates and loosening restrictions on bank lending. With the government running a large budget surplus, the finance ministry has begun lowering taxes on stock and real estate transactions and on exports of textiles and electric machinery."
"But China has more options than most countries to cope with slower growth. For starters, inflation is slowing at the consumer level — the government said on Monday that it was 4.6 percent in September, down from 4.9 percent in August and the fifth monthly decline.
With less to fear from rising prices, China’s central bank has already begun reducing regulated interest rates and loosening restrictions on bank lending. With the government running a large budget surplus, the finance ministry has begun lowering taxes on stock and real estate transactions and on exports of textiles and electric machinery."
Anna Schwartz interview
In an interview with the Wall Street Journal (Oct 18, 2008), economist Anna Schwartz warned that the Fed's response to the current financial crisis in inappropriate. She commented that the Fed is acting like the problem is about a lack of money to lend (which is what led to the Depression). The real problem, she says is "the lack of faith in the ability of borrowers to repay their debts."
The Fed keeps throwing money at the issue and meanwhile, the "banks don't know who is still solvent and who is not."
Secretary Paulson's move away from buying bank assets and toward directly recapitalizing them, means a shift from "trying to save the banking system to trying to save the banks." Rather than keeping badly managed and capitalized banks afloat, they should be allowed to fail so that healthy banks can prosper.
Letting Lehman Brothers fail was the right thing to do, but by then the government had saved so many others, "the markets didn't know how to react. Instead of looking principled, the authorities looked erratic and inconstant."
Hong Kong bankers appear to agree with Ms. Schwartz. The Wall Street Journal reported (Oct 18, 2008) that they will buy the Lehman Brother derivatives (known in Hong Kong as minibonds). The public is angry about the move and the bankers are using independent auditors to determine the market value of the minibonds.
But the minibonds are assets, no matter how bad they are, they are still assets. This should allow the strong banks in Hong Kong to move forward even if the weak ones won't.
The Fed keeps throwing money at the issue and meanwhile, the "banks don't know who is still solvent and who is not."
Secretary Paulson's move away from buying bank assets and toward directly recapitalizing them, means a shift from "trying to save the banking system to trying to save the banks." Rather than keeping badly managed and capitalized banks afloat, they should be allowed to fail so that healthy banks can prosper.
Letting Lehman Brothers fail was the right thing to do, but by then the government had saved so many others, "the markets didn't know how to react. Instead of looking principled, the authorities looked erratic and inconstant."
Hong Kong bankers appear to agree with Ms. Schwartz. The Wall Street Journal reported (Oct 18, 2008) that they will buy the Lehman Brother derivatives (known in Hong Kong as minibonds). The public is angry about the move and the bankers are using independent auditors to determine the market value of the minibonds.
But the minibonds are assets, no matter how bad they are, they are still assets. This should allow the strong banks in Hong Kong to move forward even if the weak ones won't.
Friday, October 17, 2008
It's a wild ride - and the Japanese feel like buying
Yesterday, Japan's Nikkei stock index fell 1,089 points or 11.4 percent, which was the largest drop since 1987. Today it gained 235 points, or 2.78 percent. The final number was just over 8,693. A few weeks ago the index was over 12,000. Investors know that the stocks are undervalued and there's bargains to be had, but just like everywhere, they are a little scared to jump in.
Citing the need to help take the edge off high fuel prices for farmers and fishermen, the Japanese parliment approved US$18 billion (1.8 trillion yen) to partially finance an economic stimulus package. Japan had actually crafted this stimulus proposal in August before the US financial crisis hit.
The general consensus is that Japanese investors are calm, concerned, but calm. And they are feeling good because they have a lot of money. Estimates put domestic household financial assets at $15 trillion, and half of that sits in bank deposit accounts. The Japanese are among the world's biggest savers and now they are thinking about buying.
Some Japanese politicians are suggesting that Japan invest in U.S, troubled assets. Japan has a great deal of cash, and obviously, the U.S. does not. The idea was couched in the terms of helping a needy ally. Of course, they would profit by holding the assets long term, especially after scooping them up at fire sale prices.
The Daily Yomiuri reported that the private sector was already on a buying spree. "Nomura Holdings bought the Asian and European divisions of failed investment bank Lehman Brothers. Mitsubishi UFJ Financial Group completed its US$9 billion purchase of a 21 percent stake in Morgan Stanley this week."
Citing the need to help take the edge off high fuel prices for farmers and fishermen, the Japanese parliment approved US$18 billion (1.8 trillion yen) to partially finance an economic stimulus package. Japan had actually crafted this stimulus proposal in August before the US financial crisis hit.
The general consensus is that Japanese investors are calm, concerned, but calm. And they are feeling good because they have a lot of money. Estimates put domestic household financial assets at $15 trillion, and half of that sits in bank deposit accounts. The Japanese are among the world's biggest savers and now they are thinking about buying.
Some Japanese politicians are suggesting that Japan invest in U.S, troubled assets. Japan has a great deal of cash, and obviously, the U.S. does not. The idea was couched in the terms of helping a needy ally. Of course, they would profit by holding the assets long term, especially after scooping them up at fire sale prices.
The Daily Yomiuri reported that the private sector was already on a buying spree. "Nomura Holdings bought the Asian and European divisions of failed investment bank Lehman Brothers. Mitsubishi UFJ Financial Group completed its US$9 billion purchase of a 21 percent stake in Morgan Stanley this week."
Understanding the global crisis
Here are some great news stories that piece together what's been happening globally and how the dominos started falling.
Fed, ECB, Central Banks Cut Rates in Coordinated Move ... The Fed, ECB, Bank of England, Bank of Canada and Sweden's Riksbank each reduced their benchmark rates by half a percentage point. The Bank of Japan, which didn't participate in the move, said it supported the action. Switzerland also took part. China's central bank separately cut its key rate 0.27 percentage point.... http://www.bloomberg.com/apps/news?pid=20601087&sid=aKj1Uvn3ofpo&refer=home
Agency’s ’04 Rule Let Banks Pile Up New Debt ... Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.
On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks... http://www.nytimes.com/2008/10/03/business/03sec.html?ei=5070&emc=eta1
Pressured to Take More Risk, Fannie Reached Tipping Point ... An inside account of the critical juncture when Fannie Mae’s new chief executive, under pressure from Wall Street firms, Congress and company shareholders, took additional risks that pushed his company, and, in turn, a large part of the nation’s financial health, to the brink.... http://www.nytimes.com/2008/10/05/business/05fannie.html?pagewanted=4&em
Swedish Spoken Here ...… Even though the dollar has strengthened a bit lately, we are going to need foreigners and sovereign wealth funds from China, Asia, Europe and the Middle East more than ever to survive this crisis — and they are going to need us to be healthy as well. In the process, we are going to become even more intertwined and dependent on the rest of the world.... http://www.nytimes.com/2008/10/05/opinion/05friedman.html?em
Fed, ECB, Central Banks Cut Rates in Coordinated Move ... The Fed, ECB, Bank of England, Bank of Canada and Sweden's Riksbank each reduced their benchmark rates by half a percentage point. The Bank of Japan, which didn't participate in the move, said it supported the action. Switzerland also took part. China's central bank separately cut its key rate 0.27 percentage point.... http://www.bloomberg.com/apps/news?pid=20601087&sid=aKj1Uvn3ofpo&refer=home
Agency’s ’04 Rule Let Banks Pile Up New Debt ... Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.
On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks... http://www.nytimes.com/2008/10/03/business/03sec.html?ei=5070&emc=eta1
Pressured to Take More Risk, Fannie Reached Tipping Point ... An inside account of the critical juncture when Fannie Mae’s new chief executive, under pressure from Wall Street firms, Congress and company shareholders, took additional risks that pushed his company, and, in turn, a large part of the nation’s financial health, to the brink.... http://www.nytimes.com/2008/10/05/business/05fannie.html?pagewanted=4&em
Swedish Spoken Here ...… Even though the dollar has strengthened a bit lately, we are going to need foreigners and sovereign wealth funds from China, Asia, Europe and the Middle East more than ever to survive this crisis — and they are going to need us to be healthy as well. In the process, we are going to become even more intertwined and dependent on the rest of the world.... http://www.nytimes.com/2008/10/05/opinion/05friedman.html?em
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