Those trying to predict the next big financial crisis spend countless hours weeding through statistics and charts. Maybe there's an easier way: Look at who's railing against speculators -- especially foreign ones.
An uncanny correlation exists between economic chaos and governments that turn on investors. Think of Malaysia in 1997, Russia in 1998, Brazil in 1999, Argentina in 2001 and the UK a decade ago. Like clockwork, governments that blame speculators for their troubles seem to slide into crisis.
Makes you wonder about Japan and its sudden preoccupation with speculators. It's short sellers that Tokyo finds most objectionable and it's clamping down on this rogue element. Short sellers make money by betting stocks will fall. And if you're watching Japan these days, only foreigners seem to be getting caught.
The Tokyo branches of Bear Stearns Cos and Credit Lyonnais SA received stock trading bans. Deutsche Bank AG's Tokyo brokerage unit and Nikko Salomon Smith Barney Ltd were instructed to improve internal controls. Goldman Sachs Group Inc's Japan unit in December also ran afoul of Japan's Financial Services Agency for short-sale infractions.
Blatant discrimination? It sure seems that way, especially when you consider how regulators turn a blind eye to deficiencies in domestic institutions. Take the issue of inadequate bad-loan provisions at many of Japan's more fragile banks. The FSA sure isn't cracking down on them.
It's a classic missing-the-forest-beyond-the-trees scenario. Tokyo's aggressive pursuit of foreign short sellers raises troubling questions of fairness, objectivity and political motivation. It's easier to blame foreigners for your economic woes than admit your stock market is falling because investors lack confidence in it.
Where economic philosophy is concerned, "this is more Mahathir than market," says David Gilmore, a partner at Foreign Exchange Analytics, referring to Malaysian Prime Minister Mahathir Mohamad, a fan of capital controls.
One astute reader asks: "What school of capitalism did these guys go to? The Moscow Institute of Socialist Studies?"
Tokyo has every right to worry about the stock market. As the Nikkei 225 stock average falls, banks that hold shares on their balance sheets become more insolvent.
Yet Japan is merely the latest example of policy makers blaming the messenger and missing the point. Investors put their money where profits are to be made. If an economy is weakening and government officials or monetary authorities aren't taking prudent steps to correct things, investors sell. It's their job. And, surprise, surprise, they're in it for the money.
If you want to attract investors and keep them engaged in your country, sound economic policies will do the trick. Solid banking systems, transparency and sober leadership are what pulls in capital. Without them, investors leave. And many know it's time to go when politicians and policy makers begin railing against markets. Investors know officials tend to blame markets for their own failures out of desperation.
Japanese officials who think stock sellers are undermining the economy should give investors reasons to buy. Of course the world is dumping Japanese stocks. What else are investors to do when an economy is as bad as this one? Buy and hold? Not when deflation is worsening and the bank sector is on the verge of another crisis.
Investors are shorting Japan because it's the only way to make money in the market. If Tokyo wants investors to go long it needs to tackle the problems weighing on Japan's economy. Not talk about them or create panels to discuss the economy. Not photo opportunities where Prime Minister Junichiro Koizumi pledges to stick with a reform drive that's yet to begin. Japan needs to stop talking and start doing.
Winning investors back could be as simple as coming up with a credible plan to address the bad-loan problem. Or perhaps some new thinking on ending Japan's 11-year malaise could be enough. Each day that passes without action means Japan's problems get worse.
Policy makers may not know this, but markets do.
Japan is still treating the symptoms of its illness, not the causes. Worse, Tokyo is in utter denial. Asked about a drop in Japan's sovereign credit rating, Finance Minister Masajuro Shiokawa said: "I have my doubts over why they would put us on this kind of rating. Japan's economic fundamentals haven't changed, so it's mysterious why there are differences in the ratings."
We're not talking about some mom-and-pop investor in Peoria, Illinois, who may not appreciate the complexities of Japan's situation. We're talking about the nation's top finance official -- the guy whose job it is to brief Koizumi on economic matters.
And yet here he is, admitting he doesn't get what's happening. It really makes you wonder if California Public Employees' Retirement System didn't blacklist the wrong Asian economies.
Calpers is pulling out of Indonesia, Malaysia, the Philippines and Thailand. Aside from the drama and hard feelings resulting from the Calpers move is a curious question: What about Japan? Southeast Asia sure has its problems, but do these markets really pose more downside risk than the world's second-biggest economy? Take transparency. If it's openness Calpers is worried about, then Japan may not be an optimal investment destination either.
No one knows, for example, just how many bad loans exist in the banking system. There are estimates galore, but little certainty about how big the problem is, who owes what to whom and which debts will ever be repaid.
If it's sound economic policies Calpers wants, what about Tokyo's desire to clamp down on share-selling in its markets? Or a government that routinely manipulated the stock market, propping it up before the end of the fiscal year so bank balance sheets will look better? Explain this: Amid all the gloom over the Japanese economy, the Nikkei rallied last week.
If Japan wants a vibrant stock market, one that rises on fundamentals, it'll need to do more than sideline short sellers.
If anyone's selling the nation short, it's not investors, but government officials.
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