SNS Tech Trends A step closer to another Far East meltdown An already wobbling Japanese economy, stagnant and poorly guided, faces a new crisis as banks dump shaky stocks and bad loans. Dangerously ineffective leadership makes the problem even worse. By Mark Anderson

I consider Japan to be perhaps the most dangerous part of the world economic picture. Although I have not seen the need for a specific warning -- a la my call on April 10, 1997, on the imminent collapse of Asian markets -- I am now stepping up my concern level. Suffice to say, if Japan goes down, the rest of its Co-Prosperity Sphere (yes, a top government official actually used those World War II words last month) goes with it; anyone following Japanese out-country production investment over the last decade understands this.

Where are we now? First, unfortunately, we are in March. The end of this month marks the end of the fiscal year for Japanese banks and the end of the period by which they have been exhorted to dump all possible cross-holdings in corporate stock, and bad loans. If you thought the Nikkei approaching 12,000 was caused solely by a weak economy, think again.

Of course, this is a Catch-22, as each bank sale of stock at bargain basement prices

establishes the true (low) value today of that stock on bank balance sheets, even as it … further depresses the stock market, and … thereby further lowers the value of remaining stock held by the banks, therefore … pushing lenders toward violation of the international 4% minimum capitalization requirement, if not … instability.

Exports to the U.S. are falling; there is no hope left for old "spend your way out of it" policies of the ruling Liberal Democratic Party; the country now has mammoth debts that are pushing international norms; the yen/dollar ratio, right in line with SNS calls when it was 105, is now in the 117 range, well on its way to our next 125 ceiling; and Prime Minister Yoshiri Mori's government is as unpopular as any since the war, with almost no chance that he will last until July. And his government, riddled with corruption even more than is usual, can't seem to keep a cabinet for more than a week.

Most foreigners today don't think of the leading political party of Japan as coming out of the Yakuza (the domestic mafia), but this is essentially historically true, and we now are entering a time when corruption of the LDP is one of the greatest dangers facing the world economy. The inability of this party to mount a new leadership, to wrest itself free of graft and work real business reform, and to provide a new vision and strength to a country desperately -- and publicly -- in need of same, should be a worry to us all.

They've got my attention.

-- kevin (ktross@mailcity.com), March 12, 2001

Answers

Thanks for the post, I've been closely watching that situation develop and trying to figure out the implications for the U.S. as well.

-- Guy Daley (guydaley@altavista.com), March 12, 2001.

This looks like a good place to put this.

Asia Red Alerts: Japan, Korea, Taiwan, Indonesia

By Hope Leman, AsiaWise 12 Mar 2001 10:30 (GMT +08:00)

Japan

Worst-case scenarios

As Japan heads for what is still being referred to in an overly politic fashion as "a slide back into recession", but which actually became a major economic disaster, the American media is finally taking notice of the implications of Japan's troubles for not only Japan and its neighbors, but eventually the U.S. After all, who has funded a great deal of America's debt in the last several decades? Japan. And guess who might need a lot of money in the next year or so? Japan. The lack of American media coverage on Japan's decline and (great) fall may go down in history as one of the worst cases of media negligence ever. In comparison, the accidental sinking of a Japanese training ship by the submarine the USS Greenville pales in terms of newsworthiness.

Japan's troubles will almost certainly hit the rest of Asia hard. Already, Japanese Foreign Minister Yohei Kono has warned China that Japan cannot tolerate for much longer the failure of Chinese financial institutions and other firms to pay back debts. This is a new tack for Japan, which has, for years, pussyfooted with the Chinese when it came to such matters. If Japan is getting tough with a power like China, it is going to come down hard on debtors in poorer countries such as Indonesia. Kono's new toughness suggests that Japan is willing to risk diplomatic offense in order to get its hands on some cash. Korean companies and banks may soon have to cough up money to their Japanese creditors. And a tumbling yen could wallop the Korean chaebols. Also, the flow of Japanese capital to much of Southeast Asia may slow to a trickle as stressed Japanese companies tighten their belts. Just what Thailand needs.

Keep an eye on Kamei

Now that Prime Minister Yoshiro Mori is basically a lame duck, attention will shift to the question of who will succeed him. It usually doesn't matter who the prime minister is since the bureaucracy really rules Japan. This time it matters because markets are nervous following Finance Minister Kiichi Miyazawa's frankness on Thursday in using the word "catastrophe" to refer to Japan's fiscal state. Miyazawa apologized the following day, but he was surprised and irritated that his comments got so much attention. Japan's top policymakers don't realize how worried much of the world is about Japan's economic health.

For several reasons, the Liberal Democratic Party's policy chief, Shizuka Kamei, is a man to watch:

He is one of the brains behind the disappointing emergency package announced on Friday. For months, Kamei has been pushing for banks to slow down their unwinding of cross-shareholdings because they were saturating the market. The package included a proposal for a private sector institution to buy up bank shareholdings. While such a body might relieve the immediate problem of a flood of shares onto the market, it could also stop corporate restructuring in its tracks. Japan's rigid corporations might thereby be insulated indefinitely from pressure from average (as opposed to traditionally overly patient institutional) shareholders to downsize. The appeal of such a body is that it might break up the stifling keiretsu relationships between banks and companies. But since it is being proposed by a ruling coalition that has nurtured such relationships for decades, skepticism is in order. Such a body would militate against much of the rest of the emergency package, which is intended to encourage average Japanese to participate in the stock market (which is extremely unlikely anytime soon, in any case, given the anxiety about the financial future and the pathetic market performance over the last 10 years).

Kamei is also advocating that the government keep the option of a supplementary budget open, even while the budget for fiscal 2001 wends its way through parliament. It is such extra budgets that have laden Japan with its $5.6 trillion national debt (and even that figure may understate the extent of the debt, since much of the spending is hidden in programs and projects that even the most savvy of Western analysts can't penetrate with any assurance of success). Kamei is still one of the most powerful LDP members and will have a major say in the selection of the next prime minister. Japan is far from dealing with its systemic woes.

Korea

Hyundai, Hyundai

The Kim Dae-jung government continues to pour money into Hyundai Group. This time, in fresh loans to Hyundai Electronics Industries Co., which will greatly irritate its Taiwan rivals. More seriously for Korea in terms of diplomatic heft are HEI's U.S. rivals. But maybe the Bush administration figures that Kim is too important an ally on the strategically key peninsula to weaken over a trade matter. More money will go to Hyundai Engineering & Construction Co. and Hyundai Petrochemical Co., while Dong Ah Engineering & Construction is liquidated (Dong Ah's crucial mistake was to do business in Libya and not in North Korea, which Kim Dae-jung has his heart on opening)

Part of the problem for Korean taxpayers is that the banks (such as Cho Hung, Hana and Korea Exchange) that are being pressured to funnel money to Hyundai are beholden to the government for capital infusions in recent years or for simply being allowed to do business in a climate in which banks are pressured by government to provide loans to specified firms. In addition, banks are usually pressured to hire former government regulatory employees who favor government recommended loans. One bank with great exposure to the various Hyundai arms is the state-owned Korea Development Bank (KDB).

Back on the Dong Ah problem. The banks got off relatively lightly since some of them (such as Seoul Bank, Korea First and Peace Bank) were able to slough off their loans onto the state-run Korea Asset Management Corporation (KAMCO). Many of Dong Ah's projects will be bailed out by the state-run Korea Housing Guarantee Co., which has already cost the National Housing Fund (NHF) quite a bit. This worries Kookmin Bank because its likely merger partner, Housing & Commercial Bank (H&CB), manages the NHF for the government. But then again, Kookmin could make the government happy (usually a good idea in Korea) if it did not fuss over the matter. But this wild government spending worries analysts, who warn that Korea's fiscal picture will darken the longer this goes on.

Taiwan

Skirmishes

The bad blood continues between Prime Minister Chang Chung-hsiung and the opposition in the Legislative Yuan. This time it is not about the perennial topic of Taiwan's fourth nuclear plant, but about the racier question of whether Chang committed bigamy by shacking up with a woman other than his wife, now winning public sympathy as a wronged woman. (Apparently, Chang is not a bigamist since he never married the second woman, but it is not good for Taiwan's image.)

That hostility is gumming up parliamentary business according to Chou Po-lun, head of the parliamentary caucus of Chen's and Chang's Democratic Progressive Party (DPP), who blames the KMT and its allies for blocking legislation introduced by Chen's cabinet. Chou threatened to do something about that. It is not clear what he is going to do since the DPP is outnumbered. Chou is something of a loose cannon, who recently criticized Chen for ignoring input from his own policymaking body.

Meanwhile, there could be a clash down the road on the nuclear issue between the stoutly anti-nuclear Chang and the pro-nuclear Hau Lung- pin, the new head of the Environmental Protection Administration (EPA) who says that he hopes that the (not yet built) fourth nuclear plant can be decommissioned as soon as possible, and to ensure that its construction adheres to environmental guidelines. That means that he will block any efforts by anti-nuclear forces to secure a new environmental impact assessment (EIA) and would also oppose a referendum on the issue (which many in the DPP want) unless parliament passes a referendum bill. Thus, Chen has a sort of opposition fifth column in his cabinet, and may end up undoing the gain he hoped to make with Hau's appointment, which has appalled many in the DPP.

Indonesia

Fueling concerns

While the bloody events in Central Kalimantan have been in the news, the government of President Abdurrahman Wahid is also beset by troubles in other parts of the sprawling archipelago.

After years of sticking it out in the midst of the strife-torn Aceh, ExxonMobil on Friday suspended oil and gas operations there, which is having knock-on effects for Indonesian companies in the area. Since oil and gas revenues form a huge part of the Indonesian state budget and much of the oil and gas is in Aceh, this is a bad sign for the already strapped central government.

Wahid blamed the International Monetary Fund (IMF) for a likely and unpopular cut in fuel subsidies. This is sure to irritate the IMF. Wahid is right in that it is the IMF that is pushing for the cuts, but many economists argue that the subsidies simply drain government coffers and force it to shuffle up cap in hand to the IMF in the first place. Wahid's cabinet is waffling on when fuel prices will be hiked (originally set for April 1) and by how much. They are understandably cautious since similar cuts have led to riots in years past.

And the leaders of the province of Riau are likely to react angrily to a soon to be announced decision on an oil field there. Wahid is almost certain to grant the local authorities a far smaller percentage of the revenues than they had lobbied for and a much higher percentage to the state oil and gas company Pertamina than they can swallow. Such a decision may illustrate the hollowness of the plan (implemented in January) for regional autonomy. And anger in Riau at Wahid over the decision may undermine his claim that he alone can keep provinces like it from agitating for independence.

Meanwhile, Wahid's foe House of Representatives (DPR) Speaker Akbar Tandjung may push for a second memorandum to be sent to Wahid before the DPR goes into recess from April 1 to mid-May. Wahid has until May 1 to respond to a memorandum the house sent him in February asking him to detail his involvement in the Bruneigate and Buloggate scandals. A second memorandum would ratchet up the pressure for Wahid's impeachment. And in a sign that legal processes are highly politicized, Tandjung may be investigated in a family squabble over land, in what is probably an attempt to hogtie him and blunt his effectiveness as a leader of anti-Wahid forces.

http://www.asiawise.com/mainpage.asp?mainaction=50&articleid=1268

-- Martin Thompson (mthom1927@aol.com), March 12, 2001.