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Tue, Mar 19, 2002 - Page 19 News List

Big lessons in those Japanese banking stocks

The betting now is that Tokyo's share rally will quickly lose steam after the start of the new fiscal year on April 1


"Unprecedented" is a word this trade shies away from -- too much risk that a finicky reader somewhere will trump you with a prior example of your case. But I'm tempted to break the rule as I watch the Tokyo stock market -- especially those bizarre banking stocks.

The Nikkei is up 24 percent since it hit that below-10,000 trough on Feb. 6; the Topix banking sector is up 25 percent. The outstanding performer is Mizuho Holdings, the world's largest bank in terms of assets: It has gained 68 percent since the bottom last month. It closed Friday at Japanese yen 337,000.

I've seen ramping operations in Japan before, of course. But not in two decades of Japan-watching have I seen one this transparent -- though somehow that does not seem quite the term.

As anyone watching this spectacle knows, there is nothing in the market, the economy, or the direction of policy to justify this kind of movement. This is by all appearances -- and by nearly universal consent -- a market in the throes of official manipulation. However the indexes perform come April 1, the end of the fiscal year and this run's probable "sell-by" date (if you will), there are some grave conclusions to be drawn from this charade.

Gross domestic product was off by 1.2 percent in last year's fourth quarter -- four times the market's consensus expectation.

Capital equipment orders fell in January by a record 16 percent -- again, four times the anticipated decline. Both bits of news have come in the past week.

As to the banks, they are now expected to add some 6.4 trillion yen (US$49.5 billion) to their load of bad debts. Promised inspections by the Financial Services Agency -- the results of which the government may now withhold -- could add 1 trillion yen to that figure. This comes amid a slowing in the pace of bad-debt write-offs and a decline in loan-loss reserves. As of April 1, shareholdings must be marked to market, or carried on the books at their current price rather than their original purchase price.

This closes a trusty loophole that has distorted the picture for decades.

Enter the authorities, then, with new short-selling restrictions, penalties against foreign brokerages for short-selling infractions, computer glitches at the stock exchange that further the atmosphere of uncertainty, new rules requiring life insurers to submit needless paperwork as to their share-market activity. This is the stuff of the current rally.

You can understand why. The generally accepted assumption is that a drop of 1,000 points in the Nikkei delivers to the banks a loss of roughly 2 trillion yen. J. Brian Waterhouse, banking analyst at HSBC Securities (Japan) Ltd, reckons Tokyo's 24 percent rally has probably reduced the banks' valuation losses by Japanese yen 3 trillion.

Christopher Wood, writing in his Greed & Fear newsletter, calls the market's run-up "a tactical coup for the authorities." He adds: "The equity market's rally means that the Japanese banks should reach the fiscal yearend without having to dump holdings of Japanese government bonds to make good mark-to-market losses on their equity holdings."

The betting now is that this ridiculous rally will lose its air quickly after the start of the new fiscal year. In this connection I like the February-March strategy summation Waterhouse suggests in one of his "Japan's Crisis Response" reports, a running series and an excellent read:

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