TT-435 -- Why interest rates will stay low, ebiz news from Japan

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

General Edition Sunday, September 2, 2007 Issue No. 435


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

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Once again, as business closed on Friday, the subprime
loans problem in the USA emerged to move currencies and
threaten banks around the world. While the worst fall-out
from the subprime mess happened while Japan was on holiday
in Mid-August, it took an announcement last week by the US
Federal Reserve Board as well as President Bush to breathe
some confidence back into the markets. Despite the
determination being shown by monetary authorities, there
are some very worried people out there.

You might ask why the subprime problem would affect Japan,
when the country has had very little exposure to the actual
loans themselves. The answer most often given, although not
the only perpetrator, is the carry trade and how it affects
the yen.

As the media have reported, hedge funds for several years
been borrowing money in Japan at low interest (often under
1.5%) and lending it out to higher yielding borrowers
overseas, thereby earning attractive interest rate
spreads. With a yield in New Zealand dollars of 8.25% for
example, this spread can be almost 7%. The volume of yen
borrowings and subsequent purchases of other currencies by
such funds are so huge that they serve to drive down the

While "carry trading" has been low risk for the last couple
of years, given the predictability of the Japanese monetary
authorities and expectations that Japanese interest rates
will only rise slowly, we need to remember that these funds
need backers with credit facilities and a tolerance for
high risk -- both of which have been recently "smoked" by
the subprime crisis. Thus without backers, the carry trade
has temporarily disappeared -- resulting in a corresponding
jump in the yen. Once the carry traders come back, which
looks to be the case if tax-payer money in the USA is used
to bail affected banks out, then the yen will drop once

Another body of people who are also making a big impact on
the yen exchange rate are Japanese private investors
trading foreign exchange or buying foreign securities. They
are doing so because bank deposit yields are so low in
Japan and because retail banks here are actively marketing
such speculation. The Nikkei reported in April that the
total investment in foreign assets by Japanese individuals
at the end of March 2007 was JPY43trn (US$349.59bn), up
200% over 3 years ago.

So, with the low yen encouraging carry trading, overseas
speculation by consumers, and trade retaliation threats from
Europe and some auto producing states in the USA, you have
to ask why the Bank of Japan doesn't increase its interest
rates. The nominal answer is that the country is still
stuck in deflation and increasing the interest rates would kill
the economic recovery.

That may well be, but we suspect there is at least one more
reason for holding rates down, which we highlight in today's

[Continued below...]

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[...Article continues]

One of the most important things to remember about Japan as
a homogenous nation is that it is a country that prefers
incremental improvements to radical changes. It has a
population that has been educated to be conservative, and
thus people tend to want to have surplus rather than
credit, and predictability rather than risk.

This means a nation of savers and workers, and even though
numerous editorials have appeared about the dire social
problems of Japanese youth, most of us actually living here
find that by the time someone is in their 30's, they are
either knuckling down and working as hard as they can, or
they're finding that living on miniscule social welfare
payments isn't much fun.

>From the post-war years until the early 1980s Japan's
conservative, incremental approach worked well. Possibly
too well, because as their manufacturing strength came to
threaten other first-world nations, both Japan and Germany
got blamed for deliberately weakening their currencies to
gain greater trade advantage. They were strong-armed into
revaluing their currencies via the Plaza Accord of 1985.
This agreement involved the coordinated selling of US
dollars and buying of yen and deutsche marks by the 5
largest central banks, and caused the rapid appreciation of
Japan's currency over the following two years. This in turn
quickly gutted the nation's manufacturing capability, as
companies streamed overseas to cheaper Asian manufacturing

Being in business at the time, we remember this period
well. In 1985 our exporting customers were doing great and
our technical translation business booked a record result.
Two years later, after the Plaza Accord, most of our
customers had shifted their production overseas and we
almost went bust. Eventually we had to morph into a PC
importing and servicing company.

For another 4-5 years, this gutting of Japanese industry
was somewhat overlooked because of the market excesses
developing from the strong yen. Consumers piled into stocks
and land, and the famous bubble inflated. But in 1990 when
the bubble reached its climax, millions of shareholders all
tried to get out of the market at the same time, and as
happens in boom-or-bust scenarios, the walls came tumbling

In the aftermath of the bubble and for the next 13-14
years, things looked pretty bad for Japan. First there was
the gutted production base and rising unemployment, the
emergence of China as a low-cost manufacturing competitor,
discontent among the middle class who were saddled with
property valuations only 50% of the original purchase
price, and the need to keep the economy rolling by
pump-priming the nation's infrastructure.

In doing the pump-priming, apparently more concrete was
poured for national construction projects during this
period than at any other time in the nation's history.
Further, political groups found there was easy if immoral
money to be made and many of the projects had little
function other than pork-barreling. Scandals dating from
this era are still popping up today.

When the public construction madness following the stock
bubble madness following the yen revaluation madness came
to a stop, Japan's public debt had blown out. Figures just
out from the Ministry of Finance say that the national
debt is now 1.5 times the size of our GDP, at around
JPY836.52trn (US$7.37trn). And get this: it apparently
takes a massive JPY22.2trn (US$191bn) a year just to
service the interest costs of this debt -- even with
today's low government bond (JGB) rate of around 1.5% to
1.8%. In contrast, the nation's total tax take (in 2006)
is only double this figure, at about JPY50trn (US$430bn).

Think about these numbers: the interest bill on the
national debt alone is around 1/2 of the tax income, and
that's before considering what it costs to run a government;
the 10% drop in tax-paying employees (dankai generation)
over the next 3 years; the worsening aging of society;
making good on the social welfare scandals; and the high
likelihood of a major earthquake in Tokyo. It is certainly
not hard to imagine that in 3 year's time, interest costs
will equal or exceed tax income -- especially if the
interest rates jump by 1% over what they are now -- leaving
no budget over to run the country.

Economical instability of this scale in Japan would have
massive knock-on effects for the rest of the world,
especially if the nation decided to bring home its foreign
holdings in the USA. The US war in Iraq and general account
deficit for so many years has meant that the USA is now
very dependent on foreign investors of its securities,
especially loyal investors such as the Japanese. While
luckily energy trades are still done in dollars, apart from
loyal Japanese money, the future doesn't look too good.

Given this background, it is our opinion that the US will
support continued modest increments rather than rapid
increases in the Japanese interest rates, hoping that the
government will be able to trade its way out. Most likely
they will also help fend off the Europeans. The unbalanced
trade issue will be alleviated by more "spot deals" between
the two nations, involving large investment initiatives in
defense, trade, and other areas.

On a domestic front, one wonders how the Japanese
government trade out of its debt hole. Some of the options
include: 1) raising taxes substantially, especially
consumption taxes; 2) cutting back on State spending, pensions,
health and welfare; 3) hoping that Japanese scientists make
a breakthrough discovery that replaces oil :-); 4) the
government taking back the post office's massive savings pool
and hijacking it for national budget usage; 5) the
government creating a new tax-reduced savings or bond
system that pulls substantial investments in for long
periods from the public; or 6) doing nothing and letting future
generations worry about it.

Probably it's not so hard to guess which of these options
the politicians are likely to pick...!

...The information janitors/


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Entrepreneur's Handbook Seminar 6th of October, 2007

If you have been considering setting up your own company,
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+++ NEWS

- Tamiflu sales plummet
- Market sentiment falls
- July housing starts way down
- GE may exit sarakin business
- Investment kiosks at train stations

-> Tamiflu sales plummet

We can't say that we're sorry to see that Chugai
Pharmaceutical's forecasted sales of the Tamiflu drug are
down by around 40% for the second half of this year. Sales
will plummet JPY2.2bn, to JPY3.2bn by year-end. The company
says that the drop is due to public fears about side
effects of the drug, especially after the Ministry of
Health's banning its sale in March to teenagers. (Source:
TT commentary from, Aug 31, 2007)

-> Market sentiment falls

The curse of a good education system is that consumers
think for themselves and despite the feel-good message in
the public media, Japanese consumers believe that the
future is not so bright. Accordingly, a number of economic
indicators fell in July. First was that of retail sales,
which dropped off by 2.2%, about double the forecast.
Clothing and auto purchases were the biggest losers.
Second, the stock market fell 3.9% in July. Granted, this
was precipitated by the US subprime problem, but with many
housewives dabbling in stocks and foreign exchange these
days, the drop shows they are following what is going on.
Third, the level of average wages paid, especially to
younger workers, fell for the seventh month in a row.
***Ed: Although a tight labor market should cause wages to
increase, this only seems to be happening in the more
skill-intensive sectors of finance and IT. So the rest of
the nation's workers are still having to suck it up.**
(Source: TT commentary from, Aug 29, 2007)

-> July housing starts way down

While Japan may have the lowest unemployment rate for 14
years, consumer confidence is clearly taking a hard knock.
The Ministry of Land has said that housing starts
nationwide fell 23.4% for the month of July, compared with
a year earlier. This is a substantially greater fall than
the earlier forecast of 1% down. The main drop was in
owner-occupied houses, which were down 26% to 34,763 units,
followed by condo's, which dropped 20.6% to 21,243 units.
***Ed: Annually, around 947,000 houses and condos are built
in Japan.** (Source: TT commentary from, Aug 31,

-> GE may exit sarakin business

A senior spokesperson at GE Japan has indicated that the
company may pull out of the consumer finance business in
Japan, citing a declining market and difficult new
regulations. The company owns the Lake brand and has
already closed 60% of its 115 manned loan branches. ***Ed:
With a maximum interest rate of 22%, and the cost of funds
at 1% or so, we see no commercial reason why GE should pull
out. Yes, the current environment is allowing consumers
claim refunds, but this is a temporary adjustment, and
we believe that those lenders who stay the course will see
handsome profits 1-2 years from now.** (Source: TT
commentary from, Aug 30, 2007)

-> Investment kiosks at train stations

In a move reminiscent of how cell phones used to be
marketed, Nomura Securities says that it plans to open
sales kiosks at train stations and shopping centers, to
expose consumers to the world of investing. The company
says that it will try a couple of the kiosks in Tokyo
first, and if they work, spread out nationwide. A Nomura
salesperson will man the kiosk and be aided with display
devices to explain how different funds and investments
work. (Source: TT commentary from, Aug 31,

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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Tuesday, September 4th

Speaker: Patrick Newell - Co-founder and Vision Navigator
of the Tokyo International School

September's seminar will take you to Tokyo International
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creativity to be found at one of Tokyo's and the world's
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Patrick will share how he has realized his dreams during
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Date/Time: Tuesday, September 4th - 7:00 pm
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Language: English


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Speaker: Tim Williams, Founder & Director of Value Commerce
Topic: Japan Success Stories - Value Commerce

Details: Complete event details at
(RSVP Required)
Date: Thursday, September 20, 2007
Time: 6:30 Doors open
(Light buffet, beer, wine, soft drinks included)
Cost: 3,500 yen (members), 5,500 yen (non-members)

Open to all-location is Australian Embassy B2


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In this section we run comments and corrections submitted
by readers. We encourage you to spot our mistakes and
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-> No corrections this week.

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