Titanic Deck Chair Bonds


The Japanese government has begun to sell 10-year floating rate bonds to individuals. The securities carry benefits regular bonds do not, such as guaranteed minimum interest rates even if yields plunge, and exemption from the 20% tax at source on interest payments and dividends.


TT's TakeMr. Shiokawa thought it was pretty neat that these bond issues are popular with individual investors. However, the government's attempt to directly tap the JPY1,400 trillion pool of individual financial assets will crowd out the very financial institutions they are trying to support. It's like robbing Peter to pay Paul. Individual investors in all likelihood will withdraw money from maturing deposits in the postal savings, or more likely, from time deposits at banks that no longer carry deposit guarantees. This would accelerate the flow of savings from the private sector to the public sector, which already is a problem. Moreover, encouraging individuals to buy bonds could well inhibit consumer spending, and it provides less incentive to buy stocks.


The Japanese government seems to think that this pool of individual financial assets and the nation's pension funds are a "cooky jar" they can dip into whenever they need to. Actually, the total value of Japan's pool of pension funds and individual financial assets has already peaked, sometime in mid-2001, and is now declining at around 3% per annum. As in the United States in the early 1930s, Japanese banks are perceived to face more than a trivial risk of default. When the economy is in a weakened position, and financial institutions (banks) are perceived to have a high probability of default, the market rate for what is perceived to be completely safe - and highly liquid - government securities could well be less than zero because of demand for "safe haven" funds. But as an individual, if the economy and financial markets are in that bad a shape, you might be better off holding your assets in gold or in other currencies where financial system risk was not so high.


(source: Bloomberg News, William Pesek)

Japan's Problems--Yawns at DAVOS?
Japan's problems reportedly drew little but yawns from participants in this year's World Economic Forum in Davos, while China's growing presence on the world economic stage became the center of attention.


This according to the Nikkei. Economy minister Takenaka did get up and pound the table promising that Prime Minister Koizumi would definitely cure deflation by expanding the money supply. He only stuck to Koizumi's new line by avoiding any mention of an "inflation targeting." PM Koizumi in fact has subsequently backed off of "inflation targeting". Other Japanese appearing on a Davos panel, seemed unable to make up their collective minds about whether deliberate inflation makes wise policy or not.


But most of those who attended the Japan session, Nikkei said, felt that the pace of change is too slow to deal with the problems. (TT's Take: "Its like watching paint dry") Is the real debate about Asia now centered not on Japan but on the growing Asian superpowers, China and India?


(TT's Take) For any age, the world's economic "critics" have their darlings, just like each stock market "bubble" has its darlings. Japan has definitely lost its "darling" status on the world stage. The Clinton Administration was pretty clear about their focus on China at the expense of Japan. Former president Clinton went to China with a cast of thousands and didn't bother to visit Japan. The Bush Administration however had a different view...that Japan was still important from a strategic defense perspective, even if they were frustrated by the lack of
progress in getting Japan's economy re-started. Increasingly, however, the "Japan passing" wave is growing. Japan is not newsworthy any more...it's SOS (the same old stuff). Media bureaus are leaving Japan, brokers are leaving Japan...while the vultures (those hoping to get something for a song) are circling...Yet the hermit kingdom-ites continue to pretend that it is business as usual, at least politically. This false sense of security is based on the fact that Japan is still the world's largest creditor nation, and therefore most of the ballooning debt is owed to fellow Japanese. Meanwhile, hundreds of trillions of yen has been lost in stock market capitalization without a lynch mob demanding someone's head, and the bureaucrats (the MOF, BOJ, FSA, etc), politicians , and companies continue to point the finger at someone else in a "soron sansei, koron hantai" charade. This has led some like Stanford University's Robert Madsen to term Japan as a "Game Over", even though the protagonists of this tragedy as yet do not realize it.