When the Going Gets Tough for the Banks--You Guessed It! The Government Changes the Rules


One of the "artificial" deadlines that has ostensibly been a driver of accelerated bank selling of holdings of stock has been the rule--to be implemented from September 2004--that Japanese banks must reduce their holdings of stocks to below their stated core capital. As of September 2002, the four major bank groups had stated capital of JPY13.5 trillion, versus JPY17.15 trillion of stock holdings. These stock holdings are of course worth less now, because Tokyo stocks are down by some 11% since then, meaning the JPY17.15 trillion of stock holdings in September of last year is more like JPY15 trillion and change, and what once appeared as JPY3.6 trillion of potential selling pressure is now down by about half...


Then the Bank of Japan stepped in to purchase JPY2 trillion of stock from the banks, and the government is considering allowing the corporations to return the portion of corporate pensions managed for the government's Welfare Pension Fund back to the government in the form of shares rather than cash (which would necessitate the sale of shares). This notwithstanding, the LDP is making noises about relaxing the requirement for the banks to keep their stockholdings to within their stated capital.
The aim of course is to allow the banks to limp through yet another March reporting period without having to report accounting losses--either through the forced sale of unprofitable equity holdings, or through valuation losses on equity still held.


TT's Take this could be yet another "trial balloon" floated by the LDP to "verbally intervene" in the stock market and to get a higher print on the closing day of the fiscal year. As of Feb. 28, the BOJ was the proud? shareholder of JPY831 billion of stocks bought from the banks. Nevertheless, bank stock prices have plunged as they rushed to announce new capital increases to ostensibly fund more aggressive NPL write-offs--stock that investors don't really want. Moreover, the amounts of funds procured are but a drop in the bucket compared to the amounts of NPLs they have to write off. So what has largely been accomplished by this round of capital increases is to show the FSA they are "sincere" in reducing their NPLs while trying to bolster their reported capital bases, but at the same time, a slam-dunking of bank stock prices. Why anyone besides a reluctant business partner to one of the major banks would like to buy a bank stock in Japan is beyond me....

Now Company Returns of Pensions Managed For The National Welfare Pension Fund Are A Source of Stock Selling


The stock market in Japan continues to crumble under structural selling of stock--i..e, the reason the market continues to fall is simple. There are more sellers than buyers. Since the bubble burst, domestic institutions have taken every chance they could to unload holdings of stock--for various reasons--but with the same effect, i.e., push down stock prices.


For the last several years, the Japanese stock market has stumbled from crisis, to near-crisis, to would-be crisis, while continuing to renew new pos-bubble lows. The unwinding of stock holdings by the banks has long been seen as a structural problem, ostensibly offset to a certain extent by purchases by non other than the Bank of Japan of their stock holdings--to the tune of JPY2 trillion. However, as soon as the government comes up with an idea to ostensibly help support stock prices, the side-effect of a policy implemented previously comes back to kick the stock market in the teeth.


This time, it is the return of funds managed on behalf of the National Welfare Pension System by company pension fund programs. Companies lobbied for an obtained basic permission to do this from the government. Of the 1,700 corporate pension funds in existance in Japan, some 358 of them have already received permission to return the Welfare Pension portion of their employee pension funds back to the government. These returns are beginning to show up in the buying trend of the Trust Banks. While consistent net buyers over the past several years as the keepers of the nation's pension funds, the Trust Banks have been net sellers for the past four weeks, since the first week of January. But the real wave of this selling could come after the new fiscal year, which begins April 1, 2003, and could reach as high as JPY2-JPY4.5 trillion--i.e., more than offsetting the purchases of stock by the BOJ from the banks. In looking at the average portfolio holdings of the trust banks, one finds a high proportion of holdings in the electricals, pharmaceuticals and machinery sectors.


TT's Take: For most of the Heisei Malaise, structural net selling by the banks, insurers and individuals (through the redemption/cancellation of investment trusts) has been the main reason for lower stock prices, while purchasing by foreigners and trust banks has been a main reason supporting stock prices. Foreign investors are now net sellers (by a record amount last year) and now trust banks have turned net sellers as well. Despite all the hope for vulture "hagetaka" funds and private equity to act as a force for good in restructuring Japan's troubled companies, the reality is that no one whats to buy stocks for the "retail" price--i.e., the price that is quoted on the stock market. If some one tries to procure capital in this environment--such as the major banks are trying to do just now--the result is less than a zero sum. I.e., investors are selling something for every new stock they buy, while the amount of money in the stock market itself continues to shrink--not only through falling market values, but also through incremental leakage of funds into fixed income and foreign investments.