TT-491 -- When Yen Loans for Foreign Property Go Wrong, ebiz news from Japan

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A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, October 26, 2008 Issue No. 491


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

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The US dollar - Japanese yen rate took a major turn over
this last week, and at one point the Interbank rate for the
yen hit 90.87 to the dollar, the strongest it's been since
1995. Actually we have a bit of a fresh trend here, because
apart from the yen, all other major currencies around the
world fell against the US dollar, meaning that differential
between the yen and other currencies is becoming even
more exaggerated.

As an example, the Australian dollar (AUD) has fallen from
104 yen on July 24th to just 59 yen last Friday. That's a
spectacular collapse of more than 40% in just 3 months.
Another favorite currency for Japanese housewives to
speculate in, the New Zealand dollar, has also fallen a
massive 35% over the same period.

There has been a lot of analysis about why the yen is
strengthening despite the obvious fact that the economy is
being hugely impacted by the global downturn and that the
stock market is being pummeled as a result. Most analysts
agree that one major reason is that hedge funds involved
in the FX "carry trade" are now extensively unwinding their
overseas lendings to high-interest countries, since such
business is becoming increasingly risky in the light of the
loans repayment defaults in places such as Iceland, and are
now repaying their yen borrowings.

Another reason comes from a well-known economist we spoke
to. He reckons that Japanese companies such as life
insurers and other institutional investors are liquidating
their holdings off-shore and repatriating funds back to
Japan so as to weather the storm -- i.e., Japan is becoming
a safe haven. Then of course, there are FX-trading Japanese
housewives who watch CNN and Nikkei World Business
Satellite, and who are curtailing their investments for a

Normally, for those of us earning incomes in Japan, a
rising yen is temporarily very welcome, especially since it
comes so close to Christmas. Overseas trips are cheaper,
buying Christmas gifts on Amazon is a real bargain, and
some of those student loans can even get paid down.

Well, OK, there is a downside. For some people, if the high
yen persists, it will dent their year-end bonuses. However,
on the whole, we're not expecting to see anything more
dramatic just yet. Job cuts and corporate tightening
probably won't happen in earnest until the middle of
January or February next year.

However, there is one group of Japan-based investors who
are lamenting or even panicking over the yen's surge.

[Continued below...]

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[...Article continues]

And that group is those foreigners and Japanese who bought
real estate overseas in the last 5 years, using yen
mortgages from mainly Australian and British banks.

The reason they are unhappy is two-fold. Firstly, their
cheap yen loans have suddenly become much less of a bargain
in real terms versus loans they could have taken at the
higher interest rate in the country of purchase. That's
because their yen loan conversions would have been done
when the target country currency was much higher -- thus
they're sitting on a large loan for a cheapened asset.

Secondly, all banks specializing in foreign loans are now
looking at the value of the properties used as loan
security, and are demanding a "claw-back" of the loan
amount if the land-to-loan ratio falls below a certain
ratio. In demanding the claw-back, they either ask lenders
to increase the value of the collateral provided, in order
to match the yen loan amount, or reduce the amount of the
loan. Either way, this can be a painful exercise, even for
well-off but not highly liquid families, requiring the
paying down of thousands of dollars that wasn't necessarily
budgeted for, or the encumbment of additional value from
the land title.

We don't know how many people have taken such international
land loans, but from the volume of advertising we imagine it has
to be at least in the hundreds if not thousands of people. And
for them, a manageable retirement investment has now turned
into a money-eating nightmare.

"Serves them right for taking such risks," you might think.
But the fact is that buying a property in a pristine
coastal retirement township in somewhere like Australia,
for example, at a Japanese interest rate of 2%-2.5% and
paying a manageable amount from one's salary has been a
very attractive proposition. Further, given that
international home loans are impossible to get in Japan,
and getting an Australian loan when you live outside the
country is not so easy, especially if you're not an Australian
citizen, then it's no wonder that foreign banks which have
been servicing this loan niche have been doing such a
roaring trade. Typically they have been lending against land
in Australia, New Zealand, Britain, and in some cases
Hawaii and some other parts of the USA and Asia.

The biggest risk in taking one of these international loans
is the fact that you are dealing with two different
economies, and once the economy of one location goes bad
compared to the other, then you are exposed to some kind of
risk. For example, if you borrow AUD100,000 to buy a
property, and it's converted into a yen loan at JPY100 to
the AUD, and then the AUD drops to less than a certain
threshold given in the loan contract (typically 70% or
65%), then the bank will require that the value of the
collateral be "topped up" with cash, or the loan paid down
by the amount needed to get under the threshold again.

Now, to their credit, these banks go out of their way to
explain the foreign exchange risks and they make sure that
people are conscious of what they are getting in to. But
the mechanics are somewhat complicated, and the fact is
that no one really expects the foreign exchange rate to
change by a massive amount so quickly that they can't
respond to the situation and either renegotiate the loan
or liquidate some other assets to pay it down. But
unfortunately for some, we've just had a "once in 100
years" foreign exchange shift, and many Japan-based
owners of Australian and other international mortgages
are really feeling the pinch.

As a result, there will be some normally well-to-do
asset-rich but cash-poor families, both Japanese and
foreign, who still own a first-class property asset
overseas, but who can't afford to go there for
Christmas because they've got a claw-back call and are
now trying to make ends meet. No doubt they'll be wondering
just what went wrong. All we can say is that economies go
in cycles, and we think it's better to try to tough out the
current fluctuations than to capitulate and sell your
retirement dream.

...The information janitors/


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+++ NEWS

- MoF yen buying to start?
- 4% consumption tax levy just for medical services
- Fast eaters get fatter than slow eaters
- Large Japanese loan for India
- Luxury brands see downturn

-> MoF yen buying to start?

Looks like the Japanese government is considering
intervening in the FX market by selling yen and presumably
buying dollars -- as it did back in 2003 and 2004. The
Ministry of Finance (MoF) has said that it is "closely
monitoring" the FX rate, and that it is worried about yen
strengthening "harming the economy". This is being
interpreted by market players as a likely signal that the
MoF will start intervening shortly. ***Ed: The thing is,
unlike 2003, the fluctuations in the yen are due to a
global trend where the flows of money are huge -- much
bigger than the "big stick" threat of yen buying by the
government. Even if they put up as much as JPY20trn, which
they collectively spent in the past, it would barely
contain a couple of days' worth of trading.** (Source: TT
commentary from, Oct 24, 2008)

-> 4% consumption tax levy just for medical services

Bad news always comes in three's. Not only will the aging
workforce in Japan contribute to lower industrial output in
years to come, and a lower tax base will force up pension
premiums for those poor saps remaining in the workforce,
but now a government expert panel has said that the
nation's expenditure on hospitals and other medical
facilities will need an additional JPY14trn ((US$147bn) to
maintain the current level of services -- because of all
those extra old people. Put another way, the nation will
apparently need a hike of 4% in the consumption tax to
maintain its current standard of medical care. ***Ed: Now,
this is in ADDITION to the 10% hike recommended to enable
the government to pay pensions for those in their last few
years of working life. So we're talking about a possible
400% increase in the consumption tax to look after the
nation's elderly by 2024. Not a bright outlook for workers
aged 50 or younger...!** (Source: TT commentary from, Oct 24, 2008)

-> Fast eaters get fatter than slow eaters

In some native societies it is well known that you can
feast on more by cramming the food down quickly -- before
the body's internal chemistry starts signaling that it's
had enough. Now science has proved the effect formally.
According to an Osaka University study which looked at the
eating habits and weight gains of 3,000 men and women,
researchers found that those participants who chowed down
quickly and ate until they were full, wound up over the
3-year study period to have the greatest Body Mass Index
(BMI) gains. ***Ed: You wonder who pays for this kind of
research. Studying the mating habits of round-snout
pygmy frogs would be more productive than this.**
(Source: TT commentary from, Oct 25, 2008)

-> Large Japanese loan for India

Japan has offered India a large US$4.5bn low-interest loan
to help it build a major freight railroad between India's
two largest cities: New Delhi and Mumbai. The link will be
1,468 kilometers long and will significantly upgrade
domestic trade flows and thus economic growth. ***Ed: We
presume that the railroad will be built by a Japanese
company... ;-)(Source: TT commentary from,
Oct 22, 2008)

-> Luxury brands see downturn

It used to be a given that even though regular consumers
might pull back from buying things in a recession, the
luxury stores would still do big business in Japan, fueled
by single women still living at home and a growing number
of super-rich. However, as the IHT reports, it seems that
even the designer houses are suffering these days. The
newspaper says that with inflation running at 2.4% in
August, salaries down 0.3%, and household spending down 4%,
high-end consumers are also being impacted. The report
says that Louis Vuitton (LVMH) traditionally gets 10% of
its sales from Japan, but has seen yen-based sales drop 7%
in the 9 months through September, even while they rose 22%
elsewhere in Asia and 9% in Europe. Hermes and Bulgari
apparently had small 1.5% and 3.8% increases in Japan sales
respectively, but these results were disappointing when
contrasted with a 27.8% increase in Europe for Hermes and
7.5% for Bulgari. (Source: TT commentary from, Oct
21, 2008)

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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