Land Prices Fall to 1982 Levels


The Japan Real Estate Institute found that nationwide land prices at the end of March fell to levels not seen since March 1982, and were 45% down from September 1991 peaks. Land prices in Japan have fallen continuously for 11.5 years. Land prices in the six major cities have fallen 73.5% from their September 1990 peaks.


(TT's Take) There are no signs that the decline in land prices as a whole is abating. Indeed, nationwide land prices fell by 3.7% in March compared to September the previous year, and 7.1% from the year before. This of course negatively affects the collateral value of loans held by the banks, and causes a negative equity situation for individual home owners, where the remaining value of the long-term loans they took out to buy their house during the bubble years is now worth less than the remaining value of the loan (especially for condominiums, which depreciate faster).

Japan Real Estate Institute Graph

Japanese Investors Discover Corporate Governance


As Japanese companies gear up for their annual shareholder meetings in June, the stance on corporate governance adopted by the Pension Fund Association is expected to have a particularly widespread influence.The PFA has about 200 billion yen in stocks under its discretionary management, and has established an internal set of standards to guide how it exercises the voting rights on its shareholdings. The aim of the guidelines is to raise shareholder value by exerting closer checks on company management, thus improving the returns of pension plan members.The Pension Fund Association advocates reducing the size of company boards and raising the number of independent directors to at least a third of board members. Under its voting guidelines, the association will vote against board reappointments and bonuses if a company has posted consolidated net losses or not paid a dividend for three years running, or has a total loss when results over the most recent five-year period are added up. According to one estimate, roughly 550 companies, accounting for just over a third of the TSE's first section, would be red-flagged under the association's five-year test.


The Government Pension Investment Fund now also has corporate governance voting guidelines and expects the asset management companies who manage money for them to not only vote the proxies for stock held by the GPIF but also report back to them how they voted. This has pushed asset management companies into the game of corporate governance as well. For example, Meiji Dresdner Asset Management Co. has launched a special project team tasked with investigating the state of corporate governance. Focusing on a group of some 50 important companies, the project team has been interviewing board members directly to try to get an inside view of how effectively corporate governance is functioning.


(TT's Take) While Japan's biggest public pension funds begin to realize that it is their fiduciary responsibility to vote their proxies, the sector with the most blatant "moral hazard" to corporate governance--the major banks--has seen no shareholder revolt, despite destroying massive amounts of shareholder capital over the last four years, in addition to causing losses to the government on preferred shares purchased in prior capital infusions. Some observers will suggest that the corporate governance of the banks' has been provided by the government, such as the FSA. But the greatest travesty has been that Japan's major banks, with their large historical cross holdings in corporate Japan, were once the de-facto corporate governors of Japanese corporations. Where have their shareholder's been during all of this capital destruction?

Federal Reserve Board Governor Ben Bernanke Perscribes Inflation Targeting for Japan


Ben Bernanke has emerged as the FED's point man on deflation. Many economists in Japan and abroad argue that a target for achieving a certain rate of inflation should be used to fight deflation. To raise prices to the targeted level, the government should implement more active fiscal stimulus measures, including tax cuts, while the BOJ should increase government bond purchases by an amount matching the tax reduction so as to make it easier for the government to issue new bonds, Bernanke was quoted as saying. Increased bond purchases, however, would expose the central bank to increased interest rate risks, sniffed the Nikkei. When asked about this, Bernanke said he is interested in an idea proposed by the Japan Business Federation that would see the BOJ's government bondholdings converted into those with floating rates.


(TT's Take) What Bernanke didn't say in Japan but has been quoted elsewhere (e.g., in Business Week), was that he saw the principle reason for Japan's failing to cure deflation as the reluctance of the country's ruling coalition to fully cleanse the banking system and corporations of their bad debts through massive write-offs. Once deflation has taken hold, Bernanke would crank up the monetary printing presses, expand the scale of assets purchased by the BOJ, make low-interest loans to the banking system via the discount window, collateralized by a variety of private assets like corproate bonds, and even purchase foreign bonds, thereby engineering a weak currency. All of these, it seems are considered too radical by the BOJ, and in the Japanese government.

Financials at Japan's Life Insurers Continue to Deteriorate


A big chunk of Japan's infamous personal financial assets (which have now dipped below JPY1.4 quadrillion) are in life insurance policies. Policies in force, a measure of total business volume, similarly fell for the sixth consecutive year at seven of the 10 largest life insurers -- Nippon Life Insurance Co., Dai-Ichi Mutual Life Insurance Co., Meiji Life Insurance Co., Yasuda Mutual Life Insurance Co., Sumitomo Life Insurance Co., Mitsui Mutual Life Insurance Co. and Asahi Mutual. The general trend among Japan's largest life insurers has been a slow implosion in business, profits and customer trust.


The 10 companies' stock portfolios shrank from an unrealized profit of 1.8 trillion yen a year earlier to a loss of some 380 billion yen. Together, the companies shouldered one-time losses of 1.7 trillion yen on stockholdings that shrank by 50 percent or more from their book value. Insurers are being slowly squeezed as investment returns fail to keep up with the payouts they have promised policy holders. The gap the 10 insurers had to bridge widened to 2 trillion yen last year. The cumulative losses on this "inverse yield gap" have reached JPY10 trillion.


(TT's Take) Two of the three biggest depositories of Japan's personal financial assets--banks and insurance companies--are in serious trouble. But for savers who have locked in on high promised insurance policy yields of past years (4%-5%), cashing in their policies now would mean they would have to accept near-zero returns on their savings, or the risk of losing their capital--in addition to losing life insurance coverage. The government is trying to nurse the insurance companies back to health by giving them the option to lower their guaranteed yields on insurance policies, but the life insurers are resisting, knowing that by lowering their promised yields,they could very well lose even more customers, as they would effectively be admitting they are in financial trouble. Thus it is a big "gamman taikai" (contest to see which life insurer can withstand the most drain on their assets from inverse yield gaps) as they pretend they are in good financial health. Cross-gearing with the banks only increases their exposure to market risk, as the banks, as was shown with the Resona bail-out, effectively have no "real" capital left. This cross gearing effectively means that if a big bank goes under, it could well drag a life insurer with it. Thus the Koizumi Administration (and the FSA), while they would dearly like to clean up the mess as soon as possible, are finding that massive government support may be the only way to negotiate this mess without pushing the Japanese economy into a deflationary spiral and depression.


Japan Times