Japan...deepest downturn since World War II --- Bond Market Jittery ---

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Washington Post Link

Japan Turns to Banks for Loans

By J.L. Hazelton - Associated Press Writer

Monday, Jan. 31, 2000; 1:45 p.m. EST

TOKYO  The Japanese government has issued tons of bonds in an unprecedented spending campaign to prod the economy out of its deepest downturn since World War II.

Now, faced with a projected shortfall in what it owes municipalities, the government is looking in a different place to borrow money: banks

Governments tend to shy away from banks, at least in part because they can be expensive. While the benchmark government bond yield in Japan is around 1.7 percent, Tokyo can expect to pay a reported 2.1 percent on a loan.

But Japan's recent massive economic stimulus packages have already relied heavily on bond issues, there is mounting concern in Japan that the market may have absorbed all it can take.

"The bond market is already jittery about the supply," Commerz Bank economist Ron Bevacqua said Monday. "The government is trying to avoid the market consequences of its decision making."

A Finance Ministry official, who requested anonymity, said that the government turned to the banks because it felt bonds were not a good idea and had to find other ways to raise money.

The Nihon Keizai financial daily reported that the government planned to pay 2.1 percent interest, but the official declined to comment.

It's not the first time Japan has turned to bankers for funds. The government resorted to direct borrowing to cover shortfalls in a national forestry account in 1998.

Whether the government raises funds through bonds or bank borrowing, the policy is leading to the same result: debt  and lots of it.

With its debt at 128 percent of its gross domestic product  a measure of all goods and services produced in a country  Japan has achieved the questionable distinction of joining Italy as the only two countries with debt greater than GDP. In contrast, the U.S. national debt is half its GDP.

Tokyo doesn't seem worried enough about the debt to stop spending, however. Last Friday, Prime Minister Keizo Obuchi told Parliament that he was focusing on economic recovery rather than the ballooning deficit. He's predicting 1 percent economic growth in fiscal 2000, which begins April 1.

The government's spending ways have yet to influence Japanese consumers and companies, who are holding tight to their money in fear of further hard times ahead. Spending by wage earners fell 1.7 percent in real terms in 1999, officials announced last week.

A blip involving the huge postal savings system is at the root of the $74.8 billion shortfall in the $196.5 billion budgeted for unrestricted local government funding in fiscal 2000.

Ten years ago, when interest rates were around 7 percent, lots of Japanese locked their money into high-yielding 10-year post office accounts. With those accounts maturing, and interest rates below 1 percent, many are likely to take their money elsewhere, Bevacqua said.

The postal office is the largest bank in the world, holding money for millions of Japanese, but the maturing accounts total about $935.5 billion, or a third of its holdings, Bevacqua said. That leaves the government with significantly less upon which to draw.

Turning to the banks is not so radical, Bevacqua said, since the government nationalized several of the biggest and spent $72.0 billion bailing out the system after the 1980s economic bubble burst.

But it's also not in the spirit of promised structural reforms of the Japanese economy and the political system, he said. "It's not market economics."

Peter Morgan, senior economist at HSBC Securities in Japan, said the government's latest strategy isn't that significant, adding that the difference between issuing short-term bonds to cover the potential postal savings problem and taking out bank loans will not be that great.

The move, while directed at the specific problem of the postal-savings withdrawals, could nevertheless provide a more flattering view of the overall deficit, Morgan added.

If the market looks at bond totals rather than bond and loan totals, things aren't quite so grim, he said.

(This thread is a result of Freddie Fiat's post below.)

-- snooze button (alarmclock_2000@yahoo.com), February 03, 2000


The crux of the matter might be how far can you go to spend yourself out of a recession...or will you put yourself into worse trouble?

There is something here that could serve as a caution to the Federal government, as well...

-- Mad Monk (madmonk@hawaiian.net), February 03, 2000.

At some point these guys are going to look at their foreign gov't paper holdings and some of the bigger houses are going to say "Gee, I sure could use a few of those dollars over there" and they wil present their Dollar Denominated US Gov't bonds for redemption, or simply liquidation sale. If I recal corectly, at least one house there has not less than 3 trillion $US in bonds. Uhm, yup there IS a TR in there. Think about liquidating THAT portfolio. "We would like to liquidate our portfolio. We'll be happy to do it in an orderly manner, half a trillion an hour for 6 hours tomorrow."

think THAT one all the way through.



-- Chuck, a night driver (rienzoo@en.com), February 03, 2000.

Bonding is such sweet sorrow...

-- dinosaur (dinosaur@williams-net.com), February 03, 2000.

"While the benchmark government bond yield in Japan is around 1.7 percent, Tokyo can expect to pay a reported 2.1 percent on a loan."

May I borrow some money at 2.1% interest please?

-- Guy Daley (guydaley@bwn.net), February 03, 2000.

Chuck, or whomever:


Question: If that huge redemption starts happening, and presuming our gov't will keep it as quiet as possible, how might us more Wall Street-challenged types learn about it? Or where? Related question: How might this administration try to finance such a redemption without letting the word get out?


-- Redeye in Ohio (cannot@work.com), February 03, 2000.

How will we know? Easy....those in the know will start selling first, then those that watch the ones in the know will start and then those that watch them well start and then the sheeple will ask, "please sell all my stock" and the broker will say "to whom?"

Then the layoffs will start and the unemployment will rise.

We use to be a third world country about 200 years ago.

-- what?me worry (unsureasalways@crazytimes.net), February 03, 2000.

I think I'll go put some money in the NASDAQ. La, la, la...

-- Mara (MaraWayne@aol.com), February 03, 2000.


As I recall much of Japanese investment in long term US T-Bills. If they redeem these in masse the 30 year bond index will drop. As the bond drops the yield will rise as a percentage of the new lower bond price causing other interest rates to rise competively.

This link update near real time:


-- Bill P (porterwn@one.net), February 03, 2000.

Bill P,

Thank you! Found that a most interesting link. Bookmarked it immediately.

Darn, this place gets more and more addictive! Why? Right now, because of the amazing breadth of expertise represented by those of you frequenting this place.

-- Redeye in Ohio (cannot@work.com), February 03, 2000.

Mara... I loved you're comment.

Bill P... Thanks for the great index link!

-- snooze button (alarmclock_2000@yahoo.com), February 03, 2000.

Not to be nitpicky, but they wouldn't "redeem" the bonds, the Japanese might SELL the bonds. The bond issuer (U.S. Treasury) can redeem the bonds, no one else.

-- J (Y2J@home.com), February 03, 2000.

IMHO, the Japanese banks would not liquidate their US Treasury bond holdings en masse for any reason other than to meet an immediate liquidity crunch that the BOJ was unwilling or unable to cover.

Look at it this way: Japanese banks are required to have a certain amount of reserves. Their US Treasuries count as part of their reserve requirement, pay a much higher rate than Japanese government bonds, and pay in a "hard" currency (US dollars, as compared to rubles or pesos). These are hard assets they will want to keep for as long as they can.

A run on Japanese banks or even a very high net outflow from savings accounts might change this. But the bulk of Japanese savings are in the government-run postal system. A run on the postal system would press very hard on the Japanese *government*, which would have to cover it, much more than the banks.

Under those circumstances, I would envision the Japanese government falling back on currency restrictions, restrictions on postal redemptions, and other regulations designed to keep hard assets in-country. This would collapse internal consumption even more, but would be less dangerous than issuing government bonds to cover the obligation.

As I see it, the problem with the scenario where Japan cashes out its US Treasuries is that the Japanese are captive to us as much as we are captive to them. They clung to a weak yen because that was the secret of their earlier success and they could not bear the idea of throwing away that weapon, even though it was killing them. They backed their way into a classic liquidity trap and now they do not know the way out. They got too good at hiding their strength and converting it to weakness. Now they are truly weak.

As long as the yen stays weak, the dollar will stay propped up. As long as the dollar is strong, the Japanese will value our US 30-year bonds and clutch them to their bosoms. As long as the Japanese stay long in our US bond market, we shall remain protected from our profligacy. When all that changes, we go down hard.

None of this comes with a known expiration date. No doubt it has one.

-- Brian McLaughlin (brianm@ims.com), February 03, 2000.

Don't know yet who, but someone is buying alot of 30 yr T-Bills today. Rumor on www.kitco.com is that US Sec Treas Summers is using some of budget syrplus to redeem 30 year bonds or replace long term with shorter term debt ie 2-5 yr notes.

This puts FED and Treasury at odds. FED sees need to fight inflation and raises interest rates. Treasury sees no inlfation and uses current dollars to redeem future notes. If Treasury agreed that inflation was an issue would they not let the the 30 yr T-Bills ride at low interest rates and pay them off with cheaper dollars.

Seems there is a fundamental disgreement between the FED and the Treasury.

-- Bill P (porterwn@one.net), February 03, 2000.

Bill -

It's more than "someone". It's a full-on, nostrils-flaring buying panic (not my term - that's what I've read from some Treasury analysts), and it's distorting the bond market something awful. There's probably some rumors being circulated that feed this, which no doubt helps the rumor-mongers' positions. 30-year Treasuries have dropped significantly (yield 6.153% when I last checked), which helps make mortgages cheaper, and thus feeds the real estate boom.

Meanwhile, tech stocks are ignoring the Fed rate hike completely.

Somehow I don't think this is what Mr. Greenspan had in mind.

-- DeeEmBee (macbeth1@pacbell.net), February 03, 2000.


"Meanwhile, tech stocks are ignoring the Fed rate hike completely. Somehow I don't think this is what Mr. Greenspan had in mind."

Can I quote you on that?(grin)
Thanks for your insights. The analysis and opinions given here by you, Brian M, and Bill P are a unique window into "what is happening in the market".

-- Possible Impact (posim@hotmail.com), February 03, 2000.



-- Someone (ChimingIn@twocents.com), February 04, 2000.

"A date which will live in infamy..." --- FDR

-- DeeEmBee (macbeth1@pacbell.net), February 04, 2000.

Ohh, I get it, first they hit us with Zeros Then they hit use with Ones, Billions of 'em.
Thanks for pointing this out.

-- Possible Impact (posim@hotmail.com), February 04, 2000.

I reread my reply and thought I better clarify, there should have been a "(grin)" at the end of the post. I'm sorry that the "tone" didn't come across like I intended, I really am glad you pointed out the implications.

-- Possible Impact (posim@hotmail.com), February 04, 2000.

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