I'm appending some comments made a few months ago to PKT.
1. Any asset can be lent; a house that you own can be rented to s.o. else; so can a treasury bill.
2. It would be interesting to know what price the Japanese govt is charging. If the T bills are lent at the Japanese long rate and accrue at the American rate, that is a very good thing for the Japanese banks.
3. Since 30% of Japanese loan portfolios are in US dollars I suspect that part of the issue is to whom the dollar obligations apply. If those dollar loans were made to Asian countries they are worthless. Or worth not very much. If the bank has to write off the entire amount of the loan, it must reduce deposit liabilities to match the diminished assets. That means a shrinking of the money supply. If the bank can borrow a "good liability," i.e. a U.S. Treasury, then it can do new lending on the basis of that Treasury. Since the lending will be in yen and yen rates are very low, I find it difficult to think that the GOJ would charge the US bond rate. You can't fix a Japanese bank by making it borrow a good asset at 5% and then expect it to re-lend at 2% or less. Probably part of the subsidy here is to allow the banks to increase lending at Japanese internal rates AND benefit from comparatively high payoff from US bonds. (but see #5)
4. It also makes sense, as someone else pointed out, for the Japanese banking system to reduce exposure in dollar loans so as to avoid currency risk forcing lending contraction (explained in attached note). So the strategy is A) provide good assets cheap to substitute for bad assets and B) reduce exposure in appreciating dollars.
5. Even if Japan doesn't have $ denominated loans to Asia, the contraction caused by dollar appreciation is significant. A bank is obligated to maintain a certain # of assets, including, but least important o which, is cash, to offset deposit obligations. Japanese banks can keep dollar assets against yen obligations, but they have to keep a proportion of yen assets (e.g. cash) against their dollar assets.
6. You might try looking into a closed end stock fund for your Asian investments. These used to be called country funds; Barron's now has another name for them, maybe world markets or something like that. I think they're listed under "closed end funds" in the numbers part of Barrons. There's a "Japan" fund, "France Fund," etc. These closed end funds usually trade on the NYSE. They are selling at steep discounts now relative to asset value, so barring a Mark Jones-style meltdown they are a good buy.
7. Did anyone see the WSJ article about the "vulture capital" guy? What a stitch. Talk about buying when there's blood in the streets.
-- Gregory P. Nowell Associate Professor Department of Political Science, Milne 100 State University of New York 135 Western Ave. Albany, New York 12222
Fax 518-442-5298
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