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Japan’s leadership searching for excuses for the Nikkei’s drop, and waiting for instructions

Wednesday morning’s Nikkei is reporting that Japan’s six major banks have seen unrealized profits on their equity holdings reduced by some 60% since the end of last September. That adds up to a decline of 70% in value since the end of June 2007.

Yesterday didn’t help much, as the Nikkei lost 752.89 points to close at 12,573.05. Combined paper profits at the six firms have been wiped down from 12.5 trillion yen at the end of September to somewhere in the 6-7 trillion yen range.

What attention has all this gotten from Japan’s policy makers? Back on January 15, State Minister for Economic and Fiscal Policy (should those really be the same job?) Hiroko Ota told reporters, “The various price rises, including for food, are starting to affect consumer sentiment bit by bit…I want to watch things very closely.”

Not reassuring. Ota was commenting on the Economy Watchers Index, which had been released the week before and was down for the ninth consecutive month. The survey’s index hit its lowest level since January 2003. The Economy Watchers Index measures sentiments amongst people whose jobs are sensitive to changes in economic conditions - taxi drivers, barbers, restaurant workers, hotel staff and so on. Edward Hugh posted a chart over at Japan Economy Watch that shows how this index has fallen over the past year.

Nine straight months down. Ota’s response? Again: “I want to watch things very closely.”

Yesterday, Kyodo News quoted Prime Minister Yasuo Fukuda as saying:

The actual economic situation in Japan is not one in which stocks keep sagging. The current stock downturn is happening globally, not because of Japan’s economic conditions.

Interesting, since the Nikkei is down 17.9% thus far in 2008 and I would think that this would deserve further attention, no matter what’s going on anywhere else.

A Nikkei piece on Saturday started this way:

With Japanese stocks unable to emerge from a protracted slump, overseas media have been eager to offer their own analyses of why Japan is no longer a darling of foreign investors, citing stalled reform efforts and a corporate culture unfit to produce genius inventors.

The Wall Street Journal has said that foreign investors are currently not interested in Japanese equities, discounted though they may be. Why not? It all comes back to how shareholders are treated, as the Nikkei put it:

Japanese companies are excessively nervous about possible acquisition attempts…[and] more than 400 firms have introduced poison pills to fend off potential hostile takeover bids. [The Journal] also noted that cross-shareholding arrangements are making a comeback.

We need to keep in mind that about a quarter of Japanese equities are foreign-owned and that foreigners account for 60% of trading on the Tokyo Stock Exchange.

Then we learn that the Daily Telegraph, “cautioned that Japan is no longer on the radar of global investors and that no one would be willing to invest proactively in its markets under current conditions. As a result, both foreign investors and Japanese retail investors have shifted their money into emerging markets, the article explained.”

Newsweek declared last month that Japan is no longer a leading technological innovator. Where is the Google? Where is the Apple? Where is the global marketing savvy? Where are the lifestyle changing products?

Then we hear Hiroko Ota come back and say that Japan no longer has a “first class” economy, telling reporters, “I have a sense of crisis because Japan has not nurtured industries that will grow further in the future. Thinking about Japan’s economic position in five to 10 years amid great changes in the world economy, I think it is imperative for us to conduct reforms to boost our growth.”

In response, the Nikkei quoted Prime Minister Fukuda as saying:

There are super-duper parts in the economy. But there are also some parts that are not so good. I think Minister Ota ventured to make the remarks to uplift the nation’s spirit.

(Wow - that translator is really having fun!) Uplift the nation’s spirit? It didn’t look much better the next morning. At any rate, as the Bank of Japan wrapped up its January Policy Board meeting yesterday (that one must have been easy), we learned that despite the Nikkei’s fall and a host of other downward pressures, the BOJ has left its essential assessment of the economy unchanged. The Bank’s report stated that although current readings are below its October projections, the blame can be rested on the slowdown in new housing starts.

It looks like everyone’s searching for an excuse, and they’re all going to different meetings. No one bothered to mention that wholesale prices rose 2.3% in November and 2.6% in December, or that machinery orders fell 2.8% in November. Details, details…

So what should Japan’s policymakers be doing? In a Kyodo article published yesterday entitled Japan plans no immediate action on stock plunges, yen’s rise, Hiroko Ota (still in her current position) was quoted as saying, “[W]e will closely monitor market movements, because rapid changes could negatively affect the real economy with deterioration in sentiment.”

Really? Sentiment could get worse? Has she seen the latest Consumer Confidence Index or Economy Watchers Index? That’s not very optimistic. At any rate, the big question is why should Japan stand on the sideline right now instead of doing something about the current situation? Once again, from Ota:

I think it is somehow difficult for the moment for Japan to take any action alone. We should instead think about the issue in a globally concerted manner.

I would think that all that ‘decoupling’ would make such an approach difficult, but I’m wrong, as Minister of Economy, Trade and Industry Akira Amari told reporters yesterday:

This is a spontaneous worldwide fall in stocks stemming from the U.S. subprime crisis. For the time being we have to watch how the United States deals with the crisis.

Oh, right - it all comes back to the US. After all the talk of housing starts, food prices, and lack of reforms, we come back to subprime…

Well, at least Mizuho is doing what they’re told. The government seems content to just sit and wait - at a time when US policymakers (ahem, there’s a Presidential election this year) just might be too busy to think about giving orders in this neck of the woods.

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