C. Nowell,
--It's "G" Nowell. Is this a racist allusion to "Celtic" implying that I am from ancestry which painted itself blue and was deemed by the Romans to be too crude to civilize, thus spurring the building of Hadrian's wall between Scotland and England? The intended insult would be obvious to anyone who knows that "C" is often used as an abbreviation for "Celtic" in dictionaries. Since we are name sensitive on this list, I take offense. Or, I claim the right to take offense. Or something.
My feeling was that Japanese dollar assets are mostly bank-to-bank loans and U.S. treasuries (also "loans") needed for settlements.
--I haven't seen a breakdown, just 30% of loan portfolio in dollars. It would not be illogical for some loans to be made to customer in dollars. For example, short loans to finance oil purchases. But I don't know the breakdown.
I also believe that Japanese banks tend to try and borrow in Japan and lend in the U.S. as an interest rate arbitrage.
--Not just the Japanese banks, but US hedge funds.
Ultimately it doesn't matter since all dollar lending has to be reconciled in yen. --yes, for the J. banks.
It's true, therefore, that a strengthening dollar increases the total loan exposure in a Japanese bank's portfolio without any additional lending being done
--I didn't make it up. Its been in the WSJ repeatedly. including last Friday, in the A "international" section and also in the C "finance" section.
However, my feeling is that the dollar assets are the strongest on Japanese books and that these books are not terribly open anyway, so the effective need for increased yen reserves is not so acutely felt.
--It does matter because even if the govt is tolerant they have to worry about their ratings with international entities. It costs them more to borrow LIBOR with a worse rating. The more cooked their books look the more risky they look to their Western brethren. In WSJ and Barrons the issue has been framed in terms of international standards as well as Japanese.
It also seems to me that a strengthening U.S. bond market (which increases the value of the dollar, in the short term) creates capital appreciation of dollar assets. Since these assets are very liquid, I think what might very well be going on now is that the Japanese are liquidating dollar assets, betting that the bond market has gotten ahead of itself and that with a rising Japan premium and lower U.S. interest rates, they can do better on the forex markets than with holding dollar assets.
--Seems reasonable, but it's a dicey game. The 5% US yield is very attractive. Plus, each successive bond dump they execute lowers the bond price of the next bond dump. They probably can't afford to dump them all. The main thing is that their "system" more readily accommodates a weakening dollar than a strengthening one. Swapping out of dollar assets limits downside and upside risks, so it probably makes sense to decrease dollar denominated exposure.
Not only that, but the BOJ is now swapping foreign currency reserves directly with Japanese banks. In doing this and while doing this, the BOJ is also encouraging Japanese banks to get dollar assets off their books altogether.
--as above.
What Greenspan may be doing is reducing the "moral hazard" created from the fact that Japanese banks can borrow cheap in Japan and buy high-quality assets in the U.S.. One of the problems that almost all the failed economies have had is interest-rate speculation by bankers -
--and hedge funds
swapping their overvalued currencies for more fairly valued and liquid currencies.
--we don't know what "fair" is, but in any case, the "carry trade" tries to take advantage of higher US rates.
While all this theoretically stimulates Japanese lending, the fact is that the Japanese are probably getting rid of the best assets (dollar) on their books, and still doing precious little about getting low-quality Japanese assets off their books.
--Well, you can't exactly be writing down debt if you keep having to allocate extra yen to cover requirements on a stronger dollar, can you? You have to do one to get out of the other.
This makes the present stimulus a one-time deal to the extent it really does free up credit.
--The upsides and downsides are not something I can figure out. The wins of a strong yen include cheaper imports--including critical raw materials like oil and primary materials used in manufacturing-- and lower banking reserves in yen. The wins of a weak yen include greater competitiveness in world export markets and less foreign competition in Japanese markets. Historically this has always been discussed in relation to oil prices and their macroeconomic impact. This situation is a different twist on the same story, meaning that that there are no simple answers as to whether strong or weak is "best." It's merely a question of who wins and who loses. A rising stock market would also decrease pressure on the banking sector. Personally I don't think Japan has a big problem exporting. They're the world's masters. They probably are better off doing whatever it takes to restore banking liquidity. A lower discount &/or fed funds rate may in the US may aid this strategy; it will also decrease some of the pressure on dollar denominated obligaitons in the rest of the world. And it will facilitate more US exports in the technology stocks. There's a lot to be said that the dollar is overvalued right now.
-gn
-- Gregory P. Nowell Associate Professor Department of Political Science, Milne 100 State University of New York 135 Western Ave. Albany, New York 12222
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