财经观察 1438 --- Collateral damage

Collateral damage

Oct 27th 2008 | TOKYO
From Economist.com

Japan's banking system, until recently one of the strongest in the world, is battered
UNTIL recently Japanese banks had largely avoided the agonies of the credit crunch that had caused such difficulties in much of the rest of the world. Now the misery has well and truly come to Tokyo. The culprit is not toxic derivatives and swaps, but ordinary shares held by banks in Japanese companies. These cross-shareholdings, a peculiar feature of Japanese capitalism, are having pernicious effects. As share prices fall, banks are force to revalue their assets, which in turn reduces their capital ratios. The result is a need to raise capital quickly.

In the past four trading days, the Nikkei 225-share index has tumbled by 23%. On Monday October 27th the index plunged by 6.4% to 7,162.90, the lowest level in 26 years. Mitsubishi UFJ Financial Group (MUFG), Japan’s biggest bank, plans to raise as much as ¥990 billion ($10.6 billion) by issuing new common shares of perhaps ¥600 billion and preferred securities of ¥390 billion. Mizuho Financial Group and Sumitomo Mitsui Financial Group are said to be planning their own capital increases.

The government is scrambling to help out. It is poised to announce a set of new measures, including spending perhaps ¥10 trillion to buy shares in companies that the banks hold (in an off-market transaction, so their values do not fall further). This was a tactic used by the Banks’ Shareholdings Purchase Corporation to respond to a banking crisis in 2002. The government may also request that pension funds and life insurance firms buy equities to support the market, though whether they would respond remains to be seen.

Some institutions and bankers, including the chairman of Shinsei—once known as Long Term Credit Bank, which was nationalised a decade ago—have urged regulators to suspend accounting rules that force the banks to value assets at present market value. The use of “mark-to-market” standards may force firms to write-down the value of their assets painfully, even though the trough may be temporary. As it stands, banks must subtract around 60% of their paper losses from their core capital. The government has signalled that it may be willing to ease the rules.

On Monday the Financial Services Agency also put in place a ban on “naked” short-selling, from November 4th until March 31st. Regulators in other countries have been grappling with the problem too, in an effort to stop those who, without actually taking ownership of a firm’s shares, bet on a fall in that firm’s share price. In addition, short-sellers who take a stake of more than 0.25% of the outstanding shares must disclose their position to the market.

Share prices are tumbling fast largely because foreign hedge funds have been forced—by the need to meet margin calls and redemptions—to liquidate positions. Investors are also worried that a big global recession will hurt Japan’s exporters, just as a domestic slowdown hurts other firms. Exporters are battered, too, by the steep rise in the value of the yen. It has soared by 11% against the dollar and around 21% against the euro in October, as the yen carry trade unwinds and amid a general flight to safety.

The G7 industrialised countries issued a short emergency statement on Monday, at the urging of Japan’s finance minister, Shoichi Nakagawa, expressing strong concern about the recent volatility of the yen. Mr Nakagawa said that Japan would “take necessary action promptly while closely watching the yen’s movement”, an indication (though not an entirely convincing one) that it might intervene in the foreign-exchange market.

It marks a rapid reversal of fortunes for Japanese banks. Just a month ago, fresh from MUFG’s offer of ¥950 billion for a 21% stake in Morgan Stanley, and Nomura’s purchase of operations of the bankrupt Lehman Brothers in Asia, Europe and the Middle East, Japanese bankers felt they were once again dominant on the international financial stage. They were rich with capital and willing to spend, at a time when other institutions were desperate. Now they are victims not of contagion, but of collateral damage.

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