Blasts from the past as the Nikkei hits 26 year lows

October 27, 2008
By Ken Worsley

Back in February 2007, Michigan [Democratic] Congressman John Dingell sent a letter to US President George W Bush entitled “Dingell to Bush: You Just Don’t Get It” (the letter is still on his website).

That letter called for the White House to pressure Japan into raising its interest rates, since low interest rates were allegedly¹ keeping the yen artificially weak (BOJ benchmark rates were raised to 0.50% in February 2007, where they stand today). At that time, Congressman Dingell wrote, “The auto industry doesn’t need a bailout- they need effective policies.”

Back then, the Wall Street Journal was reporting that “Toyota executives have expressed concern over the possibility of political backlash as it usurps market share from GM, Ford and Chrysler.”

Something tells me that worry has shifted, now that the yen is trading in the low-mid 90s against the dollar.

Then, in June 2007, the Bank of International Settlements declared the yen’s value to be “anamalous” (it was about 120-122 at that time). The BIS report included this line: “Given that Japanese retail investors hold the bulk of their wealth in yen, they are not as sensitive to the risk of a sudden rise in the value of the yen as leveraged investors who short the currency.”

While there is a good point in there, it ignores the fact that a stronger yen hurts export revenues (as does a decline in export growth, but that’s another story), which hurts share values, which hurts bonuses, and keeps wage growth low, which all in turn will hurt consumer spending - which accounts for about 55% of Japan’s GDP.

Moving to the present, the Nikkei closed at 7,162.90 today, its lowest level in 26 years - but everyone already knows that. News that Mitsubishi UFJ Financial Group is most likely seeking a $10 billion capital injection was unnerving, though I have to agree with Steven Towns’ assessment that “they are making acquisitions that hopefully bring some growth (any growth really) and eventually boost the bottom-line.” He sums it up nicely: “Meantime, pity the existing shareholders.” And to think that MUFG went to such trouble to ensure that their share in Morgan Stanley would not be diluted should the US government feel the need to pump cash into the bank.

At this point, the contrarian wonders if the Nikkei might just find support at the 7,600 level, especially with it trading at less than book value. Then again, with the strong yen about to hit corporate profits at exporters - Canon just cut its 2008 profit forecast by 21% - and thus consumer spending, is there really a mood for buying just now?

And we don’t even have time tonight to get into how the bureaucracy is likely to use the current crisis as an excuse to go back on certain aspects of market deregulation (get your over the counter pharmaceuticals online while you still can).

¹ They were, to the degree that carry trade was allowed to fuel.

Filed Under Banking, Business, Exchange Rates