A cumbersome Japan suggests euro assets smart move for wary

Friday 1st February 2002

JOBS FOR LIFE NO MORE: There are millions who would be purged, especially from middle management, if Japan took a belated leaf from Rogernomics

Japan has started to become the focus of disaster expectation for 2002. The country's problems are not new but are beginning to assume proportions of concern at every level of market commentary. It is notable, for example, that even the Reserve Bank cited the land of the setting sun as a risk to monetary policy this year.

If Japan tanks we are all in serious trouble because unlike other countries that have packed up in recent years - such as Brazil, Russia, Mexico, Argentina and South Korea - it is doubtful the wherewithal exists via the likes of the IMF and World Bank to come up with a sufficient refinancing package.

Striking comments on Japan emerged in recent weekly discussion notes from the Global Asset Management (GAM) team of hedge fund managers, some of whom manage money for New Zealanders by way of the Tower GAM Multi Trading Fund.

Hedge-fund managers usually make interesting reading because they aim to make money whether markets go up or down and so really couldn't care less which way things are going so long as they have made the right call.

They are a different breed from the conventional "long-only" fund manager, who makes money for clients solely when markets go up. The long-only manager is compelled to look anxiously for the silver lining in every cloud, whereas the hedge-fund manager gleefully watches for lightning and keeps a cheerful ear open for the sound of rolling thunder.

Andrew Green, GAM's manager for UK and international investments, had this to say: "There is a greater fear of deflation, which is positive for markets as [interest rate] policy will be set with that in mind. Rates are likely to stay low because of the crises in Japan and Argentina."

Most of us were aware Argentina had a crisis but few would have said that of Japan. Mr Green is at least optimistic about what lies ahead. Japan threatens to export deflation to the US by way of the plunging yen and thereby smash the global recovery.

We should see the signs fairly soon should Japanese deflation exportation set in. Lesley Lathe, of GAM's Pacific team, said: "The first quarter is likely to be crucial. In March half of the current [Japanese bank] deposit insurance will be removed with the rest going in 2003.

"This means ¥100 trillion in corporate and individual deposits become uninsured. This could start a run on the banks and it is likely to be the crisis which everyone has been waiting for."

We had better all say "hares and rabbits" for good luck come the first of March. Japanese banks are poorly capitalised, with a Fujiyama-scale mountain of bad debt they can never recover, and many are in all likelihood insolvent. Already smaller Japanese banks have been wiped out by runs on them. The big ones are just waiting to be kicked over.

Not all GAM managers think Japan is set to become the biggest financial failure of all time - a sort of national version of Enron. GAM's Asia ex-Japan manager, John Mytton, remarked: "Many people take the view that a weakening yen will derail other Asian economies but this ignores the fact that today Japan only accounts for 14% of inter-regional trade ...

"China is much more important with about $[US]40 billion of direct investment last year ... there is unlikely to be a crisis similar to the one in 1997." Mr Mytton's view disagrees with an emerging concern the collapse of the yen will set off a round of devastating competitive devaluations throughout Asia as we saw in the previous Asian crisis.

Japan's Prime Minister Koizumi has only recently done a tour of neighbouring Asian countries to try to assuage fears of just such a devaluation rout.

The fact remains, however, that Japan is trying to devalue itself out of the hole it has got into. Fiscal and interest rate policy have failed to fix the ailing Japanese economy. Restructuring is stalled because no one wants to be the first to jump.

Looked at from the economic point of view, Japan should be rushing to reform. But from the human perspective, one can see why the Japanese hesitate.

They are just beginning to confront the end of the job-for-life system in which the corporation doubled as the de facto welfare state. The welfare state as we know it is only rudimentary in Japan.

Those who visit there will be shocked to see homeless people sleeping on cardboard in the streets during the dead of snowy winter. Such people are fed by soup kitchens. Many die in the cold spells. They are a constant reminder to Japanese of what job loss can mean at the worst. And there are millions who would be purged, especially from middle management, if Japan took a belated leaf from Rogernomics.

Japan just doesn't have the systems set up to deal with mass unemployment and might now not be able to afford them anyway thanks to all the debt it is stuck with from its failed version of Keynesianism. It lacks sufficient people of an entrepreneurial mentality to take up the slack as the large corporations and their smaller client companies are dismantled.

The US is co-operating with Japan in the devaluation of the yen at a time when the dollar is over-valued. The euro has been left out of the picture. The hedge-fund managers are betting that 2002 will see both the yen and the greenback drop while the euro rises, which suggests that euro assets might be a smart move for the wary, as could be shorting the US and Japan.

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