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Koizumi’s dream of a balanced budget officially dead: Cabinet Office

Just over two years ago, Prime Minister Junichiro Koizumi announced his goal that Japan would have its national budget balanced by 2011. That isn’t going to happen.

Although most observers probably never expected it to happen, the Cabinet Office announced today that rather than having a balanced budget, it expects to see Japan saddled with a budgetary shortfall of 3.9 trillion yen in fiscal 2011. At the same time, this year’s GDP growth forecast was reduced from 2.0% to 1.3% (Last week, the Bank of Japan revised its projections down to 1.2% from 1.5%). Predicted growth in capital spending for this year was revised downward from 3.3% to 0.6%. The rise in consumer prices was revised upward from 0.3% to 1.7%. Consumer spending was revised downward from 1.3% to 1.0% - we need to bear in mind that household spending was down 3.2% in May, down 2.7% in April, down 1.6% in March, flat in February and up 3.6% in January. That looks like a nasty trend.

In January, the Cabinet Office estimated Japan’s national debt at 700 trillion yen. That’s now estimated to be at 778 trillion yen by fiscal 2009.

The real killer from the government’s perspective is that tax revenues are expected to be down, and that this could lead to hikes in consumption and other taxes. While this talk is going on, we also see that the Cabinet Office wants to encourage Japan’s households to dump their 775 trillion yen in deposit assets into the financial markets. Read more

Japan’s pension fund lost 5.65 trilion yen in fiscal 2007

As a quick follow-up to yesterday’s post on the creation of a sovereign wealth fund and the taking of seed money from Japan’s pension fund, it was announced today that the Government Pension Investment Fund lost 5.65 trillion yen in fiscal 2007. Although estimates had been published before, this is the first time we’ve seen detailed numbers from the government.

As one would expect, the fund made money from its investments in domestic government bonds, but lost about 7.5 trillion yen in equities positions both at home and overseas. This was the largest loss ever incurred by the pension fund, which has been investing full-scale in financial markets since 2001.

LDP panel proposes soverign wealth fund setup for Japan

Things have been slightly quiet on the sovereign-wealth-fund-for-Japan front lately - a bill proposing an SWF for Japan was supposed to have been written in April - but today the issue finally made its way back into the news.

According to the Nikkei, an LDP panel has proposed taking 10 trillion yen out of the nation’s Government Pension Investment Fund (GPIF), which currently oversees about 150 trillion yen in assets. About two-thirds of this money is held in Japanese government bonds, while the rest is in overseas government bonds and both domestic and foreign equities.

The interesting part of the proposal is what follows. As the Nikkei puts it:

the LDP panel urged the government to set up a state-owned asset management firm that would manage about 10 trillion yen on behalf of the GPIF. The proportions of the different types of assets would remain unchanged, but the fund would be staffed by financial professionals, who would be authorized to invest more aggressively than the GPIF.

The proportions would remain unchanged? Why force an SWF to put about two-thirds of its funds into Japanese government bonds? Oh yeah, we know the answer to that one already. We do need to keep in mind that Japan’s pension fund lost money on its investments last year.

It seems as though the Ministry of Finance has successfully kept the government’s hands away from the nation’s foreign reserves. They’re going to deplete the pension reserves first…

On a side note, the Ministry of Finance has been bossing the government around to quite an extent recently, especially over budget items, including education-related expenditures (more details to follow soon) and cutting in wasteful spending at the Foreign Ministry (which should be done). Can Fukuda stand up to the MOF? Is this revenge for not getting through an MOF Old Boy as Governor of the Bank of Japan? It’s starting to look like Mr Abe being laid to waste by the Ministry of Health, Labor and Welfare all over again…

Macquarie has a 19.9% stake in Japan Airport Terminal; will it be allowed to buy more?

Is Japan about to face a test? Earlier this week, US Assistant Treasury Secretary Clay Lowery told the Foreign Correspondent’s Club of Japan that “There are concerns among investors that Japan may not be fully committed to attracting FDI (foreign direct investment). It is therefore important Japan sends a clear signal that it is open for investments.”

Just a month ago, European Union Trade Commissioner Peter Mandelson, while on a visit to Japan, declared it to be the most closed developed economy to foreign investors.

Both are most likely thinking of the recent order issued by the Ministry of Economy, Trade and Industry against the UK-based Children’s investment fund. The government decided that allowing TCI to double its share in J-Power from 10 to 20 percent would endanger national security. TCI is already the largest single shareholder in J-Power.

Now, we have learned via the Nikkei that Japan Airport Terminal, the company that operates Tokyo’s Haneda Airport, is 31.5% held by foreign investors. Eight months ago, that figure stood at 24.7%.

According to the paper, Macquarie Airports Ltd, a unit of Macquarie Bank, is now JAT’s top shareholder, having amassed 19.9% of the company since it began buying shares last July. Japan Airport Terminal intends to extend the takeover defenses that it adopted last year.

Back in February, the government decided against passing a law to place a limit on foreign ownership of Japanese airports to less than one third. Although this was seen in some circles as a positive sign, it really doesn’t matter now that a national security law has been invoked to stop TCI from buying shares in J-Power. The question now is whether the Japanese government will continue to issue orders against foreign investors in such cases, and if it does - what potential risks could the financial markets face as a consequence?

Read JEN’s Ken Worsley in Central Banking Quarterly

A quick announcement: Japan Economy News editor Ken Worsley’s most recent article has been published in the May edition of Central Banking Quarterly, a publication of Incisive Media in London.

The article deals with the fiasco surrounding the recent appointment of a new Bank of Japan Governor, and details how the shifting political scene in Japan has affected and will continue to affect the nexus where government and finance intersect. Although it may seem simple to consider the fight over the appointment of a new BOJ Governor to be a mere proxy war between the ruling and opposition camps, much more is brewing behind the scenes in Nagatacho and the ideal that the BOJ is independent of the government continues to be undercut.

Steel Partners sells off stakes in Bull-Dog and Kikkoman; TCI is holding paper losses in J-Power

Earlier today, the Nikkei reported that Steel Partners has sold off all of its shares in the Bull-Dog Sauce Company, as well as Kikkoman. A year ago, Steel Partners held about 10% of Bull-Dog shares, and launched its takeover offer in May. After the Supreme Court declared that Bull-Dog’s anti-takeover defense measures were legal, Steel Partners brought in about 2 billion yen from the company when it bought back its stock warrants. It has been speculated that Bull-Dog has spent up to 70% of its sales revenue from the past year on boosting its cross shareholdings.

According to the paper, Steel Partners also made about 2 billion yen from its investment in Kikkoman. Although we don’t know the reasons exactly why Steel has decided to pull out of its Kikkoman position, it is certain that Kikkoman is gearing up to spend quite a bit of money on a new ketchup factory in China as well as 6 or 7 soy sauce factories in South America, China, North America, Oceania, Southeast Asia and Eastern Europe. The construction is expected to cost tens of billions of yen and bring Kikkoman’s production volume near the range of an annual 1 million kiloliters.

Back on April 1, the Nikkei published a piece entitled Firms Begin To Dismantle Takeover Defenses As Benefits Remain Unclear, which highlighted the fact that there have been no successful hostile takeovers in Japan, that courts tend to be friendly to management, that takeover measures hurt share value, and that poison pill measures can be quite costly to a firm.

Six days later, the Nikkei published a piece entitled More Firms Adopt Takeover Defenses That Seek Shareholders’ OK which stated that 443 firms had adopted anti-takeover measures by the end of FY2007.

Finally, it’s worth noting that just as Steel Partners exits now from its Bull-Dog chapter with a profit, that The Children’s Investment Fund is estimated to be holding 16 billion yen in paper losses deriving from its investment in J-Power. Today’s Yomiuri tells us, “If TCI refuses to obey the government order (to stop purchasing shares in J-Power), the fund or its executives may face a fine or prison term of up to three years.”

J-Power has no anti-takeover measures in place.

Nikkei highly critical of Japanese government’s decision to block The Children’s Investment Fund

Now that Japan’s government has effectively blocked TCI from upping its stake in J-Power from 9.9% to 20%, a slew of negative reactions to such action is bound to be published, and some pressure is expected to be put on Japan’s government to allow the nation’s current stunted form of capitalism to develop on its own.

The Nikkei got the ball rolling today, in an opinion piece titled Govt ‘Selection’ Of Shareholders Costs Japan Dearly. Some selections:

[M]arket insiders are wary of an acceleration in Japan selling by overseas investors. “TCI had offered an alternative plan restricting its voting rights even if it was allowed to increase its stake,” said Kengo Nishiyama, a strategist with Nomura Securities Co. “The government failed to give a convincing explanation of why the plan was not acceptable.”

…Each time a foreign activist fund’s attempt to take over a Japanese company has been blocked — a typical case is the aborted bid by Steel Partners to take over Bull-Dog Sauce Co. — or calls to control foreign investment in sensitive sectors have emerged, foreign investors have rushed to sell Japanese equities, regarding Japan as remaining closed to them…

…It is unusual for the government to get involved so directly in private-sector investment activities.

(I’m not so sure about that last statement; this just seems like a particularly egregious example.)

“Japan must now face the question of whether management of a company or the government has the right to choose shareholders,” said Yoshihiro Ito, director of Okasan Capital Management Co. The effective selection of stockholders through cross-shareholdings — a practice that is reviving in Japan — listings of both parents and subsidiaries, and government intervention will distort the stock market and cost companies dearly.

Bull-Dog Sauce is a case in point. The company has spent a total of more than 12 billion yen, or about 70% of its sales, to purchase cross-shareholdings and other securities in the past five years since Shoko Ikeda became president.

The government needs to be extremely cautious and have a clear justification to intervene in private-sector investments. Otherwise, it could seriously damage the national interest.

The word “could” seems a bit light in this sentence; The LDP has been damaging national interest for decades. One question they will be faced with in the future is whether the population will believe that their actions are in the voting public’s best interest or if they are more akin to amakudari back-scratching. Although this may not seem like a bread-and-butter issue at first glance, it certainly looks as if the public is going to have more of a “choice” on these matters in the coming years, if you’ll pardon the pun.

Finance Minister Nukaga requests IMF watch sovereign wealth funds, to battle protectionism

Just as Japan is having discussions over legislation to prevent foreign investors from taking large stakes in airports and other such infrastructure, and the government appears set to reject The Children’s Investment Fund’s plan to boost its stake in J-Power from 9.9% to 20%, Finance Minister Fukushiro Nukaga made some interesting comments through a written statement released Saturday at a gathering of the International Monetary Fund’s policy panel. Nukaga’s statement went like this, according to the Japan Times:

“We recognize the [increased] presence (of Sovereign Wealth Funds in the global financial market). I support the IMF’s action to make full use of its experience in monitoring movements in international capital flows, and formulate best practices in the areas of governance, institutional arrangements and transparency…(Such efforts would benefit both SWFs and countries which receive their money) by minimizing protectionism in recipient countries.”

Emphasis added.

Is it safe to assume that if the IMF decides not to take up Mr Nukaga’s request to keep a closer eye on SWFs that protectionism is greenlighted by acquiescence?

Shirakawa to be nominated for vacant Bank of Japan Governor post?

Yes, the Bank of Japan still has no Governor, and the next G7 meeting of finance ministers and central bankers kicks off on April 11, just over a month from now. The Nikkei is now speculating that a third candidate for the governorship may be nominated as early as tomorrow, though it could happen next Monday. If this schedule is followed, the new BOJ Governor could be fully approved by the middle of next week.

Interestingly, the Nikkei also speculates that Deputy Governor (and acting governor) Masaaki Shirakawa could be the nominee. This would be an interesting about-face for the ruling Liberal Democratic Party, who just over a week ago was dismissed by the ruling camp as a candidate on the grounds that it would be “inappropriate” to elevate someone who had just been handed the Deputy Governor position to the head of the bank. Read more

Have Japanese equities hit bottom yet?

Today was the last day of financial 2007, and the Nikkei Index dove 294.13 points to finish at 12,525.54 - marking a 27.5% decline since April 1, 2007. To make matters worse, paper gains on shareholdings at Japan’s six major banking groups dropped by 62% over the same time period, according to the Nikkei. This was the first time that unrealized profits from equity holdings declined at the six major banks since 2003. On the other hand, the same six banks saw 100 billion yen in paper gains in bond holdings, the first time they’ve been in positive territory since 2002.

At the same time, the Nikkei also estimates that the market value of shares held by publicly traded firms in Japan declined 30% in fiscal 2007. This would represent a loss of 8.7 trillion yen of (paper) wealth. There seems to be heightened risk developing if the Nikkei should move lower, as many Japanese firms are boosting their cross-shareholdings in an effort to thwart would-be takeover attempts. Read more

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