Events in Japan May Lower U.S. Interest Rates
Stock prices rose on the Tokyo Stock Exchange last week as Japanese investors appeared to step confidently into the new fiscal year, which began April 1.
But appearances can be deceiving. In Tokyo these days, the thrill is gone--and that could have consequences for U.S. markets.
Big institutional investors in Japan are holding back commitments to the stock market, says Yuichi Kohashie, executive vice president of Daiwa Securities America. They are concerned about new capital gains taxes and worried by a bribe scandal that has forced government ministers to resign and led to indictment of the chairman of Nippon Telegraph & Telephone Co.
The scandal makes U.S. insider trading look like child’s play. A company doing business with the government gave shares of a new stock issue to cabinet ministers and their aides so they could profit when the issue went on the market and rose in price. How did bribers and bribees know the stock would rise? Because the Tokyo market is subject to frequent rigging.
Corporations in Japan dress up their profits by trading in stocks of other companies. Takeovers are rare, but corporate speculation and manipulation is widespread.
The market has other oddities: Stocks sell at very high prices--70 to 100 times company earnings--because their values are based on real estate the companies own. But real estate values are inflated, in turn, by government controls on land use and development.
Also, the government often intervenes to keep prices from falling. One worry of investors in Tokyo today is that the government is pumping the money supply to support the market--making this rally particularly artificial.
Such market shenanigans belie the image of Japan as a well-oiled machine, but that image is false in any case. The reality is a complex nation that is currently undergoing profound changes in its politics and economy. Those changes relate to the ruling Liberal Democratic Party’s dependence on contributions from landowners, the price of urban real estate and middle-class demands for affordable housing.
Foreigners may not understand the politics, but they’ll be affected by the economics. As an indirect result of the bribery scandal, for instance, inflation is likely to rise in Japan--and that ultimately could mean lower U.S. interest rates.
How so? Begin with the fact that Japanese inflation is likely to rise because the government is going forward with a program to improve Japan’s standard of living, even though financing for that program through sales of stock in the state-owned telephone company has been sidetracked by the scandal.
Big money is involved. The government began selling shares of Nippon Telephone (NTT) to the public two years ago. NTT shares first sold at $11,500 each and rose to $21,500. The government reaped $50 billion at a clip in three stock sales, which it used to finance its budget deficit--at $108 billion, Japan’s deficit is proportionately larger than the U.S. government’s--and to fund public works.
Caught Up in Scandal
It counted on reaping more. Last year while he was still Japan’s finance minister, Kiichi Miyazawa said: “Sales of NTT add $12 billion, or 20%, to public spending on housing and sewage systems.
“That’s assuming NTT shares can be sold at a good price, and I don’t see why they can’t be,” he added. But in December Miyazawa was forced to resign in the growing scandal, and now the possibility of a new sale of NTT is remote.
So what? So extra public works expenditure without such financing promises to swell Japan’s deficit and spur inflation--a promise that may already be weakening the yen and the Tokyo stock market. Says Barry Gillman of PCM International, a subsidiary of Prudential Insurance that invests $4 billion worldwide: “Our outlook is that Tokyo may underperform other markets in the next few years.”
And that, in today’s interconnected world, could enhance the U.S. market’s attraction. “There is an enormous buildup of retirement savings in Japan, looking for new investments,” says an official of Nomura Securities. A lot of that money will find its way into U.S. bond and money market investments--and that increase of funds should restrain U.S. interest rates. Global finance, shrinking globe.
