(UPDATE 3) Japan on Edge (notes trend worsened in January)

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

[hedda_foil]

1. Holy shit!

I think I may have waited too long to put my condo on the market.

[54anickel]

2. I think they will be able to let the buck fall at a faster clip.

Their GDP just went up. This was one of the things they were holding out for, more domestic spending.

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
...........................................

I think they knew on the weekend already. Would explain Sundays Yeneticus message.

3. I wouldn't want to guess

The current state isn't a long-term solution,that's for sure.

Japan running a trillion dollar deficit to support the US 1/2trillion dollar deficit, at near-zero interest rates on both sides? I don't see it.

Who would buy the bonds?

[54anickel]

4. My guess would be it would leave Greenspan little option but to

raise rates in answer to the demand for a higher yield on treasuries, assuming there finally is a demand for better rates.