Japan’s Straying Standoff Routines
Top Chinese officials and bankers boycotted the IMF’s annual event in Tokyo as Japanese automakers also felt the strain from mutually claimed islands with historic and natural resources implications, despite increased cross-border portfolio ties reflected in central bank and mutual fund industry figures. The 8.5 percent foreign share of JGBs includes mainland allocation and retail toshin flows to emerging market debt and currencies in particular together at over $100 billion are again rising after a pause. In the trusts’ former category half the exposure is to hard currency mainly in Brazil and the region. In the local-currency denominated Uridashi segment, Russia and Turkey are popular, while sovereign and quasi-sovereign borrowers from Indonesia, Mexico, Korea and the Persian Gulf are active in the yen Samurai market. The giant state postal and pension funds have announced strategies targeting higher developing country returns while the megabanks Mitsubishi UFJ, Sumitomo Mitsui and Mizuho have expanded Asian loan books around 20 percent over the past year following corporate customers and development aid programs. In project and trade finance they have moved into the space vacated by European providers as total lines to Asean, China, and India reach $300 billion. They can underwrite the activity two-thirds from deposits on hand and it contributes a large chunk of gross profit according to industry analysts with low-performing assets at home. In its Global Financial Stability Report released at the meeting the IMF warned of “overconcentration” in domestic government bonds already one-quarter of bank holdings. It calculated that current yields were one percent above fair value and that minor price shifts could trigger mark-to-market losses that erode if not eliminate Tier 1 capital for smaller institutions. Traditionally reliable business customers like electronics firm Sharp have gotten into trouble, and automakers just recovering from recalls and 2011 supply chain disruptions from the Fukushima earthquake and Thai floods will further suffer from the Chinese trade boycott over the island spat.
Public debt at over 200 percent of GDP is in “uncharted territory” in the OECD’s words and rater S&P predicts continued deflation and economic and political stagnation. Growth was barely positive in the latest quarter as a trade deficit forms with the high yen and cost of energy imports with nuclear plant shutdown. The central bank has refrained from currency intervention but may target foreign bond buying as an additional tool in unconventional monetary policy to combat internal and external squeezes. Prime Minister Noda reshuffled the cabinet heading into elections after narrowly winning passage of a 2 percent hike in consumption tax effective 2014 to shrink the budget deficit. The interim Finance Minister comes from a labor union background with limited credentials, and opinion polls suggest the long-reining LDP will return to power on a nationalist populist platform which could leave the fiscal and geopolitical position further at sea.
