Japan Between A Rock And A Hard Spot Part - VII

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

November 6, 1997

Financial Tsunami Looming in Land of Setting Sun

PART - VII

Recent months have witnessed chaos in the economies and markets of South East Asia... all in the lengthening ominous shadow of Japan's continuing deterioration. The adverse effects and contagion are spilling over into Latin Amercia, Europe and are now launching beachhead attacks upon US soil.

Amazingly, the US governement's mild reaction to the mounting problem is almost to dismiss it out of hand as a minor disturbance. In the wake of record stock market and currency crisis in South East Asia and Japan, US government representatives announced those occurrences will have little material impact upon the American economy and Wall Street.

Now I ask you, what half-way informed person is going to swallow the NONSENSE the government is spewing??

At best this demonstrates a total mis-understanding of the gravity of the situation, and at worst *THIS IS A GROSS MIS-REPRESENTATION OF THE 'BODY-COUNT.'* In sharp contrast any Econ 101 freshman will strongly disagree with the government's bogus assessment of the transcendental currency upheavals plaguing the heretofore 'Tiger' economies of South East Asia - and the relentless sliding of the Nippon economy and Nikkei stock average. In reference to the latter and Japan's slowly sinking financial scene, the term "Land of the Rising Sun" is becoming an oxymoron.

The over-riding theme of this report is that the rapid deterioration of currencies and stock markets of the Far-East will indeed be the trigger to force the Japanese to begin dumping their stash of approximately $300 billion in US Treasury bonds, and purchasing gold with some of the proceeds from Uncle Sam's debt.

The Contagion Spreads -

Just a cursory examination of the following chart provides an in the face clarity of how severe and dramatic are the stock market declines... and how they are spilling-over into other countries. During the last three months the Asian Tigers stock markets have plummeted an average of 31.8%. The contagion effect caused Australian shares to drop 15.5%, New Zealand down 13.5%, Japanese Nikkei down 19.1% and the DOW bringing up the rear with a drop of 7.3%. Interestingly - in a morbid way - all markets freefell an average of 7.1% on Black Tuesday, 28 October 1997.

Me thinks the aforementioned US government officials suffer from market myopia.

The deep stock market plunge in the Tiger stock exchanges was not the only telling damage wrought... their currencies suffered devastating devaluations versus the US dollar since the beginning of July. The four major currencies in South East Asia are the Malaysian Ringgit, Indonesian Rupiah, Philippine Peso and the Thailanese Baht. In the short period of less than three months their currencies were decimated by an average devaluation of 27.16% vis-a-vis the greenback.

Can we of the western world possibly imagine the heartbreak nightmare of losing nearly a third of the purchasing power of ALL OUR SAVINGS within 12 short weeks?!

Country (1)

Currency

July 1

Oct. 23

% fall

Malaysia
Indonesia (2)
Philippines
Thailand

Ringgit
Rupiah
Peso
Baht

2.524
2431
26.35
25.88

3.211
3580
32.70
38.20

-24.88
-32.09
-19.42
-32.25

(1) And they are all heavily in debt to Japanese Banks
(2) Since June 1 the Rupiah has fallen 50% against the US$

 

To fully appreciate the demoralizing impact of stock market loses AND currency devaluations, we have to put this into perspective. Let's look at a hypothetical case. Consider we purchased a basket of South East Asian securities on July 1, 1997. Our original investment was US$10,000 - which was converted at the existing exchange rates on that date. Now fast-forward three months to the morning of October 29, 1997. We cannot take the stress of rapidly mounting loses any more, so we call the broker and say "SELL IT ALL, AND GIVE ME WHAT'S LEFT!" Here's what we got.

There was an average loss of 31.8% in the Tigers portfolio. That leaves - at least on paper - US$6,820. HOWEVER. Our Tiger portfolio was always exposed to the exchange-rate risk. And it caught us with our pants down. Reflecting the average 27.16% currency devaluation, our broker sent us a check for a paltry US$4,968. WITHIN ONLY THREE MONTHS WE LOST MORE THAN 50% OF OUR INVESTMENT!

But the pain doesn't stop there... the cause of the financial disease is worsening... and spreading to other forms of businesses, and to other countries - and in particular to Japan.

Japanese Banks Crumbling

By far the largest creditor to South East Asia is Japan. The close proximity, cultural similarities and legendary Nippon business aggressiveness have backfired on Japanese Banks. It is well-documented that Japanese Banks hold more than 42% of all the Tiger debt. Consequently, crumbling stock markets and depreciating currencies have precipitated a spate of unperforming loans in the Tiger economies. This is putting significant squeeze on Japanese bank earnings, which had heretofore been falling due to domestic problems. Literally, Nippon banks are between the devil and deep blue sea. Before the Tigers debacle began, reliable sources estimated the Japanese Banking system was carrying between $400 to $800 billion in unperforming loans on its books. Exacerbated by mounting bad debts exploding in the Tiger countries, this may be the 'financial straw' that breaks the camel's back (read the Japanese Banks).

Japanese are stocks hard hit as investors flee the financial sector. The following reports from Tokyo analysts aptly describe the dire market environment of Nippon banks, stemming from Hong Kong loans gone sour.

Japanese banks confront bursting of Hong Kong's property bubble -

TOKYO (October 28 - AFP) - Japanese suffered fierce attacks on the stock exchange Tuesday as their exposure to a property bubble in Hong Kong threatened to compound debt problems built up during the 1980s, analysts said. Japanese banks, responsible for 42 percent of loans in the former British colony, were sold down sharply on the bourse for their heavy exposure to the Hong Kong economy.

After a rough ride the previous day, the biggest banks were unquoted for most of Tuesday's session due to a lack buyers. They lost an average of seven percent, while the key Nikkei index dropped 4.3 percent. THE WORLD'S BIGGEST BANK, BANK OF TOKYO-MITSUBISHI, SUFFERED A 9.26 PERCENT SLIDE, WIPING 454 BILLION YEN (3.8 BILLION DOLLARS) OFF ITS MARKET CAPITALISATION IN A MATTER OF HOURS. Sellers of stock in Mitsubishi Trust and Banking, one of the world's top 20 banks, found no buyers throughout the session. According to the Basel-based Bank for International Settlements (BIS), Japanese banks have extended 87 billion dollars in loans in Hong Kong, whose reputation for financial stability has been cast in SERIOUS doubt by sharp stock market falls.

Japanese banks have accounted for 90 percent of foreign bank lending in Hong Kong, making the Chinese-ruled territory a bigger potential risk than Thailand whose financial troubles have rocked the region.

In a financially related sector, Sanyo Securities, one of Japan's top 10 brokerage houses went belly-up last Monday (10/27/97). It was the first bankruptcy of a Japanese securities company since the end of World War II -- over 50 years ago! Local analysts affirm, "...and it won't be the last."

Japanese banks under pressure -

A report published in THE AUSTRALIAN on 3 November by MICHAEL McGUIRE further reveals the severely weakening posture of Japanese banks.

EXPERTS are predicting that Japan will be the big loser from the current turmoil in Asian financial markets -- with Australia suffering as a result.

Alan Blinder, former vice chairman of the United States Federal Reserve Board, said yesterday the Asian crisis would cause Japan's present snail-like growth rate to slow further and would saddle the country's already pressured banks with further bad loans.

It is estimated that Japanese banks have about $US400 billion of non-performing loans on their books.

Professor Blinder said he was also starting to doubt whether the Japanese economy would ever break out of its current malaise.

This is bad news for Australia as Japan is the country's biggest trading partner and takes about 19 per cent of our merchandised exports, of which commodities make up the bulk.

Merrill Lynch equity strategist John Banos said: "Japan is looking at a very difficult situation and of course Japan now will be impacted by the weakness in the rest of Asia".

Meanwhile, the volatility that swept world financial markets last week is tipped to spill into this week also, as uncertainty about the future growth rate of Asia continues.

Last week, the benchmark All Ordinaries Index finished down by more than 100 points, but concealed within that figure was a fall of 177.8 points on Tuesday, followed by a rise of 143.8 points on Wednesday.

It followed a gyrating Dow Jones index in the US, which was twice forced to suspend trade on Monday as the world's most watched stock prices barometer plunged 554.26 points.

IS JAPAN AT THE BRINK, TOO?

A BusinessWeek article by Brian Bremner & Emily Thornton on 3 November 1997 paints an even blacker picture of the Japanese banking system.

Imagine this: Japan, humbled by recession and a stock market crash, its weakened banks facing a new wave of bad loans across Asia, goes to the International Monetary Fund, hat in hand, for a bailout.

Its financial system is in such shambles that the survival of some big players is questionable.

James Fiorillo, an analyst at ING Baring Securities (Japan) Ltd., observes that bad loans have actually soared 18% since March as bankruptcies have surged. And the Tokyo Stock Exchange's 18% decline since summer now threatens to leave some lenders without capital to lend.

After a week of wild gyrations in concert with world markets, the Nikkei stock average remains around 16,900. If it should slip much below 16,000, major global lenders such as Fuji Bank, Asahi Bank, and Chuo Trust & Banking would face big losses on their portfolios of corporate stock. They count the value of this stock toward capital, and such a drop could leave them perilously close to internationally agreed-upon minimum levels. Should the Nikkei plunge to 14,000, Japan's 20 biggest lenders would face some $96 billion in portfolio losses. Such a drop could shut down bank lending at home, sending the economy into a downward spiral.

Banks are also facing jitters over how vulnerable their $265 billion in Asian loans and bank deposits will be in the face of a protracted regional slowdown. In Hong Kong, where a deflationary property bust is possible, lenders have $87 billion at risk. That helps explain the sell-off in bank stocks in Tokyo on Oct. 27, the day Hong Kong shares plunged.

Japanese insurers are also on the brink. UBS Securities Ltd. strategist Neil Rogers figures that at the Nikkei's current level, five of the nation's biggest life insurers have seen the market value of their stock portfolios fall below book value. That's making it nearly impossible for them to make dividend payments and returns promised to policy-holders. Rogers thinks one or two could collapse.

Nikkei fall threatens banks -

On 29 October 1997 THE AGE, a Melbourne Australian ON-Line news service, shed even more light on a darkening situation. Their journalist Russell Skelton reported the following from Tokyo.

The Nikkei's biggest one-day fall threatens to tip Japan's economy back into recession and greatly intensify the financial squeeze on its debt-laden banks.

Business leaders and top ministers in the Government of the Prime Minister, Mr. Ryutaro Hashimoto, warned that today's 725-point fall on the Nikkei would further inhibit the sluggish economy, which is already headed for 1 per cent growth rates.

Analysts expect Japan's top 20 banks to come under significant pressure. Not only will they take losses on non-performing loans in Asia, but they are facing big paper "losses" on share holdings in the domestic market.

Dr Kenneth Courtis, chief economist and strategist with Deutsche Bank Asia Pacific, said that although Japan's 4 per cent stockmarket drop was less than most major markets, it was critical for Japan's banks, which were carrying billions of dollars worth of debts from the bubble economy days.

Dr Courtis said the banks would now be backed into a tight position because they would be forced to raise cash by selling US bonds, which would in turn place downward pressure on the economy

Before the collapse about 46 per cent of Japan's exports had gone to East Asia. With sales of car and electronic goods dropping by as much as 60 per cent, Japan's economy is now expected to come to a virtual standstill.

Analysts expect the Tokyo market to remain weak, falling below the 16,000 mark tomorrow. Dr Courtis said he believed it would lose another 10 per cent before it stabilised.

A 17000 Nikkei is the Nippon Bank Flash-Point -

World-class gold expert, Doug Casey points out in his book "CRISIS INVESTING FOR THE REST OF THE '90s" (page 330):

"With the Nikkei at 17000, most Japanese banks are right at the 8 percent line drawn by the Bank for International Settlements (BIS) for capital-to-loan ratios. If the market falls further, they (Japanese Banks) will have to call in loans. This will exacerbate the decline in property prices, further weakening their capital-to-loan ratios."

Then the down-spiral feeds upon itself. This writer foresees a definite retest of the 14000 Nikkei -- if it doesn't hold... it's Katie bar the door!

Japan will indeed be forced to dump US T-Bonds to defend the home economy, and subsequently buy gold as it fights for survival.

A one-ounce gold nugget is rarer than a five-carat diamond.

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