While much attention in the currency markets (and just about everywhere else) has been on the US and to a lesser extent, Europe, there are some odd moves afoot in Japan. Even as the yen heads south as the world’s second biggest economy flounders, it seems the Japanese government is having little success in persuading the country’s biggest banks to apply for government funds — or to boost lending.
If you are among the many Japan-watchers who believe nothing ever changes in terms of the power balance in Japan, witness the weekend spectacle of the finance minister, Kaoru Yosano, pleading with the big banks to tap about Y12,000bn ($125bn) of government emergency funds made available for capital injections. As the FT reports Monday:
“We’d like the main part [of the banking industry] to strengthen its capital base,” Mr Yosano said, referring to the Y12,000bn ($125bn) of public money available for capital injections and the central bank’s plan to provide major banks with Y1,000bn in subordinated loans. “The augmentation of capital to enhance lending is our appeal, something we‘d like [the banks] to do.”
So far, the only banks to ask for hand-outs – a relatively paltry Y121bn – are three small regional banks, Sapporo Hokuyo Holdings, Minami-Nippon Bank and Fukuho Bank.
The big three mega-banks, Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho, have all being raising capital in the form of preferred shares and securities. MUFG has also raised common equity. None, it would seem, want to tap the emergency funds being made available. And in the government’s eyes, none are lending as they should.
Their reluctance stands in stark contrast to the earlier days when the government was able to force banks to do anything it deemed suitable. This time around, the banks would rather avoid the government bail-out route with the associated complications and bureaucracy surrounding it.
In remarks that would have been unthinkable a decade or more ago, the head of the Japanese Bankers Association, Seiji Sugiyama, who is also chief executive of Mizuho Bank, said he would prefer banks to raise capital under their own steam:“To the best of our abilities we’d like to procure [capital] independently,” he said. “If economic conditions deteriorate even further, and the Nikkei average falls to below 5,000, then the situation will be difficult. The government is working on measures to prevent this from happening, and this is the most preferred route.”
As for Japan’s deteriorating economic climate – not to mention the downwards direction of the Nikkei average – the situation may well become “more difficult” and Sugiyama et al may have to change their minds.
As Yosano himself said on Sunday, Tokyo fears that Japan’s economy could shrink this quarter at about the same pace as the previous quarter, 3.2 per cent, and that a revision of the government’s fiscal 2009 GDP growth estimate of zero per cent was likely. If conditions did not improve significantly in the second half, warned Yosano, the annual contraction could reach levels of about 6 per cent, similar to the IMF’s recent estimate for calendar 2009 of 5.8 per cent negative growth.
As for the yen – last week’s move by the Fed to channel $300bn into long-term Treasuries (among other measures) and before that, by the Bank of England into full-on quantitative easing, as well as the Swiss central bank’s move to drive down the value of its currency, have fuelled speculation that the Japanese will also take the intervention route – formally or informally.
Already, the Bank of Japan is moving to spend about Y1,000bn on buying up corporate debt and has now massively stepped up its purchases of Japanese government bonds by about $4bn per month to Y1,800bn ($18bn) to boost liquidity in the financial system.
No Japanese officials wants to utter the initials ‘QE.’ But some analysts say the distinction is irrelevant, as the FT reports.
“The bank’s actions are boosting the monetary base and ramping up its balance sheet, which is QE in all but name,” wrote Julian Jessop, chief international economist at Capital Economics, in a research note quoted in today’s paper.
In a note late last week, SocGen strategist Albert Edwards, ever the yen-bear, saw potential for the Japanese to “enliven market events in the coming months” and reiterated his view expressed last month that the yen has now become a weak currency, ending a five-year period of acting as a funding currency for risk appetite (and vice versa).
From now, predicts Edwards, the yen will decline sharply, to Y110/$ in the first instance but very rapidly homing in on Y125/$1:
The Swiss have already enacted one of Bernanke’s classic cures for escaping deflation – namely intervening to lower one’s currency – and the yen will by either market forces or government action be pushed lower in an attempt to escape the disproportionately disastrous economic collapse they are suffering. And if Japan starts to export its deflation, the world better beware. The world’s second largest economy (by far) has lots of it to share.Meanwhile KBC strategist Jonathan Allum reminds us that the idea that Japan’s stock market should do well at a time of yen weakness is a “modern development” which dates back only to 2005:It has rather less than is popularly supposed to do with Japan’s dependency on exports than with the yen’s emergence as one of the major global barometers of risk tolerance/aversion. This role is alien to the yen and has been thrust upon it by the growth of the carry trade. If the carry trade has now all but disappeared, the yen will stop playing this part in the great global financial drama.
Related links:
Japan’s banks urged to tap public funds – FT
The US dollar, the Norwegian krone, and the ‘ugly contest’ - FT Alphaville
Game-changer for the euro, and a coming CHF bloc – FT Alphaville
Getting the IMF to take the heat – FT Alphaville
Ministers agree on need to boost IMF funds – FT
The Swiss franc factor - FT Alphaville
Swiss franc intervention – Short View
Swiss stoke fears of currency wars - FT
On your marks, get set, devalue – FT Alphaville