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Japan Between A Rock and A Hard Spot Part -VI

"Only Solution is to Dump U.S. Treasuries and Buy GOLD!"

August 25, 1997

The best description for the hypothesis of this essay is a paragraph borrowed from the internationally acclaimed Australian newsletter, THE PRIVATEER:

"If the Japanese are really in financial trouble - and they are - and if they were to sell their U.S. Treasury debt paper on the open market, the results would be catastrophic. If Japan sold their U.S. bonds on the open market, the results would be a diving U.S. Dollar, a big jump in long-term (30-year) bond rates - AND A CERTAIN DIVE ON U.S. STOCK MARKETS!"

WHY WOULD THEY SELL... you might ask?

Any reasonably analytical person would naturally want to know the reason why the Nippons want... indeed need to sell their burdensome load of U.S. debt paper. In essence it is simple common-sense. Japan is suffering serious financial problems. And like any person or entity in financial straits, you sell what you have the most of, and what is most liquid. Naturally, this is overly simplified - however, we must recall the Japanese are wallowing in more than $300 billion in Uncle Sam's IOUs. The Japanese own fully one-third of the U.S. debt paper.


Japan is Awash in Financial Scandal -

Nippon financial embarrassment is not a recent phenomenon - it started about three years ago, picked steam and momentum in 1996, and seems to be running flat-out in the current year. Let's review some of their financial fiascoes for the record.

Reliable Japanese sources estimate that their banking institutions have upwards of $400 to $600 billion of non-performing loans on the books - most of which are carry-overs from Japan's buying-spree a few years ago of international real estate. Recall that these cavalier purchases were for the most part bought with extended leveraged loans, collateralized with equities boasting price-earnings-ratios of 80 to 100 times. This writer wonders what impact will writing-off a large portion of the $400 to $600 billion in bad debts have on: the Japanese balance sheets, the Nikkei Average, and gold.

THE £5.6 billion bankruptcy of Nichiei Finance announced not too long ago is the biggest corporate collapse in Japan's post-war history. It is also another worrying sign that ALL IS NOT WELL IN THE LAND OF THE RISING SUN!

One of Japan's most worrying aspects is its capacity to surprise with unexpectedly negative developments. Last year Yasuo Hamanaka, the Sumitomo trader who once dominated the world's copper markets, was arrested in Tokyo and charged in connection with the $2.6 billion he lost in unauthorized trades.

Sumitomo, one of Japan's largest general trading companies, revealed that Hamanaka had been losing huge sums of money without its knowing for a decade. THE COPPER LOSSES WERE EQUIVALENT TO SIX YEARS OF SUMITOMO'S EARNINGS!

In early 1996 Daiwa Bank was fined $340 million by a New York court and thrown out of America after it was accused of hiding massive losses from bank regulators. The losses of $1.1 billion had been run up by Toshihid Iguchi, Daiwa's US treasury-bond dealing head, who confessed to making more than 30,000 undetected illicit trades over 11 years. His employers then compounded his offense by failing to report it for two months to the American authorities.

In August of last year another bank, the Long Term Credit Bank of Japan, was fined $1 million after New York regulators uncovered "numerous" bank-law violations. "IF AMERICAN REGULATORS KNEW ALL THE THINGS THAT GO ON INSIDE JAPANESE BANKS THEY WOULD PROBABLY THROW THEM ALL OUT OF THE COUNTRY," SAYS A JAPANESE ANALYST.

Then we arrive to 1997. Apparently, 1995 and 1996 were just preludes to the real symphony concert performance. Year to date it has been Financial Scandal Galore! In order not to bore you, this writer will only touch upon the major financial embarrassments - which are seriously undermining the public's confidence in Japanese financial institutions. Indeed, may well lead to "runs on the bank!"

An Unsure Insurance Industry -

In May, Japan's 44 life insurance companies lost a record $28.4 billion worth of business as thousands of policyholders suddenly lost confidence in the industry and began canceling policies. This followed the bankruptcy in April of Nissan Mutual, a large mutual life insurance company. Nissan posted loses of $250 billion in the first such failure since World War II. That's a big number indeed, reminiscent of our own S&L meltdown.

A Not So Secure Securities Industry -

In the last few weeks the entire Japanese securities industry has been racked with financial scandal - which involves the five largest securities firms in the Land of the (now) Setting Sun. These firms have the equivalent relative importance of Merrill Lynch, Prudential, Dean Witter, Goldman Sachs and Solomon Brothers -- literally, the giants of the Japanese securities industry. The following came from an Internet posting:

Yamaichi Chairman to step down. Chairman of Yamaichi Securities Company, will resign his Chairmanship of the Japan Securities Dealers Association in order to take responsibility for alleged illegal payoffs by his firm to a corporate racketeer, sources said. The organization will likely leave the post vacant for a while (writer's note: perhaps they cannot find someone untainted by all this scandal).

The Tokyo District Prosecutors Office raided the offices of the Big Four brokerage Wednesday morning seeking evidence of illegal dealings with the "sokaiya" extortionist. Nomura Securities Co. and Dai-Ichi Kangyo Bank are involved in similar scandals.

Yukihira assumed the position in March after Masashi Suzuki, then-chairman of Nomura Securities, stepped down from the post due to his firm's relations with the same racketeer.

The association has made it a practice to select its chairman from among the heads of the Big Four brokerages. That may end since Daiwa Securities Co. and Nikko Securities Co. are now being investigated by the Securities and Exchange Surveillance Commission in regard to allegations of similar sokaiya-linked wrongdoing.

All this has NOT gone unnoticed by the Japanese public. For weeks the Nikkei stock average has been sliding. And on Friday it suffered a whopping drop of 506 points, equivalent to a 2.65% decline. Perhaps this is the beginning of their Financial Tsunami.

God forbid, but this writer would be remiss were he not to mention that the Land of the Setting Sun is now in the height of earthquake season. One can only imagine what damage could be wrought in the financial markets by Mother Nature at this particular time.

Based upon considerable research I am obliged to conclude that indeed the looming Japanese financial crisis will have a negative tolling impact upon U.S. markets. The following is quoted from an article by Richard J. Maybury - as published in the U.S. & WORLD EARLY WARNING REPORT FOR INVESTORS (February 1996).


"A popular misconception in the mainstream media is that world financial markets have only recently become integrated to the point that events in far off lands affect U.S. investors. Few journalists study economic history, and therefore they do not realize the wave of bank failures that swept the U.S. during the 1930s was triggered by the failure of a bank in Austria. Banks then as now had borrowed and lent to each other, forming a global network of debt. When Austria's Kreditanstalt Bank could not pay its debts, it creditors could not pay theirs, and so forth in a domino effect ending with 4,004 U.S. bank failures in 1933 alone.

Japanese banks and investors hold hundreds of billions worth of U.S. IOUs (more than $300 billion U.S. Treasuries, and if they get into serious trouble they'll be dumping these bonds to raise cash. The value of the IOUs, from T-bonds to Junk Bonds, will crash.

For years this newsletter and many others have pointed to the Japanese bubble and said there is something rotten about the Japanese financial system. Now it's become common knowledge as seven of Japan's eight housing-loan banks have collapsed and many bank managers worry about prison."


This writer concurs with the above opinion. A
Financial Tsunami is looming on the horizon of the
Land of the Setting Sun.
It will wreak havoc in the U.S. stock and bond
markets... and money will flow to hard assets,
including gold and precious metals stocks.

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