On Monday (Sept. 8), The New York Times’ DealBook carried a memo from Jefferies’ top brass, Richard Handler and Brief Friedman, addressed to the firm’s senior bankers concerning the treatment and talent cultivation of junior bankers. As a Leucadia (NYSE: LUK) shareowner — Leucadia acquired Jefferies in early 2013 — this was a refreshing memo and another instance in which I believe Handler means what he says. I became a Leucadia shareowner via the Jefferies acquisition because in November 2011 I was convinced after reviewing Jefferies financial statements and trusted Handler’s statements (not to mention his transparency) that there was scant evidence to support the amateurish and whorish short smear of Jefferies (whose shares quickly fell by ~50% out of fear the i-bank was another shitshow à la MF Global).
The Mainichi Shimbun (original in Japanese) reported early Thursday that Japanese Government Bonds’ (JGBs) popularity is rapidly falling among individual investors. Beginning in 2003, the Ministry of Finance (MoF) has sold two types of JGBs (a fixed-rate 5-year and a variable-rate 10-year) four times a year to individual investors. However, as interest rates have been held at zero (remember ZIRP) to near-zero levels for years, Japanese individual investors may finally be voting with their purses. The October 5-year issue had a coupon of 0.6%, the lowest since the program began in ’03, and less than half the peak coupon rate of 1.5% in July ’07.
The MoF now only expects to raise Y1.3 trillion (US$14.3B) this year from individual investors, down from a prior estimate of Y2.4 trillion, and considerably lower than the record Y7.2 trillion raised in ’05. Through the end of this September, individual investors held Y27.7 trillion or 4.6% of JGBs outstanding. The MoF argues that recent individual investor reluctance for JGBs is not an issue because their weighting is so low. However, it goes without saying, as the article accurately points out, that it is an issue, as the government is poised to take on even more debt in the face of declining tax revenues.
In fact, the MoF is reportedly planning to introduce a fixed three-year JGB for individual investors next July. At this time, it’s hard to imagine a warm welcome, let alone a return to previous years’ embracing of JGBs. The MoF may be right in not being very worried, since it can just pressure domestic institutional investors to pick up the slack. So whether individual investors like it or not, it’s probably the case that they will remain proxy buyers of JGBs.
Japan watchers and investors will readily recognize and perhaps even sympathize with the plight of domestic savers. The golden days of the yen carry trade seem so distant with US$1/Y90-level support so sticky. It’s a real shame that Japanese companies don’t pay quarterly dividends as is common practice in the U.S., for instance, since household, quality Japanese companies are in some cases paying dividends at multiples of what JGBs offer. The desperate search for yield could be called off. Instead of chasing the latest overseas investment fad or making risky leveraged forex trades, maybe something more productive could be achieved.
Disclosure: The author has no direct exposure to JGBs, and does not believe a crisis is looming for Japan despite David Einhorn’s position, and in spite of the serious problems the country faces but continues to bundle into a bumbling status-quo.
Below is an extract of the latest data from the U.S. Treasury concerning foreign holders of U.S. Treasuries (year-to-date through the end of August). At least for now, the fear of foreigners dumping Treasuries can be allayed, although it is clear there is some month-month volatility from a key buyer (see the figures for Mainland China). Also, notice how the UK and Hong Kong have significantly stepped up purchases YTD. When I last published an extract of the data in January 2008, Japan was the largest holder at $586.9B, followed by Mainland China at $492.6B, and the UK at $160B.
Click table image to expand size.
For those in the area, below is a list of upcoming talks hosted by Japan Society New York. Click the respective link for additional information and for registration.
Former Japanese Finance Minister Nakagawa should never have been at the press conference that did in his career, and now has the Japanese press gone mad discussing “reputation risk.” It is disturbing that he was even allowed near the table. Equally troubling is how BoJ Governor Shirakawa didn’t preempt some questions, especially the one’s directed at him. Instead of fielding questions, he bobbled, and quite frankly, made himself look ridiculous by association. I would go as far to say that if the Japanese are so concerned about “reputation risk” that the journalists should have done the right thing and helped Nakagawa exit stage right, immediately, after becoming aware of his condition. They could have exposed him on the side or in back, instead of in front of the world.
As for Japanese stocks: I still believe that as a whole, Japanese stocks are being priced fairly by the market. Readers may have noticed how we are now rather quietly approaching last year’s low levels, which are effectively near the post-bubble trough and quarter-century ago levels. Japan may have been first into recession, but it is almost certain not to be first out — in fact, aside from the late-05 to early-07 period, Japan had basically never really exited. The current administration’s proposed economic stimulus for Japan is insignificant and deficient; and a recovery still depends more on a rebound in consumption in the US and EU, something not likely to happen soon enough or meaningful enough. Therefore, I don’t think there is any urgency for intervention to soften the yen. It would be premature. In addition, I see no rush to buy for instance, iShares MSCI Japan Index ETF [[EWJ]]. The worst case scenario is the status quo of depressed equities and relative yen strength, a double whammy.
At an investment seminar in Tokyo attended by approx. 1,000 and covered by around 30 news outlets, Jim Rogers made his case for investing in China. Not much new here, as Rogers said he likes ag commodities, metals/precious metals and natural components of solar panel plays. For China specifically, he emphasized water treatment as the key sector. And while acknowledging the worst recession in over half a century in he U.S. — which he expects will eventually end but drag on for some time still — he says if one must buy stocks (ex-China) then to look elsewhere such as Japan and Brazil.
In “Hollowing Out, Tokyo Style,” FT Alphaville’s Gwen Robinson does a fine job of capturing an ongoing, and now accelerating human resources conundrum. While it seems like there’s no shortage lately of fake Japundits (not to be confused with the real Japundit, who is simply trying to keep it real on the cultural front) saying to go long Japanese stocks, boots-on-the-ground evidence provides further insight into the opaque.
Daily J will be on indenfinite hiatus, with possible periodic posts/updates. The links, bookshelf and publications will remain available. There will be downtime in early-mid January due to server-related matters. Thanks for your support and best wishes in 2008!
The Wall Street Journal’s Asialinks daily view includes the following excerpt:
At the same time [referring to an finance professor’s commentary on how stricter bank capital requirements may in fact compel Beijing to revalue the yuan faster], China’s foreign-exchange regulator increased the total quota for foreign companies to invest in the domestic capital market to $30 billion, as promised, under the qualified foreign institutional investors program. The quota stood at $10 billion in mid-June. The regulator also said it will increase the size of the investment that domestic residents may make into overseas securities markets, but it didn’t specify the quota amount. (Link to main article)