Darrel Whitten

Japanese Media Predicts a Landslide Victory for Democratic Party of Japan

Dear Rosey99;

All (and more) than you ever wanted to know about Japanese politics is at the Observing Japan blog by Tobias Harris (observingjapan.com). Glocom (International University) www.glocom.ac.jp/e/ has academic discussions about Japanese policy.

Japanese Media Predicts a Landslide Victory for Democratic Party of Japan

Perhaps you should revisit the Hosokawa, Hata and Murayama Administrations again.

Since the LDP was formed in November 1955 and Ichiro Hatoyama (Democratic Party of Japan leader Yukio Hatoyama’s father) formed the first LDP-led administration, the LDP lost its control (majority) in the House of Councillors in 1989, 1998 and 2007 because of voter dissatisfaction, but they have maintained control in the House of Representatives for all but some 40 weeks between August 1993 and June 1994. As you are probably aware, the lower house is where the real power lies in Japan’s government, as the lower house is able to override vetoes on bills imposed by the House of Councillors with a two-thirds majority, and in the case of treaties, the budget, and the selection of the prime minister, the House of Councillors can only delay passage, not block the legislation.

The LDP lost control of the lower house in 1993 not because they were voted out but because a number of its members broke from the Party to form the Renewal Party and the New Party Sakigake. Voters actually gave the LDP more seats in the 1993 election, it was not enough to offset the losses from the defections. Ex-LDP member Morihiro Hosokawa of the Japan New Party was installed as Prime Minister and head of a coalition of seven parties (Renewal Party, Japan New Party, the New Party Sakigake, the Social Democratic Party and the Komeito). But the coalition government soon fizzled and the Hosokawa coalition government cabinet was a disaster. More ironic was the fact that Prime Minister Hosokawa stated that he would “continue the policies of the Liberal Democratic Party”.

The only lesson that the Hosokawa, Hata and Murayama Administrations demonstrated to Japanese voters was that Japan’s opposition parties were incapable of running the country. The LDP soon regained its pivotal position in government eleven months later when it joined with the Social Democratic Party and the New Party Sakigake in late June of 1994 to establish a coalition government under Prime Minister Murayama. In the midst of 1993~1994 confusion, the LDP did temporarily lose many of its leadership posts in the Lower House. One of these, the Speaker of the House, was assumed for the first time in Japanese history by a woman, Takako Doi of the Social Democratic Party.

Through various “coalitions” since the 1990s, LDP leaders have shown themselves to be adroit at cooperating with other parties while simultaneously sucking the life out of them. The Socialists, for example were the major opposition party for most of the postwar period but were virtually destroyed after trading principle for power by joining with the LDP in the 1990s. They now of course are in a ruling coalition with the Komeito.

The Liberal Democratic Party's fall from power in 1993 was due in part to its failure to carry out fundamental political reforms. As an opposition party in the post-Miyazawa Cabinet era, finding ways to get this stalled process moving again became one of the LDP's top priorities, and this gained voter support. Voters turned back to the LDP after seeing the political turmoil and inability to implement policy in the coalition government.

Japan's Economic Miracles: Next One Coming Soon?

Greater China (including Hong Kong) surpassed the US as China's greatest trading partner way back in 2004, accounting for 20.1% of Japan's trade versus 19% for the US. In 2007, China excluding Hong Kong surpassed the US as Japan's largest trading partner.
It is also the largest importer of Japanese goods.

Moreover, China was responsible for 38% of Japan's economic growth in 2002, but this surged to 68% in 2006.

While a good deal of China's output is exported to the the US and Europe, Japan has become a major export market as well. Thus while it can be argued that a good deal of Japan's exports to China are simply re-exported to the US and Europe, let's put the myth to bed that the US is still Japan's largest trading partner.

BOJ Foot Dragging Continues to Exert Upward Pressure on Japan's Bond Yields

Dear Reinko;

Just to set the record straight, savings rates in Japan are no longer higher than the US. US savings rate (as of Q4 2008) was over 3%, while Japan's has fallen to just above 2%, as the population rapidly ages and the number of "working poor" rapidly rises. Japanese salaries have fallen in seven of the past 10 years, unlike the OECD as a whole (25 countries), where average annual pay has risen consistently for nearly two decades, even during recessions.

As a result of the 90s Heisei Malaise, the Japanese government got all the debt, while corporations absorbed all the profit.

Japan’s '80s 'Bubble' Has Completely Deflated - and Then Some

Here's how Toyota's consolidated debt breaks down as of March 2008, or end of FY07.

-Total Debt (@JPY100/USD) : $122 billion

(S-T Debt)
S-T Debt: $35 billion
L-T Debt due in one year: $24 billion

- As of the end of March 2008, the company had an unused credit line of some $26 billion. Remember that Toyota can borrow in Japan at much lower rates.

- S-T debt includes commercial paper of $23 billion at an average interest rate of 3.76%

- Other short-term debt of $12 billion-plus at average interest rate of 3.36%.

- $54.5 billion of medium-term notes are due in stages between 2008~2027. 2008 portion included in "long-term debt due within 1 year".

(Bloomberg) **Yields on three-month corporate debt with the highest credit rating rose to a 12-month high of 0.83 percent on Sept. 25, the week after Lehman Brothers Holdings Inc. filed for the biggest bankruptcy in U.S. history.
Japanese banks are rushing to the blue-chip names, so the companies benefit from tighter spreads on loans.

Doesn't look like Japanese banks are running away from refincing by large, blue chip Japanese companies.

Reality Check for Japanese Commodity Price Estimates

A couple of points to remember about the Japanese oil industry.

1) While Inpex forecasts assume a Brent benchmark oil price, the actual benchmark for Japan is Dubai crude. Relative Brent, Dubai crude averaged $118.90/bbl, for a discount to Brent crude of over $4/bbl.

2) In FY08, of the JPY233 bln increase in sales for Inpex, unit prices accounted for JPY216.6 bln, volume increases JPY48.6 bln and exchange rates (stronger yen) minus JPY31.0 bln. Every $1/bbl annual appreciation in Brent crude oil gives a JPY2.2 bln boost to the company's net income, while every JPY1 appreciation slices JPY2.2 bln off of earnings, i.e., a JPY1 appreciation and a $1/bbl Brent crude appreciation would be a wash.

3) Nominal earnings are also significantly affected by inventory gains/losses. Inpex uses lower of cost or market average, with cost being calculated by the moving average method.

Japanese oil firms are notoriously conservative about oil price projections, believing that low balling earnings and beating street expectations is better than high balling earnings, missing street expectations, and then getting beaten up by investors. Unlike European and US oil execs, the top guys do not get megabucks in total comp. In Inpex's case, 13 inside directors (management) got an average of JPY46 million/director, of $460,000 per director (including bonuses). Compare this, for example, to Donald Humpreys, CFO of Exxon Mobile, with 2007 comp and bonus of $2.689 mln and total stock option and other calculated comp of $9.1 million

Escaping Japan's Potential Value Trap

William;

The Japan Corporate Governance Research Institute (JCGR.org) releases annual JCG indices for individual Japanese companies that is available for free. Others like Governance Metrics International, Northern Trust and State Street sell their governance indices to institutions and even to the companies they rate.

Ironically, JCGR has found that Japanese firms with highly rated JCG are more likely to undergo corporate governance reforms after experiencing poor financial performance. However, they admit that the relationship between the JCG Index and performance may actually be negative--thereby indicating the tricky nature of using governance metrics to measure medium-term stock performance.

More ironically, the pitfalls of "cookie cutter" governance rankings are highlighted by the fact that Nomura Holdings topped the JCG Indices in 2006, only to be brought down by an insider trading and other scandals that will hurt their investment banking business. In addition, the JCG indices cover 312 of some 3,800 listed Japanese companies.

Thus a corporate governance "score" is only one, and a tricky one at that, to measure the quality of management and corporate governance--and an even trickier way of measuring potential stock price performance. A better measurement might be foreign ownership (and the corporate governance pressures that implies) and the lack of stable domestic shareholders, such as a parent company or Japanese banks/insurance companies.

At any rate, good corporate governance is only one (increasingly important) factor to consider when picking stocks, and I have my doubts about the effectiveness of a fund or index based soley on simple corporate governance scores.

Instead, we look for evidence that management "gets the joke" about the effects of globalization on their business, and of providing competitive returns to their shareholders, and shows this with visible action, as going from "poor" to "good" corporate governance can be as powerful a stock price driver as a text-book corporate governance structure--coupled of course with a corresponding improvement in shareholder returns.

Bureaucrats, Parochialism, and the Japan Discount

Actually, I think the best thing that could happen is for the LDP to lose big in the upcoming elections, meaning they would lose control of the Upper and Lower Houses. The Lower House is more important because that is where budget control originates. If the LDP loses this, Japan will have its first truly two-party system--which we believe would work to make both parties mroe respondent to the voting public and help to elimnate over 40 years of pork barrel politics in the LDP.

More Downside for Nikkei 225 as Yen Appreciates Further

SplitAces;

Since the yen is only strong against the falling US dollar, profits of companies with high export exposure to the US would be hit the worst--both from falling US demand and a strong yen. That includes automobiles and consumer as well as industrial electronic companies. In terms of general sectors, that means automobiles and electronics. However, since both are major drivers of total Japanese profits, aggregate Japanese profits will also be hit.

Japanese Yen Poised to Renew 1995 High

Thomas;

Its a perfect storm in the currency markets too.

1) The yen carry has unwound as hedge funds blow up,
2) Sovereign Wealth Funds like Qatar which were 99% in USD two years ago are now down to 40% USD exposure,
3) "Bad boy" oil exporters like Iran and Venequela are now asking Japan to pay them in JPY instead of USD
4) US pension funds like CalPERs are reducing USD equities and shifting funds to international bonds, equities away from USD assets.

Ironically, individual Japanese investors are again loading up on USD and other foreign exchange investments on the assumption that the current blow-out in the Yen in will not last long.

Pricing Japanese Banks for Bankruptcy is Overdoing It

Dear William;

I don't know what your source of data is, but the source of the data for my comments was the Kabushiki Shimbun website
(www.kabushiki.co.jp/ma...), which carries daily TSE 1 sector quotes as well as forward PER and historical PBR and Dvd Yield for 33 sectors. They calculate PBR using the latest full fiscal year consolidated shareholders' equity per share, and the bank sector Arithmatic Stock Price Average.

The Tokyo Stock Exchange also publishes monthly PER and PBR data based on the TSE 1 Arithmatic Stock Price Indices. At the end of December, the book value per share for the TSE 1 Bank sector as calculated by the exchange (on a consolidated basis) was JPY650.80 per share, while the Arithmatic Stock Price Index for the Banks was JPY539.04, resulting in a PBR of 0.83 at the end of December 2007.

The Arithmatic Stock Price Index for the Banks recently fell to the JPY240 level, which works out to a PBR of 0.37X, implying that the Kabushiki Shimbun data is not in error.

Thus I fail to see how my comments could be construed as "sloppy" based on this data. Rather than going into a long explanation about whether the arithmatic stock price averages are better or worse than Topix indices or the Nikkei 225 indices, I believe my point is still valid, i.e., Japanese bank stocks are in aggregate at extremely oversold levels.

U.S. Markets in Early Recession Mode; Japan Already Discounting One

As Japan's small caps usually show sustained rallies at the beginning of economic recoveries, they could be dead in the water until the current storm passes even if the downside is now limited by break-up values.

Japan's LDP: Let Them Eat Cake

Dear Huangjin;

Yes, demographics is having a major impact on Japan in many ways. Most prefectures (of which there are 47) are experiencing declining populations, a weakening economic base and related lackluster demand for banking services, shrinking property values, and structural local government deficits.

That said, the government actually exacerbated the situation by "stealth" tax hikes, trimmed public services (i.e., no buses for grandma) and a rush-job tightening of regulations on building codes that has essentially stopped the housing market in its tracks. And oh by the way, they would ram through a doubling of VAT hikes in a minute if they thought it would be politically feasible.

They are also clueless as to how to restore Japan's role as an international financial center, even though they desperately would like to. How about tax breaks, easier administrative proceedures, free economic zones, etc., etc.?

Yen Carry Trade: Dire Threat or Poltergeist?

John;

The BOJ is the agent for the MOF in effecting forex intervention, using the Foreign Exchange Fund Special Account, which has two elements, the Foreign Exchange Fund and the narrowly defined Foreign Exchange Special Account. The former is a separate fund prepared for foreign exchange trading by the Government, and purchases/sales of foreign exchange by this fund are not recorded as the revenues/expenses of the Government. In the latter, results of trading such as (1) profits/losses arising from foreign exchange trading and (2) payment/receipt of interest arising from fund-raising/investmen... accompaning foreign exchange intervention are recorded as the revenues/expenses of the Government. In this case, the government issues finance bills to fund the intervention. So, Japan's total debt would technically be affected if it were a sizeable intervention.

As for the impact, in 2001, the BOJ spent $28 billion to prevent the yen from breaking JPY100/US$, and in 2002 had to spend another $33 billion to keep the yen from getting too weak. During this period, the yen swung from JPY105/US$ to JPY135/US$, so the interventions were apparently effective.

In addition, the government is now showing massive capital gains and interest on the forex held that run into the trillions of yen, and some of these profits are being funneled back into the general account to help stop the fiscal bleeding.

Would a US Recession Negatively Impact Japan?

The US dollar (and low US rates) have been supported by foreign purchases of US treasuries. Japan accounts for 27% and China 18% of total foreign holdings of US treasuries, which are $2.2 trillion. Most of these foreign holdings (66%) are "foreign official", i.e., foreign central bank holdings, which are unlikely to be dumped unless the situation becomes very dire (i.e., global depression).