Goldman Invests In Sumitomo Mitsui Bank


TT's Take For Japanese banks, the watering down of Koizumi Administration's Financial Revitalization Program (FRP) was a tactical victory.
However, the major banks are running out of time regarding two government requirements, and are worried about the still-noticeable "bite" of the FRP.


1) In spring 2001, the government urged the major banks to clean up their NPLs within two years on loans to borrowers at risk of bankruptcy or worse.


2) An additional policy accounced last October called for the bnaks to cut their ratio nonperforming loans (NPLs) to total loans by half by FY2004.


In addition, the Japanese banks are increasingly worried about the impact of the tougher bank inspection system put in place by the FSA.



a) The FSA now has greater authority to force the banks to accept the FSA's inspection results, and the banks will be forced to boost loan-loss provisions if the FSA inspectors say they need to.


b) Loan classifications for each borrower will be harmonized among the banks, most likely toward the more stringent assessment.


c) The FSA will strongly urge (and apparently back this up with administrative guidance) the banks to adopt discounted cash flow valuations for lower quality loans to their largest borrowers, covering some JPY15 trillion of outstanding loans.


Under the stricter assessments, the banks could well be forced to raise their current NPL loan-loss ratios from 15%-20% to 23%-40%, or accelerate complete write-offs (removal from the balance sheet), i.e., working to recover the loans and selling off the collateral, simply forgiving the part of the loans for which they have already taken loan-loss reserves, securitizing the loans and selling them to investors, or selling the NPLs to the Resolution and Collection Corporation (RCC). They have already disposed of a total JPY4.3 trillion in the first half to September 2002, but will not be able to achieve full year targets set by the FSA unless loan disposals are accelerated further. Their ability to do so is hampered by the fact that they their unrealized stock holdings (for the major banks) have rise to JPY5 trillion with the continuing slide in stock prices, and they are still under pressure from the FSA to continue lending to small and medium-sized firms, the outstanding loans of which already account for the majority of their loan books.


The major banks apparently have run simulations using the new assessment framework and have come up with the same conclusion; "we need more capital" to, a) dispose of additional NPLs, and b) ensure that they would not suffer the embarrasement (and possible loss of job if Mr. Takenaka has his way) of additional infusions of public money. The new Industrial Revival Corporation ostensibly will give the banks a break by buying up NPLs at prices significantly higher than the RCC, and work with each borrower's main bank to revive the target company in three years. But the IRC will not be ready by March, and April-June is looking like a more realistic time-frame.


Goldman, Merrill and other foreign investment banks for their part see their investments as a way to lever into what looks like a growing business for distressed assets in Japan. Standard & Poor's view the preferred stock investment as a large credit exposure for Goldman, but "expects it to be at least partially hedged". Moreover, while on the surface it may appear that Goldman is returning the favor for a previous investment by Sumitomo in Goldman, Goldman will be well-compensated for its risk, with a 25-year fixed dividend yield of 4.5%, versus the 1.5% dividend yield the Japanese government gets on its holdings of preferred bank stock. This has to make the government a little more than unhappy.


Indeed, Mr. Ito, senior vice minister in the Cabinet Office for financial services, has commented that "business plans submitted by the major banks will not be approved if they contain only cosmic reforms and do not focus on financial soundness"--i.e., rather than superficial reforms, the Koizumi Administration would like to see the banks implement more enduring structural reforms. The FSA uses a "Three S" approach; strategy, soundess, and sincerity. Thus a clever plan (to boost capital ratios) may not cut the ice with the FSA.

Growth In Japan's Money Supply Wanes, As PM Koizumi Looks for an "Deflation Fighting" New Governor


Japan's money supply growth eased to its slowest pace in nearly two years in December, showing the economy continues to deflate and underscoring the tough job ahead for the Bank of Japan's next boss. Growth in broad money supply slowed to 2.2% from 3.2% in November, the slowest year-on-year expansion since January 2001, the BOJ said Tuesday. The weak figure surprised most economists, who had expected growth to hold roughly steady at 3.1%. Prices continue to fall relentlessly and banks, struggling to clean up their books and faced with dwindling demand for new funds from debt-laden companies, are cutting back on lending. Bank lending fell 4.4% on year in December, the 60th straight monthly decline, the BOJ said.

Economy and banking minister Heizo Takenaka kept the heat on the BOJ Tuesday, "We recognize the need for a more expansionary monetary policy," Takenaka said in a lecture at the Australian National University in Canberra. "Of course we understand this monetary policy should be decided independently by the central bank." But the selection process "has yet to reach the final stage, and we still have a long way to go," Hayami told reporters Monday after he attended a meeting of central bankers at the Bank for International Settlements in Basel. Moody's Investors Service Inc. Tuesday lent indirect support for an aggressive stance by the BOJ's next chief, welcoming calls for inflation targeting from policymakers such as Takenaka. The ratings agency said the "more unorthodox approach" of the Finance Ministry and the Liberal Democratic Party "goes far beyond the response to deflation of the BOJ, which itself has become increasingly aggressive, but has stopped short of such measures."

(TT's Take) The data show the BOJ's efforts to inflate the economy are having little effect. The BOJ has flooded the financial system with cash under its "quantitative easing" policy since March 2001, gradually ratcheting up its excess-liquidity target and its purchases of Japanese government bonds. This has domestic politicians, the Koizumi Administration, and foreign observers demanding ever more aggressive measures, such as declaring an inflation target or buying other assets, including foreign bonds. Meanwhile, market yields on JGB's continue to hit new lows on an institutional investor flight to safety and a dearth of alternative investments in which to park the excess cash being created by the BOJ. This looks very suspiciously like the classic liquidity trap.


The question is whether a serious effort to break out of this trap will kill Japan's bond market and cause even greater capital losses. Bond yields presently continue to hit new lows as the liquidity pools up in the bond market, and investors expect even more purchases of JGBs by the BOJ, but if there is any chance whatsoever that an aggressive BOJ and efforts by the Koizumi Administration can even slightly affect inflationary(deflationary) expectations, the bond market is due for a nasty tumble.

Yahoo Singapore

Japanese Bureacrats Scramble for Taxes, Wherever they Can Get Them


Golf is an expensive game to play in any country but particularly so in Japan, where greens fees remain among the highest in the world, despite the substantial decline in the prices of golf club memberships during the Heisei Malaise. Ever the introduction of an JPY800 "green tax", golfers have contended that the tax unfairly singles out one sport, and is levied on top of the consumption tax that they also pay. Two taxes in addition to a hefty outlay for the greens fees made for a princely wad of cash, they complain. The argument has backfired on golfers. Local governments reason that anyone who can afford to pay exorbitant greens fees in the first place shouldn't be quibbling over an extra 800 yen.

When it was suggested that this tax be droppe, the nationwide local tax committee-a body whose members include the general affairs directors of every prefecture in the country-went so far as to mount a poster campaign advocating the continuation of the tax. It looks like there may be extra holes to play before a winner is declared.
Nationwide revenues from the tax exceed 80 billion yen-70 percent of which is redistributed to cities, towns and villages that have golf courses. The home affairs ministry estimates that by waiving the tax in the aforementioned cases, local government coffers will be deprived of 8 billion yen annually. Seething, the Japan Golder's Association is saying it was absurd to display posters promoting the tax next to (their) petitions that called for the abolition of the tax. The JGA and other groups have collected about 8.4 million signatures protesting the tax.


(TT's Take) Tax or no tax, tax revenues from local golf clubs are declining, simply because they are going bankrupt in droves, and could well continue doing so for the foreseeable future. The price of golf club memberships can be considered a proxy for property prices, and if that is any indication, property prices in Japan will continue to decline for the foreseeable future.

Asahi.com