TT-413 -- Hedging against the fall of the US dollar

* * * * * * * * * T E R R I E 'S T A K E * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, March 18, 2007 Issue No. 413


- What's new
- News
- Candidate roundup/Vacancies
- Upcoming events
- Corrections/Feedback
- News credits

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Ever since the Chinese overtook Japan as the largest holder
of foreign reserves, the US in particular has started to
realize that having a bunch of foreign governments you're
not necessarily friendly with holding your debt isn't such
a good idea. While only Hillary Clinton has so far come
out and said that the foreign holdings are a risk, perhaps
she should have gone further and said that the Chinese are
the real risk, not the the Japanese. This is especially so
since China recently announced that it will create a new
government department to manage and actively invest its
foreign reserves for profit. One can't help wondering if the
announcement was more of a subtle message to the
USA that, "We don't need you as much as you need

Which if it wasn't for the Japanese, would probably be

However, the fact is that while the Chinese are posturing,
the Japanese government is still a faithful supporter of US
debt, as it has been for more than 15 years now. It owns at
least 27% (US$645bn) of the US government's foreign debt as
of December 2006, compared with less than half that held by
the Chinese. Further, the overall Japanese government
holdings of US dollars was a massive US$905.048bn. Much of
this was accumulated in 2003 and 2004 as part of the
government's yen intervention program, when, according to
the Nikkei, they spent around JPY35trn (US$296bn) to buy

[Continued below...]

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Observers may wonder why Japan doesn't follow the Chinese
lead and start diversifying. After all, holding most of one's
reserves in a currency which is arguably over-valued and
due for a marked drop doesn't seem very fiscally prudent.
The reason appears to be that the Finance Ministry is
engaging in its own spot of Yen "carry trade" that we've
been hearing so much about. Basically, it is issuing
bonds at rates of about 0.6% here in Japan then earning
around 5% on US treasuries. Apparently this contributed
about JPY3trn (US$25bn) in special earnings to the
nation's coffers in FY2005. But if the US dollar drops,
this nice little earner will quickly be lost.

Ironically, the Finance Ministry reckons that it wants to
stay in US dollars and not diversify because they want to
maintain "liquidity and safety" of the nation's reserves.
But the fact is that the dollar took a big tumble in the
last two weeks simply because of jitters in the
domestic Chinese stock market. That quickly spread
to the US markets, and moving in concert with the
slump, the dollar dropped from JPY121 on February
28th to JPY115 just 8 working days later.

Remember, there were no changes in the Japanese
financial fundamentals. This "appreciation" of the yen
was simply a case of a "hit-and-run" by scared
international investment flows. And from what we can
see, this performance could easily be repeated if a
really negative economic trend starts to emerge from
the USA.

So, while the government seems quite sanguine about its
massive exposure to a fall in the US dollar, Japanese
firms are being much more pragmatic. The Nikkei recently
ran a good article about how firms are expecting a stronger
yen going forward and are planning for an exchange rate of
at least JPY110 to the dollar, if not even JPY105. The
traditional route is to hedge one's foreign funds, but this
is only a short-term measure and isn't much good during a
sustained period of volatility or correction. As many major
Japanese manufacturers start to see more of their profits
earned overseas than here in Japan, such as is now the case
with Toyota, Nissan, and Honda -- indeed, 84% of Honda's
sales came from abroad last fiscal year -- then they need
to get more sophisticated in handling their yen exposures.

One of the best ways to defeat FX movements is to procure
and produce products in the local markets that they are
being sold in. Apparently Honda has raised this principle
to a fine art and now tries to make sure that 80% of its
overseas sales are based on local production and
procurement -- no easy task when you have to build a
device containing a lot of quality-critical parts.

Another way is to simply buy and sell in yen as the base
currency and have your suppliers and customers deal with
the FX risk. While most western buyers/sellers won't accept
this, those in Asia will. The Nikkei says that one company,
JPY270bn electronics manufacturer Advantest, does more than
70% of its South Korea, Taiwan, and other Asian business in
yen now. Doing this has virtually freed the company from FX
risk and means that losses/gains only amount to
JPY100m-JPY200m for each one yen appreciation that occurs
in the FX markets. In days gone by, a one yen strengthening
would have wiped out ten times that amount.

Perhaps a third way to control FX exposure, and one which
appears to be gaining popularity among the more
horizontally integrated multinationals, is to not take cash
payments at all, but instead to off-set them against other
goods and services that can be brought back to Japan or
moved to a third market. Doing this needs a high level of
financial and systems sophistication, but the benefits can
be massive. Popular off-shore locations for IT services to
be moved to/from are China, Vietnam, India, and the
Philippines. Vietnam in particular has caught the interest
of corporates such as NEC and Nihon Unisys. Recently there
was a news release that one mid-sized Tokyo-based software
firm, Nippon Systemware, is looking to have about 12% of
its planned 900 engineers to be in Vietnam, with another
100 in China. Japanese firms particularly like Vietnam
because it is more manageable than China and because
Vietnamese of Chinese descent can read basic Kanji and
therefore learn how to communicate in writing with Head
Office more quickly.


As individuals, another way for us to cope with fluctuating
yen holdings is to start buying some overseas assets. While
real estate is perhaps the usual investment for foreigners
eying their eventual return home, another possibility is
foreign stocks. A few days ago we received a phone call
from a talented Australian stock broker we'd not heard from
in some time -- Melbourne-based David Julian. Some of our
readers may recognize Julian's name, because on and off
from the mid-1980s through to just a couple of years ago he
worked in Tokyo. He began his career as a Japanese equity
analyst with Kleinwort Benson International (now Dresdner
Kleinwort Wasserstein) then joined Salomon Brothers Asia
(now Nikko Citigroup) as a special situations and small cap
equities analyst. His last stint here was in real estate.

Nowadays, Julian is living back in Melbourne working for
EL&C Baillieu Stockbroking, a leading stock broker in that
city. He works as a private client adviser, helping, among
others, expats in Japan who want to invest in Aussie shares
but who don't have a broker or who don't know how to go
about setting up an ASX account. If you've never thought
about investing in companies listed on the ASX, you should.
The lower level of liquidity in that market means that
there are some good bargains to be had, and coupled with
signficant tax benefits for non-resident investors, makes
for a good way to build your non-US dollar reserves. David
Julian is a friendly and knowledgeable person, and has told
us that he is will to offer advice to those interested. He
can be contacted at


Probably some of our readers are wondering what our
reaction is to the Horie ruling that he is guilty and will
serve 2 1/2 years in prison for securities fraud. In light
of the lack of prosecutions over the Nikko Cordial affair,
we think the treatment of Horie is unfair, even inspite of
his ascerbic personality and media antics. More in the
NEWS section below.


*** This week's FEEDBACK section is about our Brian
Tannura article, and how he is populating Japan with
sticker machines.

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+++ NEWS

- Relaxed engineer visas
- New process for making hydrogen
- Horie convicted, and slams judgment
- Lack of sex responsible for low birth rate
- JVC likely to go to Texas Pacific

-> Relaxed engineer visas

The Japanese Business Federation, Keidanren, has
recommended to the government that the immigration
requirements for foreign engineers' visas be relaxed, to
encourage a larger number of people to come work here,
particularly in IT. They suggest that engineers coming in
under the experience category be allowed in after just 4
years of relevant work experience, versus the current 10
years. But before you think that Keidanren is going soft,
they are also looking at recommending Japanese-language
requirements on future worker intakes, to alleviate
problems typically associated with a surge of foreign
workers. ***Ed: Hmmm, we doubt that they've thought this
through too much. Imposing Japanese language skills will
add at least 3-5 years on to the supply curve, and given
the choice of English or Japanese, most Chinese and Indian
engineers are going to pick the global language. Japan
needs to understand that internationalizing may in fact
mean accepting English as a second language, as has
already happened in Europe and in most of the rest of
Asia. This is not heresy, just pragmatism.** (Source:
TT commentary from, Mar 18, 2007)

-> New process for making hydrogen

Toshiba has announced that it has developed a new process
for producing high-purity hydrogen from ethanol. The new
process uses a lithium oxide compound to clean ethanol of
CO2, and thus produces 99.9% pure hydrogen. Existing
processes can only manage 65% purity in mass-produced
quantities. The new process is expected to be used in fuel
cells and hydrogen-powered cars. ***Ed: Toshiba might
really be on to something here. Apparently the company
plans itself to enter the fuel production business --
something you'd normally only expect a trading company to
do. This development is probably worth watching.** (Source:
TT commentary from, Mar 16, 2007)

-> Horie convicted, and slams judgment

Being out on bail, Horie is still free to talk to the
press, even after being convicted of securities fraud and
being sentenced to 2 1/2 years in jail. He says that the
findings were unfair and that he is not guilty. Clearly
his defense team plan to fight the case in an appeal.
***Ed: There is no doubt that a double-standard is at work
here and to us it's quite disturbing. The problem is that
the Japanese judiciary is less concerned about wrong-doing
(else how can you explain the lack of arrests in the Nikko
Cordial scandal?) and more about the accused's attitude and
public expression of regret. Horie just doesn't want to
play the game and he's going to get his a-s kicked as a
result. The moral of this story is if you are ever
unfortunate enough to have to go to a Japanese court, keep
your utterances to ones of absolute regret and
repentance.** (Source: TT commentary from, Mar 18, 2007)

-> Lack of sex responsible for low birth rate

According to a survey by the Japan Family Planning
Association (JPA), 39.7% of Japanese aged 16 to 49 do not
have sex more than once a month, a figure which is up 5%
from 2004. Among married couples, the rate is 34.6%. The
survey results were released by the FPA's director, who
said that the figures were dismal and that, "Research shows
that if you don't have sex for a month, you probably won't
for a year." He partly blames stress from work and a
decline in physical communication skills. In another
survey, from the University of Chicago published in 2006,
Japan ranked last in a 29-country study of sexual
satisfaction. Only 25.7% of Japanese said they were
satisfied in bed. ***Ed: And probably 50% of those people
were lying... Japan has a major problem reconciling the
happiness of its people with the feudal ideals of its
aged politicians and family heads. Personal happiness is
still a foreign concept to a nation where the spiritual
ideal is one of suffering in silence.** (Source: TT
commentary from, Mar 18, 2007)

-> JVC likely to go to Texas Pacific

A Nikkei report says that Matsushita Electric is likely to
pick the Texas Pacific Group (TPG) fund over competitor
Cerberus as the buyer of its shares in stricken subsidiary
Victor Company of Japan (JVC). Matsushita owns 52.4% of
JVC and hopes to do the sale within March. (Source: TT
commentary from, Mar 15, 2007)

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.


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In this section we run comments and corrections submitted
by readers. We encourage you to spot our mistakes and
amplify our points, by email, to

-> TT412 -- 5.5m vending machines. We commented on the
activities of flat vending pioneer Brian Tannura and his
colonization of Japanese shopping malls with sticker

*** Our reader says: Greetings from Auckland. I always
enjoy reading your articles. I have been interested in your
vending machine comments over the last two articles. I
wonder whether there is a business opportunity to vend
English lessons and materials through vending machines in
Japan at prices of JPY200 to JPY1,000. One could imagine a
variety of lessons at different levels, as well as self
assessments and grammar tools. Is this a viable
distribution mechanism?

*** Brian Tannura responds: Yes, this is an interesting
idea. Possible sites include book stores, izakaya, language
schools (in some form of partnership), travel agencies,
recruiting companies, and just about anywhere that a person
would feel some pressure about their inadequate English. We
have been looking for some time at the idea of combining
flat vending as a ticket to buy content across another
media, such as cell phones, and this would certainly fit
that category.

...The information janitors/


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