TT-525 -- A coming surge in mortgage defaults? , 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, July 12, 2009 Issue No. 525


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

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Earlier this week, the Nikkei ran an article about the
latest no-deposit mortgages available in Japan as a result
of government fiscal stimulus efforts, and whether such
mortgages might trigger a Japanese subprime crisis as these
lower quality loans are tested in the future by a continuing
down economy. While the Nikkei appears to be looking 3 years
into the future for such a default surge, barely a week
earlier, correspondent Leo Lewis of the UK's Times Online
warned us that in fact there are many mortgagees on the
economic brink already and that an anticipated 16 percent reduction
in summer bonuses this year could well push them over the
edge. The article mentions that "hundreds of thousands" of
people could be affected.

So just how bad is the situation? Is the Japanese housing
market looking at the same level of loan repayment
delinquency that has been experienced in the U.S. and
Europe? This is a hard question to answer, because there
doesn't appear to be a lot of data about the current level
of problem loans -- especially from the private sector.
However, there is enough background info for us to figure
out that there could well be a major problem brewing.

[Continued below...]

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[...Article continues]

First some background:

The government's early-June supplementary budget is
targeting a revival of the housing market, by making it
easier for home buyers to buy their own homes even though
they may not have enough savings to do so. The Japan
Housing Finance Agency (JHFA) is the main facilitator for
the stimulus, and is providing in conjunction with
cooperating banks a new "Flat 35" no-deposit home loan
product to "qualified" applicants. Qualified seems to mean
that the lender has to be employed, but little other

As could be deduced from the name, the new loans are 35
years in term and come as fixed rate mortgages. Needless to
say, they are extremely popular and all the major banks are
experiencing a surge of applications. In May, for example,
Saitama Resona bank had a 30 percent increase in mortgage

The concern, then, according to the Nikkei, is that the
government's largess will contribute to a surge in loan
defaults as the recession drags on, as it could quite
possibly do, and as more people lose their jobs. Indeed,
the government is already saying that unemployment is
likely to increase another 10 percent to at least 5.66
percent by next April. Our guess is that if you were to
factor in all the people who are working 4-day weeks or
are being forced into part-time work, the real unemployment
number is probably quite a bit higher.

The U.S. experience on no-deposit home loans is that they
spell big trouble. For no-deposit loans made in 2007, they
are 60 percent to 70 percent more likely to be in default
than loans which did require a deposit. These "easy-in" loans
represent just 12 percent of all loans made by the Federal
Housing Administration (FHA), and yet represent 30% of the
FHA's foreclosures.

So does that mean Japan will follow the same pattern? It
could well do.

In FY2008 the JHFA had a 35 percent increase in bankruptcy
auctions, amounting to around 16,577 homes. Given that
there were 1.04m homes built in Japan in 2008, (est. to
drop to 950,000 this year), there were presumably a similar
number of mortgages being made. Thus, if we assume that the
JHFA handles about 20 percent of all the home loans in the
market (estimated at 180 trillion yen, or $1.93 billion), then
the real number of mortgagee defaults could be as high as
7.9 percent.

What is surprising is that this situation is barely
mentioned in the Japanese press, and yet the default rate
is not so much lower than the current 10.2 percent rate for
lenders of FHA loans ("default" being defined as those
lenders who have missed at least two consecutive monthly
payments). Given that the Japanese government is just
getting started with these Flat 35 loans, and that those
people applying for them are in the weakest part of the
economic spectrum, it seems inevitable that these policies
will set off another wave of bad loans -- just as the
Nikkei warns.

So, we would have thought that there should be some alarm
bells going off in the government by now. But if there are,
they are silent alarms, so why is there a seeming lack of

We can only assume the following reasons:

1. The short-term benefit to the construction and real
estate sectors outweigh future risks. Already the stock
price of Misawa Homes has risen from a low of 183 yen in
March to 348 yen last Thursday

2. Temporary resurgence of buyer demand -- which is
happening. Analysts had expected the number of new houses
to slump to a low of 950,000 units this year, but now with
the incentives, the number of starts is expected to come in
at around 1m units. Those people interested in upgrading or
getting into a home for the first time, know that inflation
and higher interest rates are around the corner, and getting
a 10-year fixed interest rate is highly attractive.
Interestingly, most private mortgages are ARMs.

3. Home prices are at a cyclic low, and are unlikely to
drop much further within the main city areas, thus providing
low-end investors with some assurance that they are taking a
low risk in building up property assets.

This last point is an important point of Japanese political
thinking. Whereas in the USA the number of people whose
home loans are "under water" is around 20 percent, in Japan the
peak in land prices culminated 15 years ago and prices have
been more or less stable since, other than a few areas
inside Tokyo and several other major cities. Thus the
number of home loan lenders who have a reason to walk away
from their home loans for pragmatic reasons would be very
small. Instead, those who are in trouble are most likely to
be sitting on at least some positive equity in their own
homes and therefore are more likely to want to tough things
out and try to catch up with their payments.

On the flip side, let's assume that JHFA defaults do
increase significantly. At very least this represents an
excellent buying opportunity for those small-time investors
amongst us who are looking to build up a property
portfolio. We have mentioned in this column previously that
the second-hand repossessed real estate market --
especially out in the regions is tempting. In Japan, most
distressed properties sell for the price of the land only,
not the structures on them, meaning that if you can put
tenants in, they can be a good investment. Foreigners can
easily buy land in Japan, and we expect that more and more
will do so as the defaults continue to rise.


Lastly, you might notice from our events calendar below
that we have several business seminars coming up. This
writer (Terrie) will be speaking, both in an
entrepreneurial role and also as a cost-cutter. With the
start-up hat on, we will be taking the Japan Inc.
Entrepreneur's Handbook Seminar to Okayama and Kobe, in a
first for this series. The idea is for any readers in
either of those two areas to be able to attend the seminar
without having to travel too far.

With the "Toe-cutter Lloyd" cost-cutting hat on, we will be
speaking at a CEO/Shareholder/Senior Manager level about
ideas for cutting costs inside your company. Some ideas are
a bit radical, while others are refinements, but whatever
the case, all the ideas have been put into practice in
Japan sometime over the last 3 years and are thus represent
viable ways to leverage your way out of the recession.

The topics will include:
1. Doing away with the Country Manager, but still keeping
the operation going.
2. Changing business models from direct to partner, so as
to get the partner to carry sales costs.
3. M&A at 1.5% interest rates of money used to acquire.
4. Selling the Japan business to a local player and
appointing them distributor.
5. Outsourcing key skills, rather than entire departments.

Date: July 29th. More details in the UPCOMING EVENTS
section below.


Terrie's Take is proud to be a supporter of The Japan
Helpline. To get help 24 hours assistance with any
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go to and click `help`.

To donate:
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...The information janitors/


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+++ NEWS

- JAL passenger traffic plummets
- First public airport closure
- Tuna demand drops dramatically
- TEPCO burns far less hydrocarbons
- Stock trading bot fund launched

-> JAL passenger traffic plummets

While the Japanese travel industry in general is expecting
an increase in holiday travelers next month, based on the
high yen versus the U.S. dollar, the nation's flagship
carrier, Japan Airlines, is nonetheless sinking further into
trouble. The company said that international passenger
numbers in May were off by 19.8% compared to May of last
year, and that domestic passenger traffic was also down by
13.4%. Traffic from Australia/NZ was down a huge 40%,
attributed mainly to influenza fears as well as economic
pressures reducing the number of Australians skiing in
Nisseko. (Source: TT commentary from, Jul
11, 2009)

-> First public airport closure

Continuing on an aeronautical theme, the government has
announced that it is conducting the first-ever closing of a
public airport in Japan, in September. Japan now has 98
international and regional airports, of which most operate
in the red. The closing location is Teshikaga Airport in
eastern Hokkaido which was opened in 1970 to cater for
tourists visiting lakes in the area, but which in 2008
received just 170 such tourists. The final straw was a
JPY200m airport security upgrade required to allow
passengers to feed into the national airport network.
(Source: TT commentary from, Jul 11, 2009)

-> Tuna demand drops dramatically

The Nikkei reports that the current recession is causing
consumers to dramatically cut back on their consumption of
tuna cuts, both in bars and at home. As a result, tuna
wholesalers still have late 2008 stock in the freezers,
unused and currently not salable. As a result, some of
them are booking large valuation losses and thus incurring
overall profit losses. Industry pundits are saying that the
situation will take 1-2 years to right itself. ***Ed: In
place of tuna, mackerel, octopus, and shrimp sales are
booming -- people still have to eat.** (Source: TT
commentary from, Jul 9,

-> TEPCO burns far less hydrocarbons

With its Kashiwakazi-Kariwa nuclear plant coming back on
line, and with reduced demand for electricity by industry,
Tokyo Electric Power Company (TEPCO), Japan's largest power
generation company, has reported that its fuel oil
consumption has dropped 21%, coal by almost 50%, and LNG
just slightly, in June, versus the same period last year.
Overall national demand for electricity has fallen 8.3%.
This will be good news for TEPCO and should contribute to
significantly increased profits in the coming year.
(Source: TT commentary from, Jul 10, 2009)

-> Stock trading bot fund launched

Monex has just launched an automated stock trading fund
that is driven by four different software applications
drawn from over 19,000 submissions by developers who
participated in a software contest starting back in 2004.
The fund runs a control program that allocates the fund's
trades equally to each of the four underlying programs.
The capabilities of the new system are quite impressive.
It started trading under a private trust in July 2008,
and to date has out-performed the Topix index by 18% in the
9 months through March 2009. ***Ed: Of course, one wonders
if this "open source" approach to a trading system that is
targeted to handle up to JPY15bn (US$160m) is a wise thing.
While we imagine the Monex engineers have been through the
code with a fine-tooth comb, if they missed any back door
code, this experiment could wind up as a major PR disaster
instead.** (Source: TT commentary from, Jul
10, 2009)

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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For the first time, serial entrepreneur Terrie Lloyd brings
his extremely popular business seminars to Okayama and to
Kobe. The Okayama seminar, entitled Innovative Business
Leaders Seminar, will be held on Saturday July 25 at the
Kurashiki Chamber of Commerce.

On Sunday July 26, Terrie will hold his Enrepreneurs
Handbook Seminar at the Kobe International House.

>From JR Sannomiya Station it's just a short 5 min walk down
Flower Road. To register, email
For more information please go to:

------------------- ICA Event - July 30 -------------------

Event: Summer Networking Party! Open to all

Details: Complete event details at
(RSVP Required)

Date: Thursday, July 30, 2009

Time: 19:00 - 21:00 Open Bar and Finger Food Included
Cost: 1,000 yen (members), 2,500 yen (non-members)
Open to all - venue is Zest Iikura

-------------------- EA Meeting in July -------------------

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1) Bring members of various business groups together once
a year to help each organization and their members expand
their networks.

2) Raise money for deserving charities with each organizer
designating the charity of their choice.

3) Have a fun and casual summer afternoon party that is
family-friendly and a welcoming environment for all people.

Date: Saturday, July 11, 2009
Time: 14:00 - 18:00
Venue: Monsoon Cafe Daikanyama
Price: 4000 yen in advance; 5000 yen at the door

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Language: English
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Time: 3pm - 6pm
Free registration.
For more information contact




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

=> No corrections or feedback this week.

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