Japan Between A Rock And A Hard Spot Part - II

"Only Solution Is To Dump U.S. Treasuries and Buy GOLD!"

June 27, 1997

It has recently been postulated by some media commentators that the Japanese government would be loathe to selling U.S. Treasuries, because "such a course probably would be regarded as a financial Pearl Harbor by U.S. monetary and political authorities." On the other hand there is the other school of thought, which takes issue with the aforementioned opinion. Specifically, Japan not only has good economic reasons for dumping U.S. debt paper, it has the moral obligation to protect the best interests of its own country.

In a recent statement to defuse the 'Hashimoto T-Bomb,' Secreatry of the U.S. Treasury Robert Rubin downplayed the importance of Bank of Japan's (BOJ) T-Bonds holdings. Mr. Rubin's remark in essence was to say, "no big deal, they only have about $200 billion of our paper." ...Not quite all the truth, Mr. Rubin!

In recent years Japan has amassed a disproportionate amount of U.S. dollars - due to the perennial export surplus with the rest of the world, especially with the U.S. The relentless flow of greenbacks to the Land of the Rising Sun has filtered to all segments of their economy. YES, MR. RUBIN, approximately $200 billion has flowed into the BOJ vaults - and have subsquently been converted into U.S. T-Bonds. HOWEVER, the OTHER 80% ($800 billion) was accumulated by the Japan's private sector - and subsequently invested back into the U.S. Secretary Rubin, surely you are aware large Japanese financial institutions (besides BOJ) - banks, trust funds, credit-unions, pension funds, life/health insurance companies - have been accumulating dollar assets FOR DECADES! They now hold over $800 billion in U.S. investments. Mr. Secretary, we are talking $1 trillion in U.S. investments - not a paltry $200 billion.

Both Japan's private and public sectors placed its accelerating export profits into the American bond market -- because it was lucrative -- and in their best interest to do so. During recent years this has not been a problem for the Land of the Rising Sun. However, all things change - particularly in the international investment world - where the only constant is change. Today, Japan is facing numerous and dire economic problems.

Dollar's Roller-Coaster Ride

The Dollar-Yen parity has been anything but stable in recent years - with a pronounced bias of the Yen strengthening versus the greenback. This has been an on-going problem for the Japanese. But up until the last couple of years, it was a managable problem. However, the burden of this pesky problem increases with the rapidity of compound interest. On the one hand the dollar continues to sink with more volatility - forcing the BOJ to spend hard earned cash to support and stabilize the dollar. Consequently, the BOJ is continually saddled with huge exchange rate losses. And while the falling buck continues its decline, Japan's industries are very hard pressed to remain competitive in world markets.

More Dark Clouds Looming on Japan's Horizon

You will recall the BOJ et al suffered devastating losses in their T-Bond portfolios during the latter part of 1993 and all of 1994. They caught it from both ends. As interest rates rose dramatically, bonds prices plummeted in concert with a rapidly declining dollar. Therefore, Japan was hit with a double financial-whammy: capital gains losses on the falling value of their T-Bond portfolio, AND exchange rate losses.

In light of recent months' declines in both the bond market and the U.S. dollar, it is not at all surprising that Japan's Prime Minister Hashimoto gave a premeditated and carefully worded warning that the U.S. better get its act together and start supporting the greenback. Mr. Hashimoto's comments are interpreted by some experts to mean he demands that the U.S. government take two important steps... NOW:

  1. Enter the FOREX market to stabilize the Dollar/Yen parity, and
  2. Raise interest rates.

It is painfully clear that Prime Minister Hashimoto will soon implement his ultimatum - namely, selling the BOJ's hoard of U.S. Bonds... AND BUYING GOLD WITH THE PROCEEDS!

To naively believe that Mr. Hashimoto might be bluffing is to be ignorant on how he became Prime Minister. Almost three years ago Mr. Hashimoto was Japan's chief trade-negotiator in the hard fought Trade-Agreements between both countries. In hammering out very favorable terms for his country, he established himself as a hard-line strong leader, able and willing to stand toe-to-toe with a Kantor or a Clinton (albeit without cowboy-boots). It was this impressive performance which catapulted him to being elected Prime Minister.

Experts Agree Japan Is forced to Sell U.S. Bonds

International financial exerts are also of the same opinion the BOJ has already started, or will soon be forced to start dumping Uncle Sam's paper.

"In light of Japanese Prime Minister Ryutaro Hashimoto's comments earlier this week, people will see this as a sign the Japanese are indeed selling," said Deutsche Morgan Grenfell senior currency strategist Marc Chandler.

Chris Turner, director of research at I.D.E.A., said Bank of Japan's foreign exchange data through May do not show any divesting of U.S. Treasuries. However, they reveal a sharp deceleration.

"Some central banks are sensitive to capital gains and would start selling Treasuries if they see a top. Others are sensitive to foreign exchange fluctuations," Turner explained.

"JAPAN might not be able to keep itself from selling massive amounts of U.S. government bonds. It just might not happen right away" - JOHN CRUDELE.

"What everyone is missing, and my friend Pete Peterson -- former Commerce Secretary and an expert on Japan -- pointed out to me is that Hashimoto and his successors will eventually have no choice but to liquidate U.S. government securities."

"Forget threats. Forget posturing. Forget every contorted explanation the spinners were able to come up with. Peterson says the sale of U.S. government bonds by Japan is inevitable."

Has the Process Begun?

It is this writer's considered opinion - based upon historical factors, Japan's dire needs, Hashimoto's well-earned reputation as a no nonsense negotiator-politician, and recent market action - that Japan has already begun to very carefully unload its crushing burden of U.S. Treasury paper. Furthermore, testament to the Japanese business acumen, I would be disappointed if they were not now INDEED accumulating gold in its current distribution phase.

WHO KNOWS, THEY MAY BE PAYING FOR THE GOLD IN A SWAP-DEAL FOR T-BONDS! This type of transaction would certainly prevent the bond markets from collapsing - which I am sure Japan does not desire.

Pure gold is so soft that a strong man can squeeze it and shape it.