Things seem to be looking up for Japan. The Nikkei is up 24% since its 6 February 10,000 low and the Topix banking sector is up 25%. But, a closer look and all is not what is seems
'Unprecedented' is a word this trade shies away from ' there is too much risk a finicky reader somewhere will trump you with a previous example of your case. But I'm tempted to break the rule as I watch the Tokyo stock market, especially those bizarre banking stocks. The Nikkei is up 24% since it hit that below-10,000 trough on 6 February, and the Topix banking sector is up 25%. The outstanding performer is Mizuho Holdings, the world's largest bank in terms of assets: it has gained 68% since the bottom last month and closed on Friday at ¥337,000.
I have seen ramping operations in Japan before, of course. But not in two decades of Japan-watching have I seen one this transparent, although somehow that does not seem quite the term. As anyone watching this spectacle knows, there is nothing in the market, the economy, or the direction of policy, to justify this kind of movement. This is by all appearances, and by nearly universal consent, a market in the throes of official manipulation. However, the indexes perform come 1 April, the end of the fiscal year and this run's probable 'sell-by' date (if you will), there are some grave conclusions to be drawn from this charade.
Gross domestic product was off by 1.2% in last year's fourth quarter, four times' the market's consensus expectation. Capital equipment orders fell in January by a record 16%, again, four times' the anticipated decline. Both bits of news have come in the past week.
As to the banks, they are now expected to add some ¥6.4 trillion ($49.5bn) to their load of bad debts. Promised inspections by the Financial Services Agency ' the results of which the government may now withhold ' could add ¥1 trillion to that figure. This comes amid a slowing in the pace of bad-debt write-offs and a decline in loan-loss reserves. As of 1 April, shareholdings must be marked to market, or carried on the books at their current price, rather than their original purchase price. This closes a trusty loophole that has distorted the picture for decades.
Enter the authorities, then, with new short-selling restrictions, penalties against foreign brokerages for short-selling infractions, computer glitches at the stock exchange that further the atmosphere of uncertainty, new rules requiring life insurers to submit needless paperwork as to their share-market activity. This is the stuff of the current rally. You can understand why. The generally accepted assumption is that a drop of 1,000 points in the Nikkei delivers to the banks a loss of roughly ¥2 trillion. J Brian Waterhouse, banking analyst at HSBC Securities (Japan), reckons Tokyo's 24% rally has probably reduced the banks' valuation losses by ¥3 trillion.
Christopher Wood, writing in his Greed & Fear newsletter, calls the market's run-up 'a tactical coup for the authorities.'' He adds: 'The equity market's rally means the Japanese banks should reach the fiscal year end without having to dump holdings of Japanese government bonds to make good mark-to-market losses on their equity holdings.''
The betting now is that this ridiculous rally will lose its air quickly after the start of the new fiscal year. In this connection, I like the February-March strategy summation Waterhouse suggests in one of his Japan's Crisis Response reports, a running series and an excellent read: 1. Appease Bush; 2. Buy time; 3. Survive March without crisis; and 4. Relax.
Neat enough, but it is well to look beyond the April flowers. This exercise does not augur well for the long-term future of the Tokyo markets. It comes not only amid the vaunted modernisation of trading systems, the regulatory regime, and so on. It is now clear enough that the financial authorities are prepared to use the new tools the modernisation process affords them precisely to preserve their bureaucratic prerogative. In the end, markets must be understood as having a cultural dimension. And if transparency means the stripping of culture from economic institutions ' a fair-enough definition ' Tokyo is many years away from achieving any. Better to recognise that the Tokyo financial markets are destined to resemble the political system and many other institutions in Japan in certain key respects: They will be modern in their mechanisms, but not in the way the mechanisms are applied. You will see up-to-date hardware, to put it another way, and software firmly rooted in the neo-Confucian tradition that is at the core of Japan's bureaucratic ethos.
There is also the matter of the banking crisis. Contributing to the rise in bank stocks, at least in the initial phase, were expectations of a bail-out package before the end of the fiscal year. There are a lot of dashed hopes now in this respect. 'In our view, public funds for banks is no longer part of the ongoing discussion,'' writes James Fiorillo, senior analyst for financials at ING Barings (Japan).
Anyone who bought the line that an injection of taxpayer funds was imminent deserves now to suffer the sharpest pangs of disappointment. 'They were never serious about declaring this a crisis,' Waterhouse reminds me. I'm sure Waterhouse is right, given the deep divisions within the government of Prime Minister Junichiro Koizumi. And I am sure Fiorillo is right, too ” Koizumi's ministers are simply not talking about it just now. They are no doubt looking forward to relaxing.
But let's not go too far the other way. Let's not forget, the International Monetary Fund (IMF) is still due to begin its financial system assessment programme, a thorough evaluation of Japan's banking sector, this June.
I'm told the people from the IMF, some of whom are already in Tokyo, take a dim view of the situation, and are likely to produce a document with a fearsome count of the bad-debt totals. Then the plot will thicken. 'The longer proactive reform on the banks is delayed,'' Christopher Wood ventures, 'the more likely it is that all Japanese banks are nationalised, not just some of them.''
That's my thinking, too. I think Japan is in for another of its learn-from-abroad exercises.
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