Japan Briefs

by Scott B. MacDonald

Japan- Foreign Exchange Reserves Up: Japan’s foreign exchange reserves increased by 43% to $673.52 billion at year-end 2003, posting a record high for the fifth consecutive year, according to the Ministry of Finance. The sharp rise is because of repeated and massive interventions in the foreign exchange market by the Bank of Japan in 2003 to stem a rise in the yen's exchange value. The year-on-year increase of about $200 billion roughly matched the Y20 trillion the government spent on intervention. The 43% growth in reserves is the highest since 1995.

In 2003, the Ministry of Finance stepped into the foreign exchange market almost every month through the Bank of Japan, spending more than 1 trillion yen to buy dollars in hopes of offsetting strong selling pressure on the greenback due to the Iraq war. In September alone, the MOF spent over 5 trillion yen, and continued to intervene in the market to the tune of 1.5 trillion yen to 2.0 trillion yen per month from October through December. Consequently, Japan’s foreign currency reserves topped $600 billion for the first time at the end of September and continued to hit all-time highs in each of the following three months. The government has continued to purchase the dollar since the beginning of 2004 as the yen continued to appreciate. This is likely to result in even further increases in Japan’s foreign exchange reserves.

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Bank Turnaround – Looking for a Success Story?: Everyone likes a Phoenix-like story of businesses rising from the dead. In Japan, many companies have sadly risen, although they amble along as walking dead zombies. However, this could be changing – albeit slowly. Shinsei Bank, formerly the Long Term Credit Bank that was nationalized by the government and sold to Ripplewood Holdings, a U.S. investment company, will re-list on the Tokyo Stock Exchange by February 19, 2004 though Ripplewood will maintain management rights. Significantly, Shinsei Bank's move will mark the first time a financial institution returns to the stock exchange after being temporarily nationalized. The bank collapsed in October 1998 and was reborn as a private sector-owned bank in March 2000. The new management took advantage of a loan buyback provision that gave the bank the rights to sell loans whose values dropped significantly. The fact that Shinei’s management used this option and played hardball with deadbeat borrowers was not always appreciated by the authorities or the business community, especially during the first couple of years. However, Shinsei’s performance gradually improved. Although the process of rebirth as a public company has been long and painful, Shinsei’s story provides a model for a business turnaround led by a foreign investor.

There are roughly 1.35 billion common shares outstanding, almost all of which are owned by an investment partnership created by nine foreign financial institutions, including Ripplewood. About one-third of the outstanding shares, or roughly 450 million, are expected to be offered in February, with the initial offering price likely to be set at around 1,000 yen per share. The IPO is expected to generate a total of 400 billion yen to 500 billion yen.

Banks – Lending Less: Japanese banks continued to lend less in December while the money supply grew modestly, according the Bank of Japan. Bank lending declined 5.1% year-on-year, deteriorating slightly from a fall of 5.0% in November.

Foreigners in Big to Japanese Markets in 2003: Foreign investors were net buyers of Japanese stocks for the third consecutive year last year, purchasing a net Y8.213 trillion on the Tokyo, Osaka and Nagoya bourses. It was the second-biggest annual net buying of Japanese stocks by foreign investors since the TSE started disclosing trading data in 1981. In 1999, foreign net buying totaled Y9.128 trillion. Foreigners bought a gross Y72.380 trillion of Japanese shares in the year against Y64.167 trillion of sales.

In contrast, local investors were net sellers last year. Among them, the TSE said individuals sold a net Y1.652 trillion last year and investment trusts sold a net Y141.61 billion. Corporations sold a net Y224.51 billion, while financial institutions sold a net Y6.992 trillion, the TSE said. In December, foreign investors were net buyers of Japanese stocks, buying net Y571.96 billion in the month. It was the ninth month of foreign net buying in a row. In November, foreign investors bought a net Y609.51 billion of Japanese shares.