OT-Japan Heading for Bankruptcy???

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NY Times atticle - sure sounds like bankruptcy.

http://www.nytimes.com/yr/mo/day/news/financial/japan-finance.html

-- bardou (bardou@baloney.com), January 29, 2000

Answers

wow! Scary and interesting post.

-- Carl Jenkins (Somewherepress@aol.com), January 29, 2000.

That link doesn't get me to the story bardou. Just copy and paste the story for us. Thanks.

-- Guy Daley (guydaley@bwn.net), January 29, 2000.

If Japan is heading for bankruptcy and we owe them tons of dollars, where might that put us/US (whatever)?

-- Squid (ItsDark@down.here), January 29, 2000.

That link took me directly to the story, bardou. Don't worry about it.

-- Kyle (fordtbonly@aol.com), January 29, 2000.

Squid-
change the word "we" to "they".

-- plonk! (realaddress@hotmail.com), January 29, 2000.


Link

-- Zguy (
its@bubble.com), January 29, 2000.

Thanks Zguy for the link...

-- bardou (bardou@baloney.com), January 29, 2000.

You usually cannot access the New York Times Web site unless you are registered on the site. Plus, they often take their daily stories down at Midnight to make way for the new stories of the day. So, here's the article.

Web Wizard

January 29, 2000

Japan to Turn to Direct Loans From Its Banks

Related Articles Comeback Time in Japan for 3 Big Brokerage Firms (Jan. 29, 2000) Economic Stimulus in Japan: Priming a Gold-Plated Pump (Nov. 25, 1999) Japan Moves to Stimulate Its Economy (Nov. 12, 1999)

By STEPHANIE STROM

OKYO, Jan. 28 -- In a striking demonstration of how precarious Japan's financial situation has become, the government plans to borrow money directly from banks to fulfill its obligations to local governments.

Governments normally borrow money by issuing bonds, which is cheaper than taking out bank loans. Japan's unorthodox approach to borrowing now and the size of the shortfall -- 8 trillion yen, or roughly $76 billion- have stunned economists and other market watchers. With one small exception, this is the first time since the days after World War II that Japan has taken such a step.

The amount is equivalent to roughly 2 percent of Japan's gross domestic product, and exceeds the 7.7 trillion yen the government has injected into troubled banks.

"The funding mechanism is breaking down," said David Asher, a research fellow in the Japan Program at the Massachusetts Institute of Technology. "The dam is showing more and more stress fractures, and they're trying to put plaster on them."

Concern is rising that Japan is overextending itself. The government's debts now match the country's G.D.P., and Merrill Lynch is predicting a rise to 150 percent of G.D.P. in two years.

The skyrocketing debt, justified by politicians as a way to keep a faltering economic recovery on track, is increasingly a point of contention within the ruling Liberal Democratic Party.

But by sidestepping the traditional reliance on the bond market, the new borrowing has placed a stark new emphasis on this crushing problem.

"By not issuing bonds, by taking on an intermediary like a bank," said Jesper Koll, who is chief economist at Merrill Lynch Japan and is typically upbeat about Japan's prospects, "you are basically saying one of two things: either you don't believe in the efficiency of the financial markets or you're admitting you have a credit problem." Now, Mr. Koll said, the government runs the risk of replicating, on a smaller scale, the trap that brought many Asian economies to their knees recently. "There's a mismatch because they're planning to borrow one-year loans, but the municipal deficits are not going away in a year," he said.

There are signs, too, that the government may expand its borrowing from banks, which are healthier than they were two years ago. A Finance Ministry spokesman said there were plans to cover shortfalls in another, unnamed "special account" this way, though the amount in question is far smaller.

The banks, for their part, are likely to welcome the plan. Although the Finance Ministry spokesman stressed that terms had not been set, the Nihon Keizai Shimbun, Japan's leading financial daily, said the government planned to pay 2.1 percent interest-a handsome premium to the 1.6 percent the banks could earn buying government bonds. Andrew Smithers, a prominent fund manager, is one of the few experts who put a positive spin on the plan, saying it will get more money into circulation, which many economists have advocated as a way of curing the economy's ills.

Because loan demand is low, banks have too much money sitting idle. "It's a good measure," he said, "because it further eases monetary policy and relieves pressure on the bond market, which will help lower real long-term interest rates."

Japan has been suffering from a classic "liquidity trap": while an exorbitant amount of money is available for lending, companies and individuals are not borrowing as they try to reorganize their activities. Thus, the money is bottled up in the banks, idle.

While most people see the move as a sign of government desperation, it may also help some banks facing shrinking loan demand. Masaaki Kanno, senior economist at J. P. Morgan in Tokyo, is also unconcerned. "Japanese commercial banks are the largest buyers of government bonds," he said, "so there's really no change."

The government is battling to keep its ballooning deficit in check in the face of continuing signs that the economy is addicted to stimulus measures that require more debt.

In a speech to Parliament today, Prime Minister Keizo Obuchi said getting the economy on its feet would take precedence over paring the national debt. "Fiscal reform is important," he said, "but we cannot commit the mistake of undertaking it while the economy is not firm and before it is on the path of full-fledged recovery."

Yet highlighting the discord within the government, Finance Minister Kiichi Miyazawa bemoaned the fact that the proposed budget would push government debts to 645 trillion yen, or $6.15 trillion.

Economic prospects are not bright. The Japan Center for Research estimates that G.D.P. fell by 1.6 percent in the latest quarter, suggesting that the government will have trouble meeting its target for 0.6 percent growth this year.

Hiroyuki Inoue, the center's senior economist, said the figures demonstrated that when government public-works outlays end, the economy falls right back into the doldrums. "After the effects of government spending programs faded last summer," he said, "the economy slipped back to the level it hit in 1998."

He expects the situation to change as the latest stimulus package starts kicking in. But the center's figures still suggest that the economy is far from able to sustain itself, even though Mr. Obuchi promised today that there would be no new spending beyond the record $810.8 billion budget he has proposed.

The Finance Ministry spokesman said the decision to borrow from banks rather than float bonds was merely an effort to segregate the funds, which will go into a special account for local governments. He said it had nothing to do with the government's ability to raise money, an assertion confirmed by two recent bond auctions.

But that makes the plan even more puzzling. Economists speculate that the government is wary of issuing more bonds than it has to, fearful of jeopardizing any recovery by pushing long-term rates higher. "They're afraid of upsetting the bond market," said Ronald Bevacqua, senior economist at Commerz Securities in Tokyo.

The government also wants to avoid drawing additional scrutiny from credit ratings agencies. Many economists say Moody's Investors Service, which withdrew its triple-A rating of Japan's sovereign debt last year, is poised to downgrade its assessment even more later this year. Standard & Poor's, though, recently reaffirmed its triple-A rating.

The ministry spokesman said the new plan was nothing more than a response to the fact that traditional sources of financing have fallen short. The government has traditionally been able to tap the 253 trillion yen postal savings system, but many 10-year deposits will mature soon, leading many economists to predict that money will flow out of the system in search of higher returns. The post office in Japan is the de facto largest bank in the country.

The spokesman stressed, however, that the outflow should dwindle after two years, at which point the government might be able to dip into it again.

Similarly, Mr. Koll noted that the post office took in 1.1 trillion yen in new deposits last month, suggesting that Japan's ever-so-cautious investors may prefer earning 0.28 percent over 10 years to risking their life savings in the market.

The decline in tax revenues coupled with a decreasing ability to tap the postal savings system left the government with a gaping $76 billion hole when it came time to give local governments their share. "Can they keep spending money to cover the deficits of the local governments and in the pension system?" Mr. Asher asked. "If the answer is no, there's going to be a crisis."

The government has resorted to direct borrowing at least once before, to cover shortfalls in a special account for national forestry projects. But the account for local government is different, said Kunji Okue, an economist at Dresdner Kleinwort Benson in Tokyo. "Borrowings for national forestry projects are used to manage and cultivate national forests and parks and can thus be viewed as an investment expense," Mr. Okue wrote in a recent report.

Also, he noted, the amount borrowed for the forestry account was far smaller. "This is the first time since the end of World War II that Japan has undertaken large-scale direct borrowing to cover recurring expenses," he said.

The last time the United States resorted to a similar move was in 1893, when J. P. Morgan provided gold to help the Treasury.

-- Web Wizard (Webmaster@definitely-not-a-polly.com), January 29, 2000.


Japan to Turn to Direct Loans From Its Banks

TOKYO, Jan. 28 -- In a striking demonstration of how precarious Japan's financial situation has become, the government plans to borrow money directly from banks to fulfill its obligations to local governments.

Governments normally borrow money by issuing bonds, which is cheaper than taking out bank loans. Japan's unorthodox approach to borrowing now and the size of the shortfall -- 8 trillion yen, or roughly $76 billion -- have stunned economists and other market watchers. With one small exception, this is the first time since the days after World War II that Japan has taken such a step.

The amount is equivalent to roughly 2 percent of Japan's gross domestic product, and exceeds the 7.7 trillion yen the government has injected into troubled banks.

"The funding mechanism is breaking down," said David Asher, a research fellow in the Japan Program at the Massachusetts Institute of Technology. "The dam is showing more and more stress fractures, and they're trying to put plaster on them."

Concern is rising that Japan is overextending itself. The government's debts now match the country's G.D.P., and Merrill Lynch is predicting a rise to 150 percent of G.D.P. in two years.

The skyrocketing debt, justified by politicians as a way to keep a faltering economic recovery on track, is increasingly a point of contention within the ruling Liberal Democratic Party.

But by sidestepping the traditional reliance on the bond market, the new borrowing has placed a stark new emphasis on this crushing problem.

"By not issuing bonds, by taking on an intermediary like a bank," said Jesper Koll, who is chief economist at Merrill Lynch Japan and is typically upbeat about Japan's prospects, "you are basically saying one of two things: either you don't believe in the efficiency of the financial markets or you're admitting you have a credit problem."

Now, Mr. Koll said, the government runs the risk of replicating, on a smaller scale, the trap that brought many Asian economies to their knees recently. "There's a mismatch because they're planning to borrow one-year loans, but the municipal deficits are not going away in a year," he said.

There are signs, too, that the government may expand its borrowing from banks, which are healthier than they were two years ago. A Finance Ministry spokesman said there were plans to cover shortfalls in another, unnamed "special account" this way, though the amount in question is far smaller.

The banks, for their part, are likely to welcome the plan. Although the Finance Ministry spokesman stressed that terms had not been set, the Nihon Keizai Shimbun, Japan's leading financial daily, said the government planned to pay 2.1 percent interest -- a handsome premium to the 1.6 percent the banks could earn buying government bonds.

Andrew Smithers, a prominent fund manager, is one of the few experts who put a positive spin on the plan, saying it will get more money into circulation, which many economists have advocated as a way of curing the economy's ills.

Because loan demand is low, banks have too much money sitting idle. "It's a good measure," he said, "because it further eases monetary policy and relieves pressure on the bond market, which will help lower real long-term interest rates."

Japan has been suffering from a classic "liquidity trap": while an exorbitant amount of money is available for lending, companies and individuals are not borrowing as they try to reorganize their activities. Thus, the money is bottled up in the banks, idle.

While most people see the move as a sign of government desperation, it may also help some banks facing shrinking loan demand.

Masaaki Kanno, senior economist at J. P. Morgan in Tokyo, is also unconcerned. "Japanese commercial banks are the largest buyers of government bonds," he said, "so there's really no change."

The government is battling to keep its ballooning deficit in check in the face of continuing signs that the economy is addicted to stimulus measures that require more debt.

In a speech to Parliament today, Prime Minister Keizo Obuchi said getting the economy on its feet would take precedence over paring the national debt. "Fiscal reform is important," he said, "but we cannot commit the mistake of undertaking it while the economy is not firm and before it is on the path of full-fledged recovery."

Yet highlighting the discord within the government, Finance Minister Kiichi Miyazawa bemoaned the fact that the proposed budget would push government debts to 645 trillion yen, or $6.15 trillion.

Economic prospects are not bright. The Japan Center for Research estimates that G.D.P. fell by 1.6 percent in the latest quarter, suggesting that the government will have trouble meeting its target for 0.6 percent growth this year.

Hiroyuki Inoue, the center's senior economist, said the figures demonstrated that when government public-works outlays end, the economy falls right back into the doldrums. "After the effects of government spending programs faded last summer," he said, "the economy slipped back to the level it hit in 1998."

He expects the situation to change as the latest stimulus package starts kicking in. But the center's figures still suggest that the economy is far from able to sustain itself, even though Mr. Obuchi promised today that there would be no new spending beyond the record $810.8 billion budget he has proposed.

The Finance Ministry spokesman said the decision to borrow from banks rather than float bonds was merely an effort to segregate the funds, which will go into a special account for local governments.

He said it had nothing to do with the government's ability to raise money, an assertion confirmed by two recent bond auctions.

But that makes the plan even more puzzling. Economists speculate that the government is wary of issuing more bonds than it has to, fearful of jeopardizing any recovery by pushing long-term rates higher. "They're afraid of upsetting the bond market," said Ronald Bevacqua, senior economist at Commerz Securities in Tokyo.

The government also wants to avoid drawing additional scrutiny from credit ratings agencies. Many economists say Moody's Investors Service, which withdrew its triple-A rating of Japan's sovereign debt last year, is poised to downgrade its assessment even more later this year. Standard & Poor's, though, recently reaffirmed its triple-A rating.

The ministry spokesman said the new plan was nothing more than a response to the fact that traditional sources of financing have fallen short. The government has traditionally been able to tap the 253 trillion yen postal savings system, but many 10-year deposits will mature soon, leading many economists to predict that money will flow out of the system in search of higher returns. The post office in Japan is the de facto largest bank in the country.

The spokesman stressed, however, that the outflow should dwindle after two years, at which point the government might be able to dip into it again.

Similarly, Mr. Koll noted that the post office took in 1.1 trillion yen in new deposits last month, suggesting that Japan's ever-so-cautious investors may prefer earning 0.28 percent over 10 years to risking their life savings in the market.

The decline in tax revenues coupled with a decreasing ability to tap the postal savings system left the government with a gaping $76 billion hole when it came time to give local governments their share. "Can they keep spending money to cover the deficits of the local governments and in the pension system?" Mr. Asher asked. "If the answer is no, there's going to be a crisis."

The government has resorted to direct borrowing at least once before, to cover shortfalls in a special account for national forestry projects. But the account for local government is different, said Kunji Okue, an economist at Dresdner Kleinwort Benson in Tokyo.

"Borrowings for national forestry projects are used to manage and cultivate national forests and parks and can thus be viewed as an investment expense," Mr. Okue wrote in a recent report.

Also, he noted, the amount borrowed for the forestry account was far smaller. "This is the first time since the end of World War II that Japan has undertaken large-scale direct borrowing to cover recurring expenses," he said.

The last time the United States resorted to a similar move was in 1893, when J. P. Morgan provided gold to help the Treasury.

-- Cheryl (Transplant@Oregon.com), January 29, 2000.


Last time I heard THAT size pack of lies, I was listening to someone trying to avoid foreclosure on a home, a car, and a line of credit.

C

-- Chuck, a night driver (rienzoo@en.com), January 29, 2000.



I certainly hope the average Japanese person has enough foresight to start stuffing futons with yen.

-- Gia (laureltree7@hotmail.com), January 29, 2000.

Where is PNG our inresident Japan reporter? He needs to update us and translate it all for us. I need to know if I need to reinforce my tinfoil hat. Its getting a little ragged around the edges. Taz

-- Taz (Tassi123@aol.com), January 29, 2000.

...The last time the United States resorted to a similar move was in 1893, when J. P. Morgan provided gold to help the Treasury.

"Provided gold?" Andy, are you paying attention? Here's your chance to own your own little piece of the Ginza -- here's your chance to own all of the Ginza, come to think of it!

-- I'm Here, I'm There (I'm Everywhere@so.beware), January 29, 2000.


bardou, your email address is phoney. There IS a real web site at www.baloney.com Are you aware that you are spamming them with your false email address?

Do you care?

-- dinosaur (dinosaur@williams-net.com), January 29, 2000.


This sounds similar to a water pump analogy. Say you have water coming in your boat - your bilge pump comes on but doesn't pump the water out fast enough so you try to increase the pump rate by sppeding up the pump. The problemis the pump doesn;'t fill each comaprtment when the speed is increased and actually pumps out less water at higher RPMs.

Substitute money for water; banks for pump and Japan for boat.

End result the boat sinks.

-- Bill P (porterwn@one.net), January 29, 2000.



Dinosaur, I've been using this "phoney" e-mail address for over two years now and this is the first I have heard of it. Thanks for telling me, maybe I'll add a couple of y's or l's to the end.

-- bardou (bardou@balloneyy.xcom), January 29, 2000.

Dinosaur--that's a pretty neat website! www.baloney.com

-- bardou (bardou@balloneyy.xcom), January 29, 2000.

Plonk:

The us/US was not a mistake. The Japanese are the worlds net savers and as such have lent incredible sums of money to the net borrowers. Any idea who the biggest borrow is? Uncle sugar and by the terms of the debt you and I. If large amounts of money is repatriated back to Japan for any reason, the Bonds become worth less (intended) and the interest rates could soar. Interest rates soar to finance the debt guess what happens to all the revolving credit card rates?

In finance nobody is an island, and as net borrowers, just as in the everyday world you and I live in the banks lenders call the tune.

-- Squid (ItsDark@down.here), January 30, 2000.


Yep, baloney is a neat website. Just another reason I like TB2000.

-- Kyle (fordtbonly@aol.com), January 30, 2000.

But that makes the plan even more puzzling. Economists speculate that the government is wary of issuing more bonds than it has to, fearful of jeopardizing any recovery by pushing long-term rates higher. "They're afraid of upsetting the bond market," said Ronald Bevacqua, senior economist at Commerz Securities in Tokyo.

It seems whenever I read an article on banking, I am left with more questions than answers. If there's cash supposedly sitting idle at Japanese banks, why wouldn't the government's issuing bonds simply absorb some of that idle cash while having negligible effect on interest rates?

-- David L (bumpkin@dnet.net), January 30, 2000.


A lot of that "cash" sitting around Japanese accounts is dollars and dollar denominated assets (Treasuries). With Japanese interest rates hovering around zero the US bond yield has been up till now a profitable way to have safety and get a return. Imagine a year ago you could ahve borrowed money for almost no interst rate and the population continued to save money because the fear of loosing their jobs. We certainly don't have that problem here, maybe we should import some healthy concern for the future.

-- Squid (ItsDark@down.here), January 31, 2000.

Besides which, BONDS are LONG TERM instruments, and these loans are SHORT(er) term instruments. THe "extra cash" in the banks isn't available for investment in bonds, necessarily (HELP PNG) but IS there for loans to whoever.

Chuck

-- Chuck, a night driver (rienzoo@en.com), January 31, 2000.


errr whomever.

-- Chuck, a night driver (rienzoo@en.com), January 31, 2000.

So what is the Fed's best way out of this mess? General concensus seems to be that the NASDAQ and DJIA are terribly over-valuated, if you were Greenspun, what would you do?

Without breaking into your privacy, could someone say what they're "generally" doing now to protect their funds?

-- Deb M. (vmcclell@columbus.rr.com), January 31, 2000.


Deb,
The old Banking/Finance category near the bottom of the New Questions page includes the thread stock market doomers wanted for investing advice. There may also be other threads in the same category that are relevant to your question.

Chuck, thanks for your answer. The article seemed to suggest that Japanese banks were having difficulty finding borrowers, hence the larger than usual amount of cash or near-cash equivalent assets on hand. I'm also not sure why even if a Japanese bank bought long term bonds, it would be unable to sell them if needed to raise cash.

In pondering my earlier question, I realize that I was looking at the situation solely from the perspective of supply of money, whereas the concern that Japan's issuing bonds would drive up long term interest rates is apparently due to the financial state of the Japanese government. So I'm now less confused, at least for another hour.

-- David L (bumpkin@dnet.net), January 31, 2000.


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