Japanese financial crisis

boddhisatva kbevans at panix.com
Mon Sep 28 01:56:41 PDT 1998

To whom...,

First, I'd like to apologize for going over my limit on the 27th. I didn't actually realize that there was a limit and I will have to be very careful from now on.

I have been waiting for some time for other Japanese shoes to drop. I have long suspected that a unit of the Long-Term Credit Bank might go bust. In the past there has been at least one criminal indictment of a Japanese Bank stemming from the practice of foisting bad debt onto a unit that then goes bankrupt. The art of shifting losses around is well understood in Japan.

Likewise, while the Clinton administration is infamous for "telling the truth, slowly," the Japanese are past masters. The Long-Term Credit Bank was probably d.o.a. from the first and Sumitomo Bank (the putative, would-be acquiror) was just running interference with the press. There was yet another interesting tidbit today over at Nikkei. It seems there is now a question whether the salvaging scheme for Long-Term Credit will actually leave Sumitomo in a position of capital adequacy sufficient for the Bank for International Settlements.

Now read the following and listen for that shoe-dropping sound:

------------------------------------------------------------------------ MOF, BOJ Prepare To Help Japanese Banks Raise Dollars

TOKYO (Nikkei)-The Ministry of Finance and the Bank of Japan have drawn up an emergency plan to help Japanese banks cope with their growing difficulties in raising dollars, sources said.

The contingency plan involves the government depositing a portion of its foreign currency reserves, which amount to about $210 billion, with Japanese banks that are unable to meet dollar settlements.

The Bank of Japan will sell dollars to the banks in exchange for yen in a swap deal for a certain period. The BOJ will use its $20-30 billion in capital for the deal.

Japanese banks will also be encouraged to reduce assets denominated in foreign currencies and to issue detailed reports on their foreign currency dealings to financial authorities.

The Bank of Japan will do its utmost to prevent the difficulty of Japanese banks in raising foreign currencies from throwing the global financial market into turmoil, the sources said.

The plan comes amid shrinking confidence in Japanese banks abroad. The problems in the financial sector have led to a sharp rise in the "Japan premium" - the interest surcharge Japanese banks have to pay on funds raised overseas - and increasingly to an outright refusal by foreign banks to make loans at all.

In the past, Japanese banks that were unable to borrow dollars conducted swaps with foreign banks, using yen as collateral. These days, however, foreign banks are reluctant to engage in such swaps.

(The Nihon Keizai Shimbun Sunday edition)


Americans on the list might remember an ad campaign that went "Orange Juice - It' not just for breakfast any more." Try this on for size: Foreign Currency Reserves - they're not just for defending currencies any more.

This news may portend a liquidity nightmare in Japan. Law and business practice have made the securitizing of mortgages (commonplace in the U.S. and Europe) a relatively novel concept in Japan - and those are the good mortgages. In addition, writing off bad real estate debt is extremely difficult in Japan. These two things (among others, I'm sure) combine to keep a lot of debt on the books of Japanese banks. Then there's Japan's rock-bottom interest rates, which make Japanese debt less appealing. Now there is apparently a question of whether Western banks want to engage in swaps for yen debt at all - bad tidings I think.


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