Road Front Property Prices Continue Historic Decline

The average price of land on main streets in Japan was 121,000 yen per square meter as of Jan. 1, down 6.2% from 12 months earlier, for the 11th straight year of decline, according to the National Tax Agency. The rate of decline is down only slightly from last year's 6.5%. Property values assessed by the National Tax Agency lag actual property prices by a significant margin, but other surveys indicate the same--i.e., continued deterioration in Japanese property prices as a whole.



Selected areas of Tokyo managed to buck the downtrend with large new urban renewal projects, accompanied by a flurry of construction and popular shops selling luxury goods. But price declines accelerated in 32 of the nation's 47 prefectures where the Heisei Malaise continues to deepen. The situation outside of Tokyo is like night and day. In Tokyo, a piece of land in front of stationery store Kyukyodo in Tokyo's Ginza district continues to be the most expensive in the country for the 18th straight year ,at 12.72 million yen per square meter, and rising for the third straight year. On the other hand, prices in outlying regions such as Nagasaki Prefecture fell 10.8%, and Tokyo saw land prices as a whole fall 2.6% on average.


TT's Take The good news for selected properties in Tokyo is bad news for rents, where the polarization continues. Sleek new building complexes such as Roppongi Hills are actually cannibalizing office space in older, less ideally placed buildings. The Roppongi Hills complex, developed by the Mori Building group, in reality is cannibalizing space currently rented by firms such as Goldman Sachs in aging "trophy" buildings such as Ark Hills. Thus vacancy ratios in Tokyo continue to rise, especially in the central districts, and for outlying small, older buildings, space is becoming virtually unrentable.

JGB Yields Back Below 1.0%

10 year JGB yields have again slipped below 1.0% versus a 1.4% rebound high, as foreign buying and heavy trading volumes that represented the recent "buying panic" in Japanese stocks have abated, and despite the news that Japan's GDP in the April-June quarter grew by an annualized 0.6%. If this is a recovery, it is characteristically (for the Heisei Malaise) weak.


(TT's Take) While JGB yields, along with other global bond markets, backed up sharply as overly bearish sentiment regarding stock markets and the US economy were revised toward a more sanguine view, they could increasingly begin to delink from the move in the US. For one, the Nikkei 225 has backed off the 10,000 mark and is slowly breaking down technically. For two, assuming that the upbeat news we are recently seeing in Japan is indeed a weak recovery, what is the appropriate JGB yield, given; a) current demand for funds, and b) ongoing financial fragility and bankruptcy risk? As the stock market spiralled ever lower and the government and the BOJ became ever more desperate to stem accelerating deflation, economic socialism has encroached ever further into Japan's financial markets.


For one, the BOJ remains a heavy bond buyer, purchasing a whopping JPY1.2 trillion of bonds a month. For two, they until recently had been the buyer of last resort for stocks, purchasing upwards of JPY1.5 trillion so far of a total quota of JPY3 trillion. Thirdly, they have made massive interventions in the currency market, at unprecedented levels exceeding JPY9 trillion, not to mention the record amount of funds (upwards of JPY25 trillion) they have left in the money markets to provide abundant liquidity to support the banks and their struggling borrowers.


If the situation were as rosy as stock prices and bond prices have recently been suggesting, the BOJ would not only begin backing away from direct asset purchases of stocks, but also from the bond market and the money markets. This would undoubtedly cause serious withdrawal pains in all the financial markets--i.e., JGBs, stocks and the Yen-Dollar exchange rate. Thus we are not even approaching the initial stages of a "normalization" of Japan's financial markets.

NPLs at Japan's Banks Shrink JPY7.7 TRillion

The FSA has reported that the outstanding balance of bad loans held by Japan's 131 banks totaled 35.3 trillion yen as of March 31, down 7.9 trillion yen from the previous year for the first decline in three years. The balance of soured loans incurred by 13 major banking groups or banks fell a sharp 7.7 trillion yen to 20.7 trillion. The agency said the figures were calculated on the basis of standards under the financial revitalization law.


On the other hand, the balance of bad loans for 118 regional and second-tier regional banks came to 14.7 trillion yen, down a mere 0.2 trillion yen, apparently due to slumps in regional economies.

(TT's Take) Kudos for the improvement go to the FSA and the Financial Revival Program initiated by Heizo Takenaka last October. The banks were pushed kicking and screaming into the write-offs. As pointed out many times in the past, while the banks may be nearer to surmounting the big hump in NPLs, they remain dangerously thinly capitalized because of the use of DTAs.


Last December, when Sovereign Asset Management began to take a position in UFJ Holdings, there was a case to be made for a punt in the beleagured bank, as UFJ's stock price had imploded by some 90% since May 2001, compared to a 60% plunge in the Topix banks index and a 45% fall in the Topix. Their buying, plus short sellers flattening their position, made the rally in UFJ's stock. But while UFJ may not be the worst off of the major banks, it appeared to "delink" from the Topix banking sector index in December 2001, and still trails the sector index by some 30%. Thus investors remain wary of UFJ's relative position, even though the bank ostensibly is trying harder with their IR efforts.

Financial System Council Ducks DTA Issue

The government's Financial System Council agreed today on a proposal to introduce a new bail-out system to allow infusions of public money into a selected bank without having to declare a "financial emergency"--but they ducked the issue of deferred tax assets (DTA)--i.e., more stringent guidelines have been put off indefinitely. The FSA has already put the banks on call that it expects them "to comply or explain" with the restructuring plans they promised when they received prior infusions of taxpayer capital.


The government has also passed legislation to enhance the role of the Bank Shareholding Purchase Corporation, and as a result, the Bank of Japan is considering dropping their program of buying stocks held by the banks, purchases of which have already reached JPY1.506 trillion, of a ceiling of JPY3 trillion.


At the same time, the government passed legislation allowing the life insurers to unilaterally lower the promised (contracted) yields on insurance policies already written, ostensibly as a measure to save life insurers on the verge of bankruptcy.


(TT's Take) The regulatory agencies (Standard and Poor's) said that they would consider any insurance company that takes such action i(to lower promised policy holder returns) in "default" on the obligations. In addition, the issue of DTA's has been shelved for the time being because the Koizumi Administration and the government apparently does not want to have to deal with the de-facto nationalization of another bank, namely, Mitsui Trust, whose DTA's at the end of the last fiscal year were essentially 100% of Tier 1 capital.


Japan's "shukanshi" (Weeklies) continue to point out that "there for the grace of God goes Mitsui Trust" in relation to the Resona Bank bail-out. They quote company insiders who are beginning to see the benefits of de-facto nationalization--"even if we are nationalized, management will not be arrested, and employees will not be fired--what's wrong with that?" Domestic "punters" trading through the online brokers were quick to realize the import of the Resona bailout--i.e., the 200-plus companies previously priced for bankruptcy were more likely to survive given the bail-out, and thus did not need to be priced for bankruptcy--just yet.


Perhaps the government's calculation was that Mitsui Trust (as part of an old "Zaibatsu" group) would be more problematic politically than Resona, even though the prior CEO of Resona thought he had political "clout" enough to prevent de-facto nationalization. For Mitsui Trust, there remains the possibility that they will be absorbed into the Mitsui Sumitomo Group, specifically, combined with Sumitomo Trust. For Sumitomo Trust, provided that Mitsui Trust's skeletons in the closet are not substantial enough to present a threat to Sumitomo Trust's viability, (Mitsui Trust's) investment trust marketing organization and (pension assets) under management are attractive...

With Stock Prices Out of the Danger Zone, FSA Resumes "Get Tough" Attitude

The FSA gave Mizuho Financial Group Inc., Sumitomo Mitsui Financial Group Inc., and rival banks until July 30 to explain their failure to meet profit goals imposed after 1999 in return for taxpayer-funded bailouts The deadline, contained in a letter sent yesterday to banks, calls on them to make a case to regulators detailing why they missed earnings targets. The seven-biggest banks posted combined losses of 8.7 trillion yen ($73 billion) in the past two years.


The seven big banks are now forecasting combined net income of 893 billion yen in the year ending March 31.
Japan transferred 8.6 trillion yen into banks in the three years starting March 1999, and encouraged a series of mergers that created Mizuho, Sumitomo Mitsui and UFJ Holdings Inc. Mitsubishi Tokyo Financial Group Inc., Japan's third-largest bank by assets, is the only one of the nation's major banks that doesn't owe money from the government bailouts.


The LDP old guard are still trying to insulate the banks from stricter governance by the FSA. Taro Aso, chairman of the policy research council of Japan's ruling Liberal Democratic Party, said on July 18 he will ``consider'' blocking compliance orders that may hinder efforts by banks to accelerate disposal of non-performing loans.


But forcing the biggest banks to cut by half the level of bad loans they hold by March 2005 is a cornerstone of economic reforms that Prime Minister Junichiro Koizumi's government has proposed to help pull the nation's economy out of a decade-long economic slump. Japan's seven-largest banks had 20.2 trillion yen of bad loans, or 7.2 percent of their total lending, as of March 31, 2003. That's down from 23.9 trillion yen six months earlier. Many of course think the actual number is higher.



(TT's Take) The banks and their supporters in the LDP were able to prevent the Financial Services Council from clarifying the issue of deferred tax assets (DTAs), ostensibly because other banks would also be declared insolvent if the DTA guidelines as applied to Resona were applied to other banks. So the "bait and switch" for the FSA is to push for the banks who already got infusions of public capital and have not paid it back yet (that's everybody except Tokyo Mitsubishi) to toe the line on their restructuring plans.