(UPDATE 3) Japan Financial System on Edge

New data added--also changed the title so it would scare people less.

"But in fact, according to the more recent numbers, Japan has already spent most of the additional 100 billion US in just one month--a new record (7.15 out of 10 trillion Yen)(3). This pace is greater than that of the entire US deficit, and Japan is a smaller economy."

Japan Reserves On Edge of Collapse
PRESS RELEASE
Citizens for Corporate Accountability

- Japan does not have several months foreign reserve holdings left for US assets, as previously thought, because $650 billion in holdings--almost the entire amount--is already used up.
- Since Japan has run out of holdings, it is borrowing against itself using US bonds.
- In recent testimony, the Fed alluded to this type of risk
-(UPDATE 3) Japan spent almost all remaining reserves in January.


(UPDATE 3, Japan spent most of the 100b US in January) (SEATTLE) 02/17/04 - Figures outlined in a foreign news release concerning Japan's foreign exchange situation paint a picture that is far worse than headlines suggest. The news release, from the AFP--which apparently wasn't broadcast widely in the US news--has since been deleted from the web, but is dated January 2004(1). Specifically, the release shows that Japan has already exhausted its resources to buy US dollar assets.

Japan has been buying US dollar assets to offset currency effects due to problems in the US economy, at a rate never before seen. This has been holding up US credit, deficit, housing, and stock markets, and keeping US interest rates low, in a new and unusual way. This action is said to be unsustainable, because it represents a significant portion of Japan's total gross domestic product ("GDP").

In the release, the Japan Finance Ministry announced a "deal to sell US bonds to the Bank of Japan" to raise an amount of 100 billion dollars US. However, the release says the Finance Ministry has to buy the same back after three months. This short-term action is apparently necessary, because the release indicates almost all of Japan's foreign exchange reserves are already in foreign currencies--leaving none left to invest in US assets ("foreign currencies accounted for 652.8 billion dollars"--out of 673.5 billion total).

At the most recent rate of use, the additional 100 billion dollars would last a few months, at best. But in fact, according to the more recent numbers, Japan has already spent most of the additional 100 billion US in just one month--a new record (7.15 out of 10 trillion Yen)(3). This pace is greater than that of the entire US deficit, and Japan is a smaller economy.

And there is a question as to whether the 100 billion dollars in US bonds might be unexpectedly sold. The news is significant because it suggests serious US credit problems are closer than previously thought, and the US Federal Reserve may no longer have the ability to keep US interest rates low, when foreign flows are reduced or reversed.

In recent testimony, the Federal Reserve acknowledged "near-term" risks related to the deficit, without specifically acknowledging multiple levels of credit dependency in the economy, nor the unsustainable rate of Japanese reserve fund consumption(2).

###

Footnotes:

(1) "Japan's Foreign Reserves Hit Record", AFP, Friday January 9, 11:59, Yahoo!: Error 404 The requested URL could not be found.
(2) Rising red ink, he said, could potentially push up long-term interest rates in the near term. See Greenspan: 'near-term risk' from the February 12, 2004 edition of CS Monitor.
(3) Bloomberg News

[alexwcovington]

1. Jesus

How bad is this versus 1998?!

[UpInArms]

4. instead of 1998 - think October 1987

http://www.bmonesbittburns.com/economics/bottomline/common/line_b.asp?issue=20030922

The communiqué calls for flexible exchange rates, which signals that Japan, which sold record sums of yen this year to stem its gains, will let the currency extend its rise as the economy pulls out of a 13-year slump. All of this sounds great, and is no doubt a big win for the U.S. National Association of Manufacturers, but it is highly destabilizing and therefore very risky. In playing these exchange-rate games, G-7 Ministers might well get more than they bargain for. It was the 1985 Plaza Accord to weaken the dollar, and the 1987 dollar-bashing comments of then- Treasury Secretary James Baker that triggered the stock market crash in October 1987. This is eerily reminiscent of just that time.

It's not as though the dollar hadn't already been on a downtrend. It had fallen over 17% on a trade-weighted basis from its high in January 2002 until this past Friday, but with this weekend's sharp selloff, the trade-weighted U.S. dollar is now down 19.6%. The yen moved from Friday's close of 114.28 to roughly 112 this afternoon, having approached 110 earlier today. The Nikkei sold off 4.2% overnight on fears that major exporting companies like Toyota would be hard hit by the yen appreciation.

But if this were so good for the U.S. economy, then why are stocks and bonds selling off in the U.S. as well? The bond story is an easy one. The Japanese and Chinese have been huge net purchasers of U.S. bonds-government, agency and corporate. They have used the proceeds of their enormous current account surpluses to buy dollar bonds and therefore prevent a meaningfully larger lift to their currencies. With the Chinese yuan tied to the U.S. dollar, their dollar holdings emanating from enormous trade surpluses are exploding. Reduced net purchases of bonds by Asians (not to mention net sales) would lead to sharply higher interest rates in the U.S., which would, of course, slow economic activity there.

and there was this:

http://www.gold-eagle.com/editorials_03/temple072903.html

In 1987, it was primarily the Japanese investors’ refusal to put new money (except at much higher interest rates) into financing America’s growing deficits that caused the eventual meltdown on Wall Street. Now, what we see happening is the selling of GSE (Government- Sponsored Enterprise) paper. Specifically, it’s been acknowledged in recent days that European banks-perhaps including the European Central Bank itself-have been selling some of their holdings of Fannie Mae and Freddie Mac paper. Both deteriorating U.S. monetary and fiscal fundamentals and the increasing accounting questions over those mortgage agencies specifically have apparently led to Europeans deciding that they want to reduce their holdings of assets deemed increasingly risky.

(edited to add 2nd link)

[Nite Owl]

2. Do you have the link to the rest

of this Dan?

And there is a question as to whether the 100 billion dollars in US bonds might be unexpectedly sold. The news is significant because it suggests serious US credit problems are closer than previously thought, and the US Federal Reserve may no longer have the ability to keep US interest rates low, when foreign flows are reduced or reversed.

That caught my attention!

[Kenneth ken]

3. there is a link

at the bottom of his post; he typically links to his own web page for this stuff.

[Nite Owl]

5. Thanks

n/t

[Kenneth ken]

6. In the economics forum

there are competing posts from junker; one about the dollar bouncing around for a month and then collapsing starting about this week 9originally posted 1-16-2004, saying a month from then) and another that talks about collapse possibly in 90 days (I think that one is new, so put it about mid to late May)

" However, the release says the Finance Ministry has to buy the same back after three months. "
Would this put the Japan crunch about late April or so?

So my real question for you is, does this article seem to substantiate the junker post about collapse coming in late spring?

thanks - I kind of think I understand this stuff, but there is also a feel of a very high degree of esoteric thinking involved on the part of the writers and posters, which leaves me well out of my depth.

edit for links referenced:
dollar collapse in 90 days

7. I do my own analysis

I don't know how junker does his analysis,and I don't read much of it.

Based on the amount of money spent in January, though, it would look like there are only days left for Japan to intervene using yen to buy dollars.

Now, they could sell other assets in foreign exchange holdings, like euro or gold, but how long would that last? Not very long--not until the end of march.

I think the point is the current situation is unsustainable, and the only way to get that 100bln dollars back quickly would be to sell the bonds before march.

I do not see anything bridging the gap until spring, unless the US Fed intervenes, and we are in no position to do that, except to raise US interest rates.

That is just my guess. Do not make any financial decisions before consulting someone who is a professional. I am just a nosy smart person who started Bev Harris on the BBV thingy.

Dan

[TNDemo]

8. What are the different scenarios that could play out in the U.S.

with this? Trying to think about what this might mean on a personal level.

9. Someone or something has to make a move

There isn't enough money to cover February--figure it out for yourself.

Something has to be sold or allocated before then, to keep things equal in forex. But even with that:

The longer term problem needs to be fixed--some kind of correction in the stock or bond market.

Once again, this is not a financial recommendation.

Greenie did say "near-term" problems, perhaps.

[Kenneth ken]

12. Thanks

I did know you do your own analysis, and I was at least somewhat aware that you don't seem to post on junker threads much. Those were just the threads I had read most-recently in terms of economic collapse, before this one.

I was just curious; it does seem certain that "bad news" is coming. The real questions are how bad, how soon, and how wide-spread.

The answers are starting to seem like very, very and very.

And of course, with all due respect, I wouldn't ever make financial decisions on the basis of one or more anonymous posters on a public web site.

[54anickel]

11. Junker has gotten conservative on his "dates and amounts" as

folks kept calling him on it and missing the true message he was trying to get at. The one you saw that was for around this week for his first post, the 90 day thing was his taking a more conservative stab.
Exactly when it will happen is really immaterial if you harp too much on the date and not catch the true warning.
I wouldn't dwell on the when, I would just try to best be prepared.

[54anickel]

10. Japan's GDP number just came out at 7.0

That should make them more comfortable with a rise in the Yen, meaning drop in the dollar. They may intervene to try and keep it "orderly" (whatever the eff that means).

http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=102&topic_id=370306

direct link here
http://www.forbes.com/business/newswire/2004/02/17/rtr1264778.html
TOKYO, Feb 18 (Reuters) - Japanese stocks jumped on Wednesday morning after data showed that Japan's economy grew at a faster-than-expected pace in the last quarter of 2003, supported by robust exports and capital spending.

Gross domestic product (GDP) grew by a real 7.0 percent in October-December on an annualised basis, beating a median forecast of 4.6 percent, data released before the opening showed.

"This is strong confirmation that Japan's economy is on a recovery track. We're still very dependent on exports, but the numbers also show that consumption is holding up strong," said Tsuyoshi Segawa, strategist at Shinko Securities