JAPAN

[rffrydr]

Core rate up .5%; 3 in a row:

"Mitsubishi UFJ Securities senior strategist Naomi Hasegawa said remarks this morning by Prime Minister Junichi Koizumi fueled conjecture that the central bank will soon end its present policy.

'[Changes in] consumer prices are coming in above zero and we are seeing signs of getting out of deflation,' Koizumi told a parliamentary committee.

His comments were his most positive yet on recent indications that the economy is winning its battle with falling consumer prices. Previously, Koizumi had insisted that it was too soon to say that the economy was coming out of deflation."


Bonds and stocks were short going in. End-of-day showed resiliency, (complaceny?)

Hey Henry, Devil's advocate: with Japanese debt at a Godzilla-sized 160% GDP on the worlds fastest aging population (and most afraid of foreign workers) do they have any choice BUT to reflate their way out? And politicians want a decade for "reforms."

An end to quantiative easing may be announced at the end of Japanese Fiscal Year--but this could take a long, long time to play out. Markets 1st "verdict."
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

The story behind the story of much of this rebound rally..yet, the yen has mysteriously followed, 82 to 86 or so. One should not underestimate the conservativeness of japanese money--housewives aside.

http://www.alertnet.org/thenews/newsdesk/T285984.htm
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Japan Post set to privatize this Monday - becoming the largest commercial bank in the world, ahead of Citigroup. The immediate changes are minimal, however. Over the longer-run, there could be profound changes (such as a rise in Japanese yields given that this pool of savings may be diversified into other assets, including foreign securities) - but when it comes to the Japanese, the cultural barriers to change can be enormous:
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Japan Set to Privatize Postal System
Saturday September 29, 5:19 am ET
By Hiroko Tabuchi, Associated Press Writer
Japan to Privatize Postal System, a Move Intended to Inject Competition Into Banking Sector


TOKYO (AP) -- Tiny Shirogane post office in a quiet Tokyo neighborhood, with just three clerks and one ATM, might seem far removed from the world of global finance.
But when Japan Post is privatized on Monday, the Shirogane office will become part of the world's biggest commercial bank -- with assets of $3.03 trillion -- in a move intended to inject competition into Japan's banking sector.

"Our customers will soon experience the merits of privatization," Yoshifumi Nishikawa, president of Japan Post, said Friday. "They will see a better quality of services, or new products -- in short, more convenience."

The massive changeover is the result of 2005 reforms instituted by then-Prime Minister Junichiro Koizumi, a former post and telecommunications minister who championed the issue in his landslide victory in parliamentary elections that year.

Much more is at stake than just stamps and letter deliveries: Japan Post operates a bank with over 400 million accounts. Its 24,500 offices nationwide act as sales agents for insurance and investment products.

For millions of rural Japanese, the post office is their only bank, and the system's ubiquitousness has made it a symbol of a benevolent government ready to cater to every citizen's needs.

"The post office is such a basic necessity," said Kazuko Nishina, 36, an accounting clerk, who was withdrawing cash from her savings account at the Shirogane post office.

"I'm still not sure what's going to happen with privatization, but I hope there aren't any surprises for ordinary customers," she said.

Changing such an entrenched system has been tough. When Koizumi pushed through the reforms, critics warned privatization would reduce services, especially to the countryside.

Even lawmakers within his own ruling party vilified the reforms as another attack by modern times on an orderly, secure society.

But Koizumi argued that the government guarantee on postal savings had encouraged generations of Japanese to park their money in the low-interest accounts, creating a stagnant pool of savings and diverting funds away from more productive investments like stocks and mutual funds.

Experts have also said that postal funds have been used to finance pointless government-backed public works -- bridges to nowhere, redundant roads -- and to purchase government bonds, contributing to a public debt now over 160 percent of Japan's gross domestic product.

"These reforms were necessary in terms of making more efficient use of funds," formerly being diverted to useless public works projects, said Kentaro Kogi, banking analyst at Macquarie Securities.

Privatization could also help foreign banks and investment companies scoop up new clients, with the huge savings pool up for grabs at a time when more Japanese turning to stocks and mutual funds.

That means big money for both domestic and foreign banks, as well as insurance companies.

"We can expect the changes to be a plus for stock markets, against the general backdrop of a trend toward more diverse investments," Kogi said.

The entity privatized on Monday will eclipse Citigroup, with assets of $2.22 trillion, as the world's largest commercial bank. Third will be Japan's Mitsubishi UFJ Financial Group, with $1.67 trillion.

Under the 10-year privatization plan, Japan Post will on Monday be broken into four separate businesses, initially held under a government-controlled holding company: An insurance company, savings bank, mail courier and post office management company.

The companies are set to be made independent by 2017, and aim to list on stock markets. The new bank has said it hopes to improve returns on its savings by starting mortgage and credit card businesses, and lending to small companies.

Still, uncertainties remain.

Some say that far from encouraging open competition, Japan Post will be allowed to encroach on rivals by introducing new investment services and new insurance products before a more level playing field is created.

Another issue is whether foreign firms will have equal footing to sell investment products through the newly privatized bank. So far, they have been granted only a minor role, with Goldman Sachs Asset Management the only foreign firm chosen from a dozen that applied to sell their funds.

Meanwhile, some analysts say the mammoth organization -- largely lacking expertise in more sophisticated investments -- could struggle to stay profitable. That raises the risk the bank could start selling off its huge government bond holdings, causing a hike in yield and ultimately adding to the government's debt payments.

"The concept of postal privatization is good. It will inject competition into the banking sector and raise the overall quality of financial institutions, and would encourage more risk-taking behavior and revitalize the economy," said Junsuke Senoguchi, a banking analyst at Lehman Brothers Japan.

"But, depending on how privatization plays out, the move could ultimately damage public finances," Senoguchi said. "That's probably not what the government intended."

[HenryTo]

Japanese banks only now disclosing their subprime exposure. Still not sure on the extent of the exposure, however:

http://www.bloomberg.com/apps/news?pid=20601087&sid=a5gASwmgFR8I&refer=home

[rffrydr]

was going to post; you beat me to it. See marketthoughts for Mrs. Watanabe.

Senzhen next?
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Today is the Tomorrow you worried about Yesterday!

[Geoffrey]

NYT on how the Japanese housewives fared in August.
Celebrity trader from +150k USD to an account balance of $1k.

http://www.nytimes.com/2007/09/16/business/worldbusiness/16housewives.html?pagewanted=1&ei=5087%0A&em&en=654d792bc6401821&ex=1190174400

[rffrydr]

It held up; and it's also held down. This is more telling on the state of politics in Japan--or lack thereof.
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Yen appreciated against both the US Dollar and the Euro on this piece of news.

Interestingly, Yen has also held up against both the Dollar and the Euro in recent days despite horrible economic data.

[HenryTo]

Japanese Prime Minister just resigned:
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Japanese Prime Minister Abe will resign By CHISAKI WATANABE, Associated Press Writer
21 minutes ago

TOKYO - Japanese Prime Minister Shinzo Abe announced Wednesday he will resign, ending a year-old government that has suffered a string of damaging scandals and a humiliating electoral defeat.

Abe, whose support rating has fallen to 30 percent, cited the ruling party's defeat in July 29 elections for the upper house of parliament, and said he had instructed party leaders to immediately search for a new premier.

"In the present situation it is difficult to push ahead with effective policies that win the support and trust of the public," Abe said in a nationally televised news conference. "I have decided that we need a change in this situation."

Abe, 52, a nationalist who entered office as Japan's youngest postwar premier, did not announce a date for his departure from office.

Word of Abe's resignation comes after his scandal-scarred government lost control of the upper house of parliament to the resurgent opposition. The LDP still controls the more powerful lower house, which chooses the prime minister.

Abe's resignation marks a rapid fall from power for a prime minister who came into office a year ago with ambitious plans to repair frayed relations with Asian neighbors, revise the 1947 pacifist constitution, and bolster Japan's role in international diplomatic and military affairs.

The prime minister, whose grandfather was premier and whose father was a foreign minister, initially met with success in fence-mending trips last autumn to China and South Korea.

But a string of scandals starting late last year quickly eroded support for Abe. Four Cabinet minister were forced to resign over the past nine months, and one — his first agriculture minister — committed suicide over a money scandal.

Abe also was facing a battle in parliament over extension of the country's refueling mission in support of the U.S.-led operation in Afghanistan.

Abe had said he would quit if he failed to win parliamentary passage of legislation extending the Afghan mission, in which Japanese ships refuel coalition vessels in the Indian Ocean.

"I have pondered how Japan should continue its fight against terrorism," Abe said Wednesday. "I now believe we need change. So Japan must continue its fight against terrorism under a new prime minister."

The plenary session of the lower house was to be delayed, media reports said, but an official of the lower house said she could not confirm that.

Opposition lawmakers said it was about time Abe resigned.

"It is irresponsible for him (to quit) after he gave a policy speech and was to face parliament questioning. He should have quit right after the upper house elections," Mizuho Fukushima, head of the opposition Social Democratic Party, told NHK.

[HenryTo]

A somewhat different view on the Japanese economy - but he still thinks the Yen should go down. Courtesy of Barron's:
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Japan on the Mend: Still a Haven?
Richard Jerram, Japan Economist, Macquarie Securities
By LESLIE P. NORTON

AS AN ECONOMIST SPECIALIZING IN JAPAN, Richard Jerram arrived in Tokyo in 1987, at the time of the Great Bubble. There, with a timeout for a Ph.D. from the London School of Economics, he watched the country go through its long decline and recent revival. We phoned Jerram in Tokyo at Macquarie Securities to catch up on what the July 29 Upper House rout means for Prime Minister Shinzo Abe and for global investors, and whether Japan, sometimes viewed as a haven, really is one. For Jerram's views, read on.

Barron's: Could you brief us on the July 29 election? What are the implications?

Jerram: The government did very poorly. It no longer has a majority in the Upper House, so it's going to be very hard for it to get things done. Technically, they can bludgeon bills though the Upper House because they've got a two-thirds majority in the Lower House. But clearly you don't want to bully the Upper House into pushing bills through too frequently. If the government spends critical capital, it won't be in economic areas, it's going to be in things more related to international relations or possibly domestic educational policies. It seems a reasonably good bet that just about nothing will happen on the economic front over the next couple of years.


What had people expected?

My view was that the Abe administration had no interest in economics. But there was an argument that once this election was out of the way, you'd see the real reformist coming out of Abe, which always seemed far-fetched to me. Whereas in Japan, it's been very, very difficult to sell reform, in the last couple of years. there's a growing sense of concern about inequality. The low probability of reform just got smaller. To push up support for the next election in a couple of years, the [ruling Liberal Democrat Party] needs to push up its traditional rural support base, which implies continued agricultural protection or increased rural spending -- more bridges to nowhere. So for the short term, possibly nothing happens or something that's not very positive.

How about the longer term?

It does seem the public, after putting up with 15 years of dreadful policy management, is starting to express some dissatisfaction. Look at the economy -- the crisis is over and there are more jobs than people looking for jobs. The banks are solid. Deflation is pretty much over. Land prices have stopped falling. Despite that, the government took a hammering in the polls. If you do get a general election in the next couple of years, you actually have a reasonable chance of the LDP losing power. People assume the opposition is such a rainbow coalition that it will fall before the next election, and if the opposition does manage to stick together, then they can easily win. It's still the same problem: There's not a great enthusiasm for pro-market reform, and the central opinion is a social-democrat type of reform. But policies will be very fluid because of the broad spectrum of opinion. So it could get really interesting.

Meaning woes for investors?

Interesting, meaning unpredictable. But they haven't had to give serious thought yet to their policy positions because they've been condemned to permanent opposition.

What does the market want to see?

Top of the list is tax reform. Around 70% of companies never pay tax, and this isn't because they are unprofitable, it's because they exploit loopholes. The ability to operate without any tax liability encourages inefficiencies. The second area is deregulation. There's always been progress, but the rest of the world is turning fairly fast, and even though Japan is reforming, it makes comparisons with the past rather than the rest of the world. But disposing of government assets would be an obvious place to start.

What happened to privatization of the postal system, which is like a gigantic bank? It was the rallying theme for the [ex-Premier Junichiro] Koizumi government in the snap election two years ago?

It was important for its symbolism rather than its actual impact. It would be better for the economy if they simply closed some parts of the organization down than privatized them. You risk setting up an institution with implicit government guarantees and subsidies competing with the private sector. But the reform is happening; it will be another 10 years before it's fully implemented. It's probably not good for some of the regional banks, which will face tough competition, but they have time to adapt.

Let's turn to the economy. What's happening with deflation, the consumer?

People don't appreciate the dynamism of this economy. The policy failures of the 1990s created so many distortions that once the roots of the problem -- the distressed banking system and deflation -- are resolved, you have a productivity catch-up and unavoidable efficiency gains, which is what you're seeing. The corporate sector is gradually more enthusiastic. The frustration with this domestic reflation, or normalization, is it's creaking to life with an extreme amount of caution after 10 years of misery.

Things are getting better. The consumer can get a job, his wages are going up, he is prepared to spend a little more. You are getting such good productivity gains from the better resource allocation that, unfortunately, the recovery is not generating inflationary pressure. What you see in real terms is what you get in nominal terms. Consumption is growing 1% to 2% real. If you could stick a couple of percentage points inflation on that, you get a respectable top line, but right now it's unimpressive.

What does this mean for interest rates? The Bank of Japan recently stayed its hand because of market turbulence.

Interest rates are going to go up. The BOJ is telling us that they will normalize rates almost with disregard to current economic conditions. Inflation has been back in negative territory for the past five months, and the BOJ is still saying, because it has a forward-looking policy, it is comfortable raising rates. There are two basic problems in this. The framework is misguided: The BOJ has a much lower inflation tolerance than most other central banks, and lower than economic theory suggests is sensible. They're unable to predict inflation, because it's hard to figure out how much spare capacity is there. It's difficult to have a forward-looking policy if you don't have confidence to predict what happens next.

So, rates will go higher. By when?

It looks to me like they will raise rates again, probably October, from 0.5% now, after making sure the data are still solid and the world is not melting down. My impression is that [BOJ Governor Toshihiko] Fukui would like to leave office with the rates at 1%, so maybe they'll raise again in March as a farewell gesture. It's less predictable beyond that, because you don't know about the new governor -- whether it will be someone more aggressive or a standard insider. The argument that they will raise rates again in October and March is not really based on an assessment of economic conditions. It's based on an assessment of the guidance being offered by the BOJ.

What does this mean for the yen?

I assume ¥117 to the dollar this time next year. There seems to be the assumption that as you put up interest rates, the interest-rate differential with the U.S. will narrow and the yen will go up. You start to question it if it's increasingly apparent that the interest-rate increases are misguided because then you question the outlook for domestic growth, asset prices and whether you want to be owning yen, either as a domestic or foreign investor. If you conclude the policy is misguided, the yen could easily go down when they raise rates.

You argued recently that Japan was a safe haven. Why?

The economy is a safe haven because it has this internal domestic dynamism that's simply a reaction to the distress of the past 15 years. Japan has not participated in the credit boom, in the financial innovation that helped drive the U.S. and Europe. Over the past five years, the money supply has grown 46% in the Eurozone, 31% in the U.S. and 8% in Japan. Clearly there's a risk to trade, but most people don't realize that exports are only about 15% of the economy.

But within the stock market, more than half the companies are large manufacturing companies -- export-based manufacturers where profits are very sensitive to external demand conditions. The second problem is even as foreigners only own about 30% of the market, they account for close to 60% of trading. If the foreign investor starts to withdraw, liquidity could go down. In my visits with investors, the Europeans are more comfortable with the idea of a clumsy, inefficient social democrat government and reasonable corporate success. Europeans are still more comfortable with Japan's growth. In America, the reaction to Koizumi's postal reform was really more striking. They're more negative now -- they see the return of political inertia or barriers against corporate governance.


So, people have been fairly relaxed about the prospect of Japan's economy growing 2% to 3%, but you have to be much more concerned as the stock market reintegrates with the rest of the world, which it's doing because 15 years of very sluggish domestic growth and deflation have shrunk the balance sheets of domestic companies. Those geared to a dynamic global economy became more important.

What's your view of equities?

For the past four or five years, you've had very positive economic conditions and persistent upward revisions to earnings forecasts, and the market has done well. We expect that to continue but not on the same scale, because the cycle has matured, operating gearing has diminished, as has room for macro-driven earnings surprises. In the '90s, the importance of management was very low, because the economy was driving earnings. Now we're entering a more mature phase, where sector selection is less important than management competence and valuations. It becomes a more stock-specific, micro-driven market.

What kind of earnings growth should we expect?

In the 5% to 10% range. You had a good bounce early in the process, which settled down to around 20%. But operating gearing is diminishing, your capacity utilization goes up more slowly. In America, the corporate sector persistently delivered profit growth well in excess of nominal GDP through continued pressure for governance and management squeezing out inefficient parts of businesses.

Are we not seeing the same in Japan?

There isn't the same pressure. It's a shame: It would be a source of stronger efficiency gains and a healthier stock market.

You don't sound too optimistic. How do small-caps look?

You can find some fantastic growth names at very reasonable prices, but it's not clear that now is the time to get in. Though it's probably getting reasonably close. Topix is 17 times earnings, fairly cheap, implying a 6% earnings yield, versus a 1.6% bond yield. The dividend yield is 1.4%. If you think there is going to be a significant improvement in corporate governance, then 17 times is very cheap, and if you think there isn't and growth will be dull, there's no immediate trigger. It would be surprising if you woke this time next year and the market was at 25,000 [from around 16,000 today]. Looking a little longer term, say a five-year view, you do have the pressing need to improve returns on domestic assets and improve domestic efficiency, so there will be greater pressure on corporates to improve returns.

That said, you can find some very interesting micro companies in Japan -- fantastic global companies and companies geared towards the domestic recovery, which is not well appreciated. We like Mizuho Financial [Ticker: MFG]. They're nicely geared to interest-rate increases, and active management of personal wealth through the sale of financial products. Banks were crushed in the past month. For 15 years, people assumed the worst in the absence of transparency. But the regulatory environment has changed so significantly the disclosure is fairly reliable. We like KDDI [9433.Japan], not because domestic telecom is roaring but because it looks cheap. We like Sumitomo Metal Industries [5405.Japan], which has great gearing to global energy investments. We like Nintendo [7974.Japan]. And the trading houses are coming up cheap, but obviously some people are uncomfortable with things geared to the global cycle at this stage.

Thank you, Richard.

[nodoodahs]

Yeah, the volatility will have to calm down so that the currency losses don't knock the carriers out of the interest spread positions. It'll be a while before it's back on in force ... but it will be back, and this cabinet move just helps assure that.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[HenryTo]

Yes, eventually. Sentiment (local polls) showed Japanese households to be more optimistic about the current government after the reshuffle.

[nodoodahs]

What's bad for the Japanese economy is good for the carry trade.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[HenryTo]

PM Abe "reshuffles" cabinet - but it really is just a bunch of LDP old guards - who "guarded" over Japan's worst period in economic growth since WWII; and who are most likely to raise the consumption tax:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aMxC_cFpOXpU&refer=home

[rffrydr]

Mrs. Watanabe, the Carry Trade's champion:

[rffrydr]

Mauldin this week is looking where he should be, where "subprime" story has little influence but liquidity does, Ms. Wantanabe's purse.