The economic cycle in Japan appears to be turning down, with industrial production peaking. Japanese...
The economic cycle in Japan appears to be turning down, with industrial production peaking. Japanese banks in the process of selling their Tokyo stocks have driven the market down to near 14-year lows. So why are banks reducing their holdings in stocks at what appears to be a low point in the stock market cycle? And why do they have so much of their capital tied up in volatile stock market implements?
Historically, Japanese industry coalesced into industrial groupings known as Keiretsu, where firms form a relationship by exchanging equity with one another (now referred to as cross holdings). The problem for banks began in the 1990s when property prices collapsed and left a swathe of bad loans. And, to add to this, many banks held more than half their capital assets in stocks and shares.
The quick-fix from the Japanese authorities was to come up with a system that enables banks to liquidate share portfolios without them coming out on to the market and damaging prices. Selling of equities by banks has led to some tit-for-tat selling by firms holding bank shares, but this appears to have caused few concerns in the market.
Cross holding selling has far greater implications than just depressing market prices, as it will alter the structure of Japanese industry. The existence of the special groups is threatened and perhaps it heralds the end of Japan's form of capitalism. The market will become more competitive as banks compete more aggressively for business across the market by offering better services. But investors are now left wondering whether the market correction has run its course and stocks have hit bottom.
Generally, markets bottom before authorities take recuperative action. This is tricky for Japan as interest rates are already low and banks are in no shape to lend and reflate the economy. One of the more interesting developments is the notching down in the value of the yen against the dollar. For much of the Clinton administration there has been a reluctance to allow the Japanese to de-value their way out of economic problems, but recently the yen has fallen through the ´110 level to ´118 to the dollar.
The willingness to accept change is being demonstrated as the politicians attempt to wrestle power from the bureaucrats in the biggest post-war shake-up in Japan's governance. Not only are civil servant numbers being reduced, but the number of ministries is also being cut from 23 to 13, and the power to formulate policy will be moved from the bureaucrats to the Prime Minister's office for the first time.
The first moves have been made to transform Japan into a more competitive capitalist economy. Tinkering with the over-supply of stock in the sector is not a solution, but a short-term fix. But at least this will give stocks breathing space before the long-term benefits in the governance of Japan and its economic management become apparent.
Les Jones is lead fund manager with CCS Japanese Growth Fund
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