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Enron Mail |
Enron Global Markets Competitive Analysis
JAPAN UPDATE: 9/25/01 Risks Increase for Longer, Deeper Deflationary Recession If Current Policy = Mix Muddle Remains, NPLs Unresolved SUMMARY: Deflationary Recession: Japan, apart from the raft of new and compounded di= fficulties consequent of September 11, was already facing a very difficult = end of fiscal half-year and confirmation of another recession After September 11: The impact of the shock to the world system over the pa= st two weeks has reinforced - from outside - the structural challenges faci= ng the domestic system Yen Strength Despite Intervention: Recent efforts to stem rise of Yen, enla= rge supplementary budget, reinforce the continuing reactive basis of policy= -making in Japan, leadership challenges Koizumi Still Enjoying Support, Keeping LDP Afloat: Cabinet's approval rati= ng is 79%, with the LDP's approval at a 9-year high of 51% Signs of Life: Bankruptcies down and retail sales component rises; as in th= e US, consumer behavior will drive outcomes Surrounding Asia: Weakens further on concerns about risk aversion relative = to emerging markets and depressed export outlook Collateral Effects: US weakness reinforces trend toward coincident global r= ecession NPL Update: Still Vague: Koizumi finally releases basis for expanded RCC ro= le in settling NPLs REPORT: Global Context Japan's greatest challenge is coming from the coincidence of recession, def= lation, high government debt stock, and, for the first time, sustained eros= ion of export surpluses and flight of manufacturing outside of Japan for ex= port to Japan. Part of the latest reductions in the world growth outlook a= nd the related decline in world equities are due to the September 11 traged= y and its many human and economic consequences. This portion of the equity = market losses will be hard to recover. Another part of the post-tragedy dec= line is a delayed reaction to the global deflation and recession which were= deepening prior to September 11. (Economic data since September 11 provide= d firm evidence of sharply weakening economies in the U.S. and Europe. Equ= ities would probably have declined even without the tragedy.) This part of = the recent equity loss argues for policy changes to stop the global slowdow= n. The challenge, as described in previous reports, comes from differing p= riorities and magnitudes of responses across major economies to a global cy= cle downturn. =20 Koizumi v. MoF The Japanese government reportedly signaled some flexibility in its fiscal = stance: Koizumi said he may have to take a "flexible approach" to the Y30 = trillion cap on new JGB issuance; but Shiokawa said the government's plan t= o keep new JGB issuance below Y30 trillion was unchanged. The government i= s considering issuing up to Y5 trillion 10-year or shorter maturity "Koizum= i bonds", funded by the sale of national assets as well as funds arising fr= om administrative reforms (not included in the Y30 trillion cap). BoJ The central bank has shown no inclination to use monetary policy stimulus t= o stop the recession. Instead, it continues to pursue fiscal stimulus and s= tructural reforms, policy steps are seen by several sources as actually dee= pening the recession. Though nominal interest rates are at zero, real inter= est rates are very high. The central bank provides Y6 trillion in excess li= quidity to the commercial banking sector, but the funds are very short term= and have not penetrated into the economy. NPLs Event: Koizumi administration officials released the program for expanding = the Resolution Credit Corp's role in settling the NPL problem. Because of = still unsettled battles between FSA leader Yanagisawa and other Koizumi adv= isors, the details of this plan were still left vague. Yanagisawa is invol= ved in a two-front war, pinned between officials on one side who want to ba= nkrupt the 20-30 top debtor companies immediately, and BOJ officials on the= other side, who want to fund the RCC much more aggressively through buying= specially issued RCC bonds to let the institution expand its purchases of = bad debt. Result: What has been decided is to have the RCC dramatically change the pr= ice at which they will purchase assets from banks and to expand its ability= to make losses when it sells those assets. This is an "in principle" decis= ion and the fights rage on about exactly what this new freedom should mean.= Yanagisawa hopes to combine more activity on this front with his main idea= of re-examining 'need-attention' loans (with help from market signals like= the price of company stock, etc. detailed in our previous reports). Yanagi= sawa would create a new class for these loans and then require banks to rai= se the reserves they hold against these loans.=20 Strategy: Using the RCC is seen as an alternative to direct capital injecti= on. As one senior advisor put it, "It's not just that Yanagisawa wants to = avoid capital injection because he'd be blamed for the failure of his first= injection. It's because capital injection (into "healthy" banks) doesn't w= ork. We can't really force them to change management and to improve perform= ance. There's a sense at FSA and the government generally that bankers are = lousy and they'll never improve. Banks....are very unpopular. Providing cap= ital to RCC is less obviously a direct help to the banks. That explains som= e of the interest on the part of politicians." And it explains why this wil= l be part of the eventual solution. BOJ's Interest: BoJ is interested in funding this RCC because it allows the= m to be part of the solution without adopting inflation targets or directly= purchasing JGBs. Assuming the RCC will be financed through issue of govern= ment-guaranteed bonds, the BOJ would be happy to buy them as long as they w= ere guaranteed (but not issued by) the Japanese government. BoJ does not wa= nt to directly underwrite bonds issued by RCC because that would be against= the law (conveniently) and RCC would have a low rating. It's also true tha= t BOJ likes the RCC idea better than going through the process of tighter a= ssessment, bankruptcies, and capital injection, because it cleans up the ba= nks' books in one swoop. FSA's Concern: FSA official's comment: "There is a real problem in everybod= y pretending that the problem will be solved by taking all the bad loans to= RCC. No matter how much money it gets, the RCC simply doesn't have the cap= acity to help reconstruct companies. Maybe it can farm out this work to tho= se who do. But the most likely outcome is that it will just give up and res= ell everything at market price. This would mean that a lot of companies, in= cluding those which may be saved, will go bankrupt. There are social and ec= onomic consequences - it will be very deflationary. The banks will be a lot= better off but industry will be in a bad way. That's why we have to take s= ome more time and figure out how much of this can be done through the RCC a= nd how much through better reserving for special attention NPLs."=20 Koizumi Advisor's Assessment: One of Koizumi's advisors, looking over the s= tate of play and admitting all of the hesitation that FSA officials feel, s= ays, "There is no doubt that we still have lots of stuff to be worked out. = But as I see it, we now have vague outlines of NPL disposal. In addition, t= he FSA now admits that it has to get tighter: i.e., it has to get to the 'n= eed attention' loans and look at them more carefully, reclassify the bad pa= rts of need attention loans, and those additional downgraded loans will hav= e to be disposed of in the 2-3 year framework. In other words, the Y13 tril= lion total will go up significantly. We will give banks a break through the= use of something significantly above market price in selling NPLs to RCC. = But the most fundamental thing still to be understood is that the RCC will = have to acquire reconstruction skills or buy them if the companies sold to = RCC are to have a fair chance of recovery."
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