Japan is the next sub-prime flashpoint

Discussion in 'Economics' started by BoyBrutus, Feb 15, 2008.

  1. Japan is the next sub-prime flashpoint


    By Ambrose Evans-Pritchard
    Last Updated: 12:20am GMT 13/02/2008

    There is still $300bn of bad debt out there, and Japan could be hiding most of it. Ambrose Evans-Pritchard reports

    Just as battered investors had begun to glimpse signs of recovery in America, the next shoe has dropped with an almighty thud in Japan. Echoes are rumbling across the Far East.

    Read more from Ambrose Evans-Pritchard
    China's Year of the Rat race

    The Tokyo bourse has crumbled, suffering the worst start to the year since the Second World War. The Nikkei index is down 17 per cent since Christmas, and the shares of Japanese banks are leading the slide. Mizuho Financial, Mitsubishi UFJ and Sumitomo Mitsui have all been punished as hard or even harder than those US banks at the epicentre of the sub-prime debacle.

    Japan's Nikkei index is down 17pc since Christmas
    The nagging fear is that Japan's lenders - the conduit for the world's greatest stash of savings - have taken on a far bigger chunk of mortgage securities, collateralised loans obligations and other exotica from America's structured credit boom than they have yet revealed.

    Americans and Europeans have so far confessed to $130bn of the estimated $400bn to $500bn of wealth that has vanished into the sub-prime hole. Somebody, somewhere, must be sitting on a vast nexus of undisclosed losses. We may find out soon enough whether the hold-outs are in Japan. The banks have to come clean under the country's strict new audit codes by the end of the tax year in March.

    "We think this is where the next big problem is going to pop up," said Hans Redeker, currency chief at BNP Paribas.

    "We know from Bank of Japan's lending survey that the banks are already tightening hard, so something is brewing. Right now, we are in the lull before the second storm in global markets, and Asia is going to be the source of the nasty surprises," he said.

    The iTraxx Japan index measuring default risk of 50 Japanese companies saw its biggest one-day jump ever on Thursday to 77.5. Rightly or wrongly, it is flashing a serious distress signal.


    What we know is that Japan's economy - still the second biggest in the world by far - has fallen over a cliff since October. It remains joined to America's hip after all. The decoupling theory has failed its first test.

    Japan's machine orders dropped 2.8 per cent in November and a further 3.2 per cent in December. January housing starts fell to the lowest in 40 years, down 18 per cent on the year. Tokyo property was off 22 per cent. Can this still be blamed purely on a change in building rules?

    "Recession is a clear and present danger in Japan," said Tetsufumi Yamakawa, chief Japan economist for Goldman Sachs. "The leading indicators are deteriorating very sharply. Inventory is piling up at a rapid pace. There are clear signs of deceleration in exports of steel and semi-conductors to China," he said.

    Yes, China. It turns out that the intra-Asia trade that was supposed to immunise the region against a slump is a disguised supply-chain ending up in the US market. American shoppers still make 30 per cent of global demand, just as it did a decade ago. Nothing has really changed.

    "We think the Bank of Japan may have to start easing by the middle of the year," said Yamakawa.

    There is not much monetary ammo left. Interest rates are 0.5 per cent. So it's back to zero, and helicopters of central bank cash ("quantitative easing"), those peculiar hallmarks of Japan's past battle with deflation. The brief attempt to "normalise" Japan Inc has already failed.

    We tend to forget that Japan remains the world's top creditor nation by far, the shy master of fate. The country's net foreign assets of $3,000bn roughly match the net debts of the US.

    The yen "carry trade" - borrowing cheap in Tokyo to chase yields from New Zealand, to Brazil, Iceland, and above all Britain - has juiced the global asset boom this decade by $1,000bn. It is perhaps the biggest liquidity pump of them all, yet it stopped pumping in August. Indeed, it is sucking the money back out again. The yen is soaring.

    Where have the Japanese recycled the quarter trillion dollars they earn each year from their surplus? Official data shows that their holdings in US Treasury bonds have not risen.

    The Swiss offer us a clue, says Redeker. They are Europe's Japanese, champion savers looking for returns abroad. They devoured US sub-prime debt on a much bigger scale per capita than the Americans. Hence the $24bn in write-downs by UBS.

    So far, Japan's biggest three banks have admitted to just $4.7bn in total losses between them. The figure is rising. Mitsubishi, the biggest, has just raised its tally to 12 times the sum admitted in November. This looks like a replay of the early 1990s when fear of losing face delayed the awful news.

    Hong Liang, Beijing economist for Goldman Sachs, is not much more hopeful about China's prospects this year. "The combination of a US slowdown and monetary tightening in China is never welcome, but the accumulated problems have to be resolved this year," she said.

    Inflation at 6.9 per cent is getting out of hand. The root cause of overheating is the weak yuan. The central bank has piled up $1,500bn of foreign reserves trying to stop it rising. The longer this goes on, the more inflationary it becomes. So Beijing has begun to step up the pace of revaluation, letting the yuan rise at an annual rate of 20 per cent in January. There will be casualties. Large chunks of China's manufacturing export industry have wafer-thin margins. A rising yuan tips them into the red.

    China's mercantilist drive for export share is a double-edged strategy. The trade surplus has risen at $80bn a year, increasing tenfold since 2002 while the economy has merely doubled. The result is that China is as dependent on the US economy as Mexico.

    So the storm spreads East. Haruhiko Kuroda, head of the Asian Development Bank, warned that the region would catch a cold after all as the US sniffles and sneezes. "Asian economies are not totally immune. A significant slowdown in the US economy will most certainly affect the region's growth," he said.

    The global watchdogs are scrambling to rewrite the script. The World Bank has cut its China growth forecast from 10.8 per cent to 9.6 per cent in 2008. Private banks are slashing deeper.

    Once the striptease starts on the onset of a global downturn, it usually has a long way to run.
  2. Daal


    this could explaning part of the sell off in J-REITs. a lot of them have short-term debt that comes due regulary and if the banks all the sudden announce huge losses and japan is hit hard by the global slowdown a cascade of Centro Properties like situations could develop as they cant roll over the debt.
  3. Wouldn't surprise me: Japanese banks were notorious for hiding their problems during the decade long economic languishing.
  4. All of this is a good sign. The brakes need to get hit in China, otherwise we're (the US) going to get priced out of everything. Back to the drawing board for everybody. Come back in 2-3 years.
  5. amylase


    I remain skeptical.

    Japanese banks getting hit hard by sub-prime is to me wishful thinking of their wall street counterparts.

    Traditionally japanese banks derive almost all of their revenue from bank loans & interests (the most basic function of bank). They are far less sophisticated & diversified as their western counterparts.

    I continue to believe that sub-prime problem is a Western problem, one that Japan, China are quite remote.

    Japanese and Chinese economies are driven by real hard manufacturing and exports while U.S. economy is more driven by the "untouchable" financial services (think sub-prime) of wall street.
  6. You guys will buy anything huh?

    As long as it's on the internet, you'll believe it.

    This site is as biased as any.

    Here's an idea. Instead of reading into this garbage and making dumbass assumptions why not learn how to trade so you can make money off of things like this (or determine even if there IS money to be made).

    Fundamentals are only half the battle.
  7. Good point. They've lived with near zero interest rates for years. Why would they go balls to the wall with a bunch of risky American mortgage investments? It does seem a tad bit contradictory...
  8. The Telegraph isn't too bad: has some good leads sometimes so I don't think you should dismiss it out of hand.

    You'll find that the Economics forum has little to do with day-to-day trading. It's just people that enjoy the fundamental side of life.

    And for those of us who are swing traders, it can make MORE than half the difference.
  9. Does anyone know when these Japanese banks are reporting?