[CANSLIM] Japan

From: "Tom Worley" <stkguru@bellsouth.net>
Subject: [CANSLIM] Japan
Date: Sat, 10 Aug 2002 18:05:55 -0400
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I haven't been Japan bashing much lately, but found this report from
Strategic Forces to be very interesting. I pass it along just in case you
want something else to worry about.

- ----- Original Message -----
Sent: Friday, August 09, 2002 5:38 PM
Subject: This Week's Global Economic Update

___________________________________________________________________

                            S T R A T F O R

                    THE GLOBAL INTELLIGENCE COMPANY

                        http://www.stratfor.com
___________________________________________________________________
Japan: Revised Reform Slows Economic Demise

Summary

Japanese Prime Minister Junichiro Koizumi has altered a banking
reform that, if implemented in their original form, could have
caused the collapse of the country's economy. But a new loophole
in the plan will lead to only a steady bleeding of assets from
the banking sector, at a slow enough rate that the world need not
worry over much about the sector's demise.

Analysis

Japanese Prime Minister Junichiro Koizumi altered his banking
"reform" plans Aug. 1 in a way that in essence waters down their
impacts and imposes negative interest rates on savings accounts.
He followed the move with a retraction of his previous pledge to
limit Japan's profligate deficit spending .

Under the original banking reform package, the government planned
to end insurance guarantees on all deposits of more than 10
million yen ($83,000) starting on April 1, 2002. The plan as
originally intended likely would have triggered an unravelling of
the Japanese economy, but a recent loophole Koizumi inserted
ensures a slower, less painful death.

At stake is 300 trillion yen ($2.5 trillion) in deposits. With
the Japanese economy locked into a deflationary spiral, the end
of deposit insurance would almost certainly collapse many of
Japan's already wobbly banks, particularly the smaller ones that
would see many of their customers flee with their savings to
larger, supposedly more stable banks. The international fallout
also could be catastrophic, as a formal collapse of Japan's banks
- -- along with the world's second-largest economy -- could cause a
panic that would make the 1997 Asian financial crisis look like
small potatoes.

The financial system got a taste of what was coming when the
reform was adopted April 1 for timed deposits. The day before the
switchover, the total amount held in timed deposits, installment
savings and loan trusts dropped 27 percent from a year ago, while
deposits in ordinary savings accounts shot up 51 percent,
according to the Bank of Japan. The key is that the first
category of savings is rather illiquid, and most depositors were
willing to take a financial hit when they switched over their
accounts in order to keep government guarantees. Completely
ending deposit insurance for demand deposits -- standard savings
accounts -- would provoke a much sharper and more damaging
response.

Officially, Koizumi says the full reform will still be
implemented as planned, but in traditional Japanese fashion he
has inserted a loophole that renders it meaningless. Federal
deposit guarantees will still apply to non-interest-bearing
accounts. However, since interest rates have been at zero for the
better part of the past three years -- pushing the payback on
savings accounts down to a pathetic 0.001 percent per year --
switching over to a non-interest-bearing account is a no-brainer,
even if the account charges fees.

With such a policy, the banks and government in essence would
levy a negative interest rate on savings accounts. In exchange
for insurance, depositors sacrifice a portion of their holdings.

Unlike many aborted Japanese reforms, the revised proposal if
adopted will not worsen Japan's economy. In fact, it will have a
number of broad-ranging effects that will help manage the
economy's decline. It should indeed calm the frayed nerves of
many Japanese citizens afraid of losing their savings. Money will
still steadily leak out of the banks, but not in a panicked
torrent that results in a sharp banking collapse.

The money that does leave will go into two places: new
investments and cold storage.

In Japan, choices are very limited. Investment funds are heavily
exposed to the government bond market, which has been paying zero
and near-zero returns for the past several years. That leaves
stock (and especially property) a standard refuge for scared
capital.

Any losses the banks suffer from deposit withdrawals should be
made up by higher stock and property prices; after all, it was
the collapse of stock and property prices -- which make up a
massive proportion of bank holdings -- that helped weaken Japan's
banks to the state they are currently in.

More Japanese, however, are likely to simply stash it away under
their futons, an increasingly popular trend in the country. The
amount of currency in circulation continues to climb -- 10.6
percent in July from a year earlier -- and the new policies will
hardly staunch the flow. Any money stored away will not only be
unavailable for the new investments that the moribund Japanese
economy so desperately needs, but is also likely to help foster a
rise in petty crime simply from the extra currency sloshing
around in people's pockets and homes.

So long as the hemorrhaging from the financial system is slow and
steady, this new policy might actually achieve some good. Japan's
economy, particularly now that Koizumi has abandoned any real
pretense to reform it, is in terminal decline. Policies such as
this one do nothing to slow, much less reverse, that decline.
What they do accomplish, however, is removing factors that would
cause systemic immediate collapse.

In this case, the policy serves to prick the banking system,
allowing funds to slowly bleed away. In time total deposits will
be much smaller -- whether from capital flight or subzero
interest rates -- and the banking sector's stability will no
longer command global attention.
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