Flash! Crossholdings Unwound

In a research report dated 21st of August, 2006, K. Nishiyama of Nomura Securities says: The final figure makes it clear to us companies have finished unwinding their cross-shareholdings. The final figure is the approximately 11% of oustanding market cap (excluding listed subsidiaries/affiliates and the holdings of life & non-life insurance companies) that has held steady at this level (again) as it has for the past calendar years. This is from a peak in 1990 of 50% of outstanding market capitalization (including insurance co's holdings) and 33% which is the amount sympahtetic to the current constant 11%. It took more than a decade and a half, but it's finally done!

So can investors rest easier now? Or even better, can they look forward to the time when managers try to please them, above their affections to other constituents (i.e. management themselves!), as well as non-executive employees, suppliers, customers, and government ministry officialdom? That is an interesting question, for one must remember that there is much overlap here. For while the companies may have shed their holdings, one would be premature to say these holdings have found themselves homes in the hands of stable (or for that matter unstable market-oriented investors. This is because "Government" has not finished intermediating the "great unwinding". Through the DIC (Deposit Insurance Corporation, the BoJ and its affiliates, and Daiko Henjo pension giveback share acquisitions programs, the Government (and thus the people) own quadruple-digit billions of yen worth of shares.

Why should we care about this technical distinction? Investors should care for several reasons. First, these shares are in purgatory. An institutional half-way house, so to speak. Some must be unwound within the next several years. Second, the State of Japan was nearly downgraded by Moody's not long ago, and they've continued to run > 6% per annum fiscal deficits. So although they may not want to sell the proverbial family silver, their accumulated Debt-to-GDP ratio may cause them to sell against their wishes. And remember: these are no small lines of stock, but a vast amount of shares in virtually every enterprise in Japan. Mind you, this is not a prognostication that Japanese shares will be going lower any time soon (though I do not preclude this from happening), but rather to take such "All Clear!!" proclaimations with a touch of skepticism.

The Enigma of Martin Armstrong

Some memories fade, but are not forgotten. The same holds true for certain personalities, particularly the bizarrre and eccentric. One such notorious individual is Martin Armstrong a.k.a. Princeton Economics a.k.a. self-professed expert in the history of money and things gold, and of course, true to my theme of things Japanese. He was accused of Ponzi fraud and the purveyor of the notoriously unvaluable "Cresvale Bonds" that besotted Japanese corporate investors and populated their portfolios, much to their eventual chagrin. Coincidentally, in a bout of synchronicity, I was wondering only a few weeks ago what's become of him and was preparing a post, so it is timely indeed that after languishing for six and a half years in a Manhattan jail cell, he finally pleaded guilty to charges fo Fraud on Thursday, August 17th 2006.

In a nutshell, Martin Armstrong was a confidence trickster, if not a fraudster for which he was accused. Martin Armstrong was also a bad trader. A very very bad and inept trader. And Martin Armstrong committed fraud to cover up his bad trades. And then he committed more trades to cover up his fraud. Most in Nikkei and Gold. Despite the laughable ineptitude with which he implemented his "strategies", by most accounts he was smooth, suave and authoritative, in a way that encouraged people to entrust to him their money. Which he duly lost. Many many hundred of millions of US doillars. Perhaps billions. The official court dockets (available on-line) from his 1999 indictment in the Manhattan district of US Federal Court read like a Shakespearean comedy. The more he traded, the more he lost. So much and so bad were his trades that his colleagues, and brokers mercilessly joked about it behind his back. He was so consistently wrong-footed in his bets that he would have done far better flipping a coin to decide whether or not to be long or short. Or use the infamous "8-Ball" method. Or consult Nancy Reagan's financial astrologer, or ask the advice of Paul Wolfowitz. Anything but use his own judgement.

Though his company, Princeton Economics, had head offices in the US, he traded from Tokyo in an office overlooking the gardens of the Imperial Palace. For Japan has a special place in his scheme. You see, the Japanese too, in undertaking their own form of speculation known as Zaitech, had lost billions in late 80's and early 90's on dubiously-thought-out wrong-footed speculation and investment. Like Martin Armstrong, and other agent-trader victims shell-shocked by large lossess, they were too ashamed and emabrassed to tell their shareholders that they had punted wrongly, or in UK football vernacular, scored an "own-goal". Not willing to "come clean, they found themselves with a serious problem and yearned for a clever and tidy solution that would absolve them of the thing they feared most, which was NOT the losing of the money itself, but accepting responsibility, a dilemma not unlike that faced by I. Lewis "Scooter" Libby.

Enter Martin Armstrong and the almost forgotten Cresvale Securities. He too had a problem since his golden-tongued investment plans, proved rather less robust than hoped [and promised] and resulted in large trading losses for his clients. It seems that he was able to continue his scheme and make payments to the clients who redeemed by using the proceeds from new investors. This, however was proving more difficult as losses mounted, and so he need new clients. Big clients. Well-heeled clients who wouldn't be asking for their money back any time soon. Like money from a dead persons trust. A better yet, a dead-pet trust. Or even better: a Japanese corporate client that themselves had a dirty big secret to hide.

And so they found each other: the companies, like an inveterate gambler, desperate for an investment saviour who would, over time, regain their previous losses, rescuing them from humiliation and shame they most dreaded (not to mention a demotion to the Corporate Travel Office, or Janitorial Services Dept.) and Armstrong, now with a fresh load of clients, and more importantly, their cash. In between them stood Cresvale Japan, the securities firm who brought them together, gave legitamacy to both their pursuits, and took nice fees out of the middle in the process, and in so doing torpedoed themselves out of existence.

The scheme worked something like this: Japanese Corporate 'Y' perhaps lost $100,000,000 speculating through a subsidiary, selling Nikkei Put Options or buying boatloads of overvalued shares after consulting with Madame Inoue's Buddhist toad. They were able to hide this for a while by playing "pass the parcel". perhaps between offshore subsidiaries with different year-ends. Thus their consolidated accounts still showed these losses as assets at their full value on their balance sheets. So Armstrong/Cresvale prposed they swap $50,000,000 of new money for a "repair bond" with a maturity value equal to the full $150,000,000 ($100mm of losses + $50mm of new money) and then let Magic Martin do his thing. If things went right, they would make their money back and everyone wins. If something goes wrong, well they can blame the investment losses on Armstrong, call it fraud, and take write-offs, without having to take responsibility in the first instance. (note: this is sketch of the essence, not the actual details).

This is all interesting, but what really fascinated about this story is that in the mid-90s, certain un-named American value investors had eyed a number of Japanese companies that they believed "cheap" because they seemed to have large amounts of cash & marketable securities on their balance sheets, relative to their now-diminished market capitalizations. In some cases it was in excess of their entire market capitalization. Many reasons were put forth explaining the phenomena such as: "empire building"; "saving for a rainy day"; "deflation"; "management conservativeness"; "investor pessimism"; "adverse taxes upon large distributions"; "legal inability to conduct share buy-backs" etc. All seemed somewhat plausible. Conspicuous by its absence, except as speculated by the most hardened, battle weary cynical gaijin observers was: "because it doesn't exist".

But clearly some people HAD to know about their losses. For other foreign banks were in the repair bond business. And many of the companies themselves were household names. Maybe their businesses were not as fraudulent as Armstrong's, but nonetheless their audited accounts and actions were meant to deceive shareholders by masking losses and allowing them be amortized over many years.

Annd since we are writing it, we all now know that things didn't go according to planned. When the Armstrong fraud broke, many of the guilty Japanese Corporates had to come clean. Sort of. They said they were victims of fraud (and some truly were unsuspecting purchasers of Cresvale Bonds), but the "repair Bond" concept and angle was often lost on most observers. Yakult Honsha (TSE#2267) was said to have $1bn of losses, as well as engineering firm Chudenko (#1941); specialty chemcial maker Gun-Ei Co. (#4229) pharma co's. Kissei (#4547), and Towa Pharm (#4553), machine-tool giant Amada Corp (#6113), pneumatic specialist SMC (#6273), eletronic parts mfgr Alps Electric (#6770) advertising agency Asatsu (#9747), office furniture maker Itoki Crebio (#7972) and more than 50 other firms were deemed to be "stung". Yakult's losses were so big that they couldn't blame Armstrong, but many other co.s did, and were "absolved" of culpability for their original sins.

The epilogue was that Armstrong, accused of Fraud, sat in jail for contempt of court, not brought forth to trial for failure to turnover evidence and in particular, tell authorities the whereabouts of $15mm of gold and silver coins and bronze statues he'd squirreled away. It was the longest such languishment for contempt in United States history. All the while, he's claimed that he was innocent of the fraud. I make no judgement here, but it seems likely from the court documents and testimony that he did commit fraud in the form of the ponzi that used new proceeds to pay old losses. His brokers, Republic Bank, (now the behemoth HSBC) coughed up nearly USD$600mm for their part of not alerting autorities to the potential wrong-doing, whichh court documents alledge, they were well aware. But most of the losses were not "embezzlement" or "theft", per se, as the newspapers and Japanese Corporates would have readers believe, but out-and-out ineptitude and shitty trading, for which is no crime, excepting one's sensibilities of the good, the bad, the random and the ugly.

His guilty plea may reflect that Armostrong the man met Armstrong the fraudster. Or it may reflect Armstrong's understanding that having spent six years in jail, an admission of guilt might allow him to squeeze a few years of freedom in his (no pun intended) "Golden Years".

For investors, the only the protection they can afford themselves is doing appropriate due diligence and being highly skeptical of anything that purports to be "too good to be true", or turn base metals or paper into errrrr gold.

PM Tanigaki? Rat's Chance in Hell

Back from holiday and rested, I see in a headline that all is now clear: Chief MoFo Tanigaki's pseudo-vicious fight with the BoJ was a prelude to his now not-so-secret desire to succeed PM Junichiro ("Elvis") Koizumi as Japan's next PM, Bloomberg reported. His platform? Consumption tax increases coupled with lukewarm anti-nationalist foreign policy. It is the true Keidanren platform making him far and away the favorite of Corporatist and Mercantilist interests in Japan who would like to see a weaker yen and a "kindler, gentler Japan" to the billions of emerging Asian consumers. The only problem is that these are inherently unpopular policies with "the people". No matter that the Emperor's own reservations have been leaked to the press about PMs making official visits to the Shrine where amongst others, the spirits of Class-A war criminals are errr remembered and revered. No matter than neo-mercantilism is set to torpedo the post-WWII monetary system. Tanigaki is well behind Abe in polls, who leads with between 40% & 50% of voter sentiments. But at least we can now understand why Keidanren's Man With a Plan has been such a persistent and vocal critic of ending BoJs Free Money policy.

Testosterone & Markets

How does one disentangle youthful exhuberance from recklessness or separate age's wisdom from over-conservatism? These are particularly interesting questions from the point of view of investment and speculation, and I believe, become particularly germane following a period where volatility and diminuation have been absent from price action for a longer-than-normal duration.

I have no categorical answers, but I have some anecdotes to share beginning high atop the petit Luberon in Vaucluse some years ago. After a lovely picnic amidst the herbs & cicadas, our group descended towards Oppede down a path that turned into a large and steep field of loose scree. My friend and I had done this walk dozens of times, though we were with a group of young people who were on the mountain for the first time. Descending thorugh a field scree, with the right pitch can be as exhilarating as skiing, pulled by gravity, softened by deep but hard loose stones. We picked up the pace, and within the limits of safety, began surfing through the stones. The others made their way, too, surfing at their own pace, or excusing themselves from what must be sais, was a risky undertaking to begin with. A few moments later, one of the younger and most exhuberant members of the group, brimming with testosterone and enthusiam, came bounding past us, taking dangerously giant steps. Mid-stride, I look over at my experienced friend and we shook our heads in disbelief and exchanged looks that said "That lad is insane and it will end in tears". But a few minutes later, we saw him splayed across the rocks, with bright-red blood oozing from a large and nasty gash atop his head. Bad luck? Possibly. Overconfidence & testosterone? Probably.

I drive a motorcycle myself which might be considered a risky endeavor (at least by the actuaries). But I am neither reckless, nor unnecessarily aggressive. I take advantage of the benefits that the motorcycle offers to bypass traffic jams, always looking for the unexpected: the car that is signalling left. but turns right; the motorist exiting from a blind drive, etc. This caution is driven by fear that comes with experience and wisdom. It results from a rapid mental cost vs. benefit analysis which says the advanatge of early arrival, or satisfication at having beaten the traffic is insufficient to the cost of death or incapacitation. It is that simple. Yet, every day, I am surrounded by other motorcyclists - mostly young men their late teens and twenties - who arrive on the "wrong side" of the cost vs. benefit calculation. They weave recklessly through cars and fellow motorcyclists, pass cars at high-speed around blind corners, tempt fate of on-coming traffic with cavalier non-chalance, and overtake around cars that have stopped to let someone pass. I realize that I could be accused of being overly conservative, of the kind that comes with age and family. But few of my aged peers die or or paralyzed needlessly or painfully. This fate is reserved for the reckless and young. Interestingly, they are not without skill as riders. Most are better than I, with many driving from young ages and participating in motocross. No. Their achilles heel lies in their inability to visualize potential risks; to imagine mechanical failure; to anticipate that others might be fallible. In short, they are onverconfident, probably driven by raging levels of testosterone.

Which brings me to markets, speculators, and hedge funds. For one cannot but see the parallels between youthful enthusiam and confidence - often a prerequisite for outsized returns (without respect to risk). But it is also a primary contributor to crash & burn syndrome. Age does (or at least should) breed a brand of conservatism that teaches one to respect markets, but to value the power of independent thought. To look forward, rather than backward. To approach risk laterally, and from many dimensions. To question the paradigm of "what is working", and look to those that are not for potential ideas. I am certain that there are smart and capable young investors, wise beyond their years, and every bit as capable as older peers. But they are rare. Youth, by definition, is prefaced by single-mindedness, that is a boon during a bull-market, but a potentially fatal flaw when risk rises, paradigms shift, and the ground upon which one stands rapidly turns to quicksand. Take a moment to reflect upon the benefits of age and wisdom.....

My Sadakazu Tanigaki Scrapbook

Japan's MoFo's were at it again today, issuing warnings that deflation might not have been whipped yet, and that the BoJ should refrain from raising rates from their current Zero level despite the lowest unemployment rate in the OECD, rising asset prices, a 7% of GDP fiscal gap, as well as robust capex and rising housing starts, and, yes, eight consecutive months of positive inflation numbers. All which reminds me of Monty Python's "Dead Parrot" sketch. Given Mr Tanigaki's variant perception, I thought it would be a good time to break out my Tanigaki Scrapbook.

Here is Mr Tanigaki one of his partners in crime, Mr Kuroda, looking very cheerful indeed at a recent ADB meeting. Notice the smiles and the confidence. It is interesting to note that in pitched battles between the Finance Ministry (or the Treasury, Exchequer etc.) and the Central Bank, in any country (except where the Chief Banker is a toad), the Finance Minister almost always resembles the cuddly toy, while the Central Banker is always cariacatured as Darth Vader. This is because the Finance minster typically tells "the people" that they can "have their cake and eat it too".

Here, we see Japan's Finance Minister Sadakazu Tanigaki, shaking hands with his Chinese counterpart Jin Renqing in the Chinese port city of Tianjin. Tanigaki was in China to attend a meeting of Asian and European financial leaders. Notice how tightly Mr Tanigaki is holding Renqing's hand. It was reported by those present that following the photo-opp, Tanigaki refused to let go, and security had to be called to pry their hands apart. Though it was hushed by reporters, he was reputed to have lost his typical decorum revealing the honne behind his tatamae by screaming: "We will follow the RMB where-ever it goes, we will NEVER revalue without you, whatever the cost, to the ends of the earth and the end of time.....we will not let it go...."
Apparently, my sources tell me, PBoC Chief Zhou Xiaochuan was observing Mr Tanigaki's rather uncharacteristic outburst, and was seen here grinning broadly at the mad-hatter-like behaviour of the Minister, reputed to have said: "Hasta la vista, baby!"


Here is Mr Tanigaki displaying faux-concern for the impoverishment of the "Mr & Mrs Sato" that might result if the Bank of Japan raises interest rates to where they should be given that Japan has the lowest unemployment rate in the OECD, is running a 7% of GDP fiscal gap, experiencing a boom in asset prices, with commercial rising rents, eight consecutive months of rising consumer prices, and robust housing starts. Observers are asking why, with all the problems in the world, and reform issues on his plate at home, Mr Tanigaki has made it a personal crusade to undermine the Weberian bureaucrats steering the BoJ. Answer: One might think it was to hide the immense incompetence within his own ministry and his inability and unwillingness to do anything about the huge and persistent fiscal gaps. But the real reason might be, that higher rates, though prudent and necessary, might ruin the MoF's grand Macchiavellian plan to trash the Yen to insure Japan's currency remains competitive with its Asian neighbors.

Ah yes, "Plan B". Mr Tanigaki is shown here with his vision of the future: A Yen that has been debased so thoroughly by persistent 7% of GDP fiscal gaps, and through years of ZIRP and quanititative easing, that the only thing the YEN will be good for is framing and hanging on one's sitting room wall. Observe the Elvis-like hair-do on the pictured figure on the note.


But Tanigaki is wily and always prepared. Here, he is seen executing "Plan C": Pray Pray Pray that the BoJ will continue to neglect it's fiduciary responsibilities. No matter that China remains vastly poor by comparison. No matter that the USA has [perhap unwittingly] donated many jobs and much wealth to the cause of Chinese development. No matter that Japan, though vastly rich is unwilling to give a competitive inch to China or its Asian neighbors, putting the vast burden of global adjustment squarely upon the Americans and the Europeans. No wonder the Chinese detest the Japanese. But can it last? He is praying it can and will.

Finally we see Mr Snow giving advice to Mr Tanigaki on post-governmental careers. Mr Snow tried the less oblique route to international financial reconciliation, but was undermined (like Mr O'Neill before him) by an American Congress pandering for votes and a political system dominated by special interest campaign contributions, an administration that spells Economics with a "K", and by the helpful assistance of "friends" such as Mr Tanigaki, Mr Renqing.

Tanigaki: "Elvis Lives!! - ZIRP Forever?"

Bloomberg reported today that Japanese core prices rose 0.6% YoY in May, their 8th consecutive monthly rise, while the unemployment rate fell to 4%, the lowest in eight years, and certainly the lowest amongst their largest OECD peers. Housing starts, too, increased robustly. That is EIGHT years and FOUR percent. But this should come as no surprise. For the government continue runnning a fiscal gap equivalent to nearly 7% of GDP, while the BOJ still has their discount interest rate at about ZERO. But "Why" do they persist with what is arguably a most reckless fiscal and monetary policy ?

Because they are cynically selfish and not "team players" in the international sense. Because they are intent on winning and holding market share in classic mercantilist tradition, through policies that overtly manipulate the exchange rate. They rightly (though selfishly) believe it is better to subsidise employment than unemployment, though any economist (most certainly Keynes & Triffin when they sculpted the Bretton Woods system from the ashes of WWII) would tell you that this is a classic example of a fallacy of composition whereby what is "good for a part" is not necessarily "good for the whole" [system]. They are are beggaring jobs, employment, and thus wealth over and above what they have rightfully earned from others.

So what will Tanigaki and Koizumi heir-to-be, Abe, do to spin this one? Well it seems PM Junichiro Koizumi is taking it very seriously indeed. So seriously that he's making a special trip to the USA. To see the Treasury Secretary & the President? No stupid! To commune with the spirit of Elvis at Graceland! This of course makes eminent sense for both Tanigaki and Elvis are shrouded in mystical denials and each harbour a "big lie". For Elvis, rumours abound that the "King Lives". But we all know that's horse-shit. Tanigaki's big lie is "Deflation still haunts Japan and so Japan can tolerate neither a stronger Yen, higher interest rates, nor lower government expenditure. This too is complete total utter rubbish. He knows. I know it. And most economists with an ounce of objective reality know it too. But in the eyes of the international community, especially voodoo soulmates in Washington, this can be defended, if implausibly, and so allow Japan to continue keeps rates absurdley low and fiscal gaps absurdly high, in comprison the reality on the ground, and thus ugli-fy the Yen, to maintain competitive parity with the Asian big-three of China, Korea & Taiwan.

So what happens now? The BoJ is worried. Or rather concerned. In a distinctly Japanese sort of way. Gov. Fukui remarks daily upon the future repurcussions of current policy blunders, but these are limited to Japan (fears of over-investment etc.), and not "the global commons". And the pressure to NOT go against the grain, and disturb the harmony of the nation by neutralizing Japan's self-serving parasitic policies is strong. But the pressure will continue to mount on Tanigaki, for HIS denial is looking more ridiculuous. So, he will marginally relent and "allow" the BoJ to raise rates, albeit too little, and too slowly to make any difference except quell criticism (whichh they detest). Such half-hearted moves will be yet another indication of their measured parochial cynicism at the expense of the rest of the world - something that has come to be expected from our Japanese allies. Indeed, with friends like this, who requires enemies?

Mr Fukui Ups the Ante

Poor Toshihiko Fukui. Fresh from losing the ZIRP tug-o'-war for the hearts and minds of Japanese people with Chief MoFo Tanigaki, he found himself under intense scrutiny for his investment in MAC, the investment fund of now-disgraced pseudo-activist and admitted insider-trader Yoshiaki Murakami. No doubt this was egged on by the MoF & Tanigaki, and while people like former intervention hot-hand Eisuke Sakikibara said there was no malice involved, he admitted it was rather careless and dumb of Mr Fukui. Clumsy indeed, but if Mr Fukui desired to enrich himself, just imagine how much he could peddle his material non-public information to someone like Mr Tudor, Mr Kovner or Mr Moore. No! He is an honest, loyal, if a bit naive, public servant.

And Mr Fukui has done Japan Inc. well. For he has steered a true course in comparison to that Mr Hayami, and achieved the objectives set out by the boffins. But now he has a problem. He has become distinctly uncomfortable with the policy and its longer-term impacts, both upon Japan and the US and he wants, shall we say, tack. Unfortuntely , Mr Tanigaki is minding the mainsheet, and in so doing is doing his best to prevent any change of direction.

And so today, Mr Fukui seems to have had enough and in upping the ante in teh BoJs battle with the MoF, has declared, according to Bloomberg news, that there should be no delay in implementing the change in policy. It doesn't get any more explicit than that. Now, I wonder if the MoF will produce some incriminating photos of Mr Fukui or send some tattooed types to loiter around the foyer of the BoJs fine edifice.

Central Banks Behind the Curve??!?

Debate is raging: how bad is inflation? Is the the Fed "behind the curve"? Are inflationary expectations picking up? Perhaps, some ask, inflation is only a problem amongst Aspen ski homes, tins of Beluga caviar, and Harvard tuition??!?

Another fracture in arguments supported by inflation apologists (IMHO akin to Creationists and evidence tallied by Darwin and, for that matter, all science) was hammered by a private auctioneer in the form of Gustav Klimt's portrait of Adele Bloch-Bauer, that sold to a museum affiliated with the Lauder family for a staggering sum of USD$135,000,000 dollars.

The apologists may argue that this was a "special picture", and was "unique". But aren't they all? The point is that each new record is an important tell-tale that says: Money is increasing in quantity faster (and accujmulating in more concentrated fashion) than the general increase in GDP. Today it's a Klimt. Tomorrow it will be your haircut, and your bag of crisps, and the quart of milk.

Tokyo Momentum Update

While the Average stock in Japan is down about 16.5% CYTD, and the indices have shed nearer to 20%, little has changed insofar as investor preferences, at least as they relate to momentum. One-month, three-month, six-month twelve-month, and all flavours of formation period in-between, have maintined their "spread" out-performance between the best-performing and worst-performing deciles of stocks.

This is curious if only because there has not only been enormous liquidation and margin-puking going on, but mperhaps more importantly, other major world bourses, most notably the USA have seen their 3,6,12 & 36 mo momentum spreads get absolutely crucified by a magnitude of 25% - numbers not seen November 2002 and January 2001. As a result Calamos ( doyens of uber-momentum), and heirs apparent to Navellier (TOP20 Fund -25.4% peak to trough)has seen his formerly $20bn long-only fund pummeled 20% since mid May.

Why has the relative performance of winners and losers been so dramatically altered in the USA, but not in Japan? My guess is that inflation and its associated interest rate rises that people fear, are structurally perceived as posing greater earnings threat to the US market. This is exemplified by heightened conditional co-variances of "risky" stocks (i.e. stocks whose earnings have higher r-squared to changes in aggregate demand and aggreagte US earnings), that will (presumably) manifest itself from continued hikes in US rates. Most sensitive to this are primarily effect sectors most buoyed by the "liquidity trade" (materials, mining, cyclicals, housing, etc.) coupled with secondary effects of general deleveraging by hedge funds, which means, "selling what they own". This has caused BOTH accelerated sector rotation coincidental to intra-sector convergence - both which are anti-momentum effects.

Japan, by contrast, has been caught in the jetwash. This has seemingly caused marginal exposures across the board to be reduced, which has not caused excess sector rotation nor the intra-sector convergence that so defines anti-momentum (excepting the shortest of reversion horizons). Where does it go from here? The momentum effects in Japan appear to result from the attention certain stocks receive from large foreign admirers, be they hedge funds, activists, or large long-only shops. And I believe that these allocations are somewhat stickier than the marginal flows driving some fo the US style shifts, and so I see no immediate reversal. Until, of course, if and when, Japanese stocks return to ignominimy. As for the immediate direction, the selling has been overdone and today the 14th of June with many fine securities having shed 30% to 40% from values seen just a few months before, I strongly suspect a significant and profitable near bounce is on the cards.

June 9th Market Musings

There is much that fascinates me today. Newsflow on Murakami continues strong, with most writers wielding late, but probably deserved, tar & feathers. The market bounced in sympathy with an "outside reversal" afternoon bounce in the US markets, and an oversold technical condition after a classic "margin puke" in Japan. And finally, the largest-ever MBO in Japan was announced with Nomura Principal Finance teaming with management to take the Skylark Co. (TSE Code#8180) private at a price of YEV2500/shr.

Today's news on Murakami alledges that in addition to being a child-raper, a North-Korean spy, being responsible for global warming, and being covert operative for Al-Zarqawi, he back-stabbed, two-timed Livedoor's Horie but dumping shares in NBS, after he urged [and convinced, we are supposed to believe] Horie to buy them at higher and higher prices. We are meant feel sorry for Horie, and despise Murakami's lack of honor. But I feel like I am watching the Japanese equivalent of Jerry Spinger, and really feel no sympathy for either of them.

Following on this, the Asahi Shimbun reports on research by Kazunori Suzuki, professor at Chuo University's Graduate School of International Accounting, that suggests Murakami's activist style of investing actually destroys both companies and shareholder value. He's analysed the juicy and apparently undervalued companies in which Murakami's fund made investments and found that while their ensuing stock market performance was better than average, their ensuing business performance was pathetically worse than average on many important measures. The researchers suggest that this might be due to the distraction and low morale caused by the raiders' unwanted interest in the company, and therefore questions whether the activist has the company's long-term interests at heart. The skeptic (being me) would respond that the share price performance was aresult fo the raider/activists own buying upon the relatively illiquid markets of the smaller companies that caught his eye, and the true story will need to be seen only after MAC and other activists dispose of their holdings, or the researchers try to disentangle the subsequent share price performance due to "improved management and shareholder focus" from the insanely large market impact of incentivized fund managers jamming up the prices of these securities to collect ludicrously large performance fees. Furthermore, the skeptic might rightfully suggest that the companies in MACs portfolio suck. They are sh*t that sticks to your shoe, and they are cheap for a reason. OK, they were too cheap, but that is quickly resolved once one buys them up, and then what? You've gota large position in a sh*tty, illiquid company. It was no surprise that the companies that appeared "the cheapest" in the mid nineties all has "Martin Armstrong Repair Bonds" in the "marketable securities" line on their balance sheet, where REAL marketable securities should have been.

Finally, there is Skylark - Japan's largest MBO to-date. Rumour has it that the sale was the resulot of a typically Japanese family feud (similar to the Canadian McCain's), and the exit via a sale to Nomura and management was a mutually acceptable option. But THE PRICE for a pedestrian chain sushi-conveyors, buffets and dressed up noodle wagons?!?!? Granted, MBOs are "new" to Japan, and sometimes you have to learn by doing - even if the lessons are harsh. There is no lesson on the perils of "paying too much" than paying too much. And while I admire the engineering prowess, manufacturing organization, and long-term committment of Japanese corporations, I would also point out that Zaitech was invenyed in Japan, and there is good reason was THIS concept was never successfully exported!

So, You Think You've Had a Bad Day

It is worth noting that when Impressionist paintings are "ringing the bell" at auction, and you overhear your nine year-old wanting to be a "hedge fund manager", that it may be time to consider that we are near to an intermediate-term top. Such was the case with Tokyo at year-end - something that's been alluded to in this forum in unwaveringly but none-too-subtle form.

Today, the 8th of June, Japanese fund managers might be forgiven feeling a little glum. After what was a bad start to the week, they saw yet another four percent hived off of their average portfolio values in what was the third biggest volume day of the calendar year. This was more notable since it was the largest volume day on the negative side of zero. This places the popular price-weighted benchmark, the Nikkei 225 at -9.17% YTD, and the the broader TOPIX first-section down 10.1% YTD. But if you bump into Tokyo bourse investors today, and they seem particularly [black and] blue, I will tell you why: The average investable stock, which is to say, the index of quarterly-rebalanced, equally-weighted security prices is down more than 17.4% since December 31, 2005, (and more -18% YTD for the annually-rebalanced variety!)!!

So while your American friends may be feeling poorly because the S&P500 has given up most of its gains (+0.45% YTD), and your European colleagues, too, are feeling regret at having shed their double-digit profits to less than a percent YTD, I would ask you to be especially kind to your Japan-centric acquaintences, and perhaps buy them a very, very, dry Martini and lend them an understanding ear to offset the very real financial, performance, and emotional distress they may be encountering.

Murakami: Legitimate Activist?

Forty-six year old former Ministry of Finance (known as "MoF") official Yoshiaki Murakami was arrested having admitted that he used material non-public information to profit from Livedoor's takeover of Nippon Broadcasting (TSE Code#4660). Bloomberg reported that Ken Siegel, Senior Partner at US lawfirm Morrison & Forrester (amusingly known as MoFo) commented that "...it would be a shame if this discourages legitimate shareholder activism."

Which begs the question: "What is legitimate shareholder activism?". It also begs the question: "What is legitimate management intransigence and what constitutes cynical self-serving behaviour?" Is this culturally determined, since there are many flavours of capitalism that have evolved in the world, distinct from the American version where the owner is "king" and all else, labour included, is meat for the grinder.

As is most often the case, reality probably lies somewhere in between Daniel Loeb's obnoxiously delicious missives, and Tokyo Style's (TSE COde# 8112) deliciously obnoxious disregard for their financial partners (i.e. capital). But it IS important to recognize that, in many places, the form of the limited liability corporation has many uses. In many instances, it is NOT to provide immediate rewards to shareholders, as the case may be in France or Belgium, where the "holding company" is effectively a legal tax dodge affording the owners to avoid various pecuniary wealth and generational estate taxes, while maintaining the benefit of effectively private control over one's business affairs. And indeed, the same may be said of many second-section listed subsidiaries in Japan.

Here I make no judgement of the relative merits such organization and [lack of] profit-maximizing business objective, for I believe that while profit-maximization affords certain disciplinary benefits, I believe that the large corporation legitimately serve multiple constituents - not least, shareholders, employees (including management), the community, and suppliers (probably in that order). And I also believe that many of these constituents are best served (shareholders included I might add) by longer-term vision and investment rather than shorter-term maximization strategies (meeting quarterly earnings forecasts, or the incipient year's profit growth), that might reward "activists", but impoverish the other constituents (including longer-term shareholders).

From my perspective, I might make one observation that I have learned in my years of experience that separates the "mouse that roared" from the "real men" of financial substance. And that is: possession in nine-tenths of the law. This is to say, if you are not prepared "to own it" (bid for majority control) and run it (take it private), or are not able to do either due to majority stake-holders, you've got nothing to say.

The Nail That Sticks Up Gets....

I remember that fateful day when Hank Greenberg Former Chairman of the colossal AIG Insurance Company started attacking US Attorney Eliot Spitzer implying he was something akin to a "fascist". Well I was far away as the crow flies, but I KNEW what was coming and next thing you see, Mr Greenberg was being investigated for fraud, and subsequently was bounced out of his job amidst great personal embarassment and shame. Despite the fact that, in he end, he was cleared of any wrongdoing, one could see he messed with someone more powerful, and he lost, full-stop. Of course, we shouldn't shed any tears for him as he is, after all, sitting in control of the CV Starr Foundation that owns an ungodly amount ($21 billion??!?) of AIG stock, in addition to the billions he has accumulated of his own.

But this is not about AIG or Mr Greeneberg, but about former MoF official, Yoshiaki Murakami: value investor, corporate cage-rattler, stock-greenmailer, petty thief, and now corporate scafflaw & greedy trader, whose portfolio took a severe hammering today as a result of an investigation into MAC Asset's potential wrongdoing. Many people seem to have issue with Mr Murakami: self-serving managers, squeezed short-sellers, his fund investors, as well as his competitors. But the one he has really offended is Japan Inc., and like the disgraced Livedoor upstart Takefumi Horie found out, there are limits to how much they'll take. For he has challenged entrenched interests and caused (in all truth) some positive changes in the respect (or at least lip service and dividends) that Jap[anese companies heed shareholders, but in this process has disturbed the "wah" of the house of Nippon. But he has wrought these changes in an apparently ill-tempered and undiplomatic manner that has been seen as vulgar (in Japan) to most of the powers that be, in addition to those transgressed.

The markets severe reaction today was perhaps predictable since he has, for parochial interest, NOT been gentle upon "price" in accumulating his positions. I have two observations that I can humbly offer Mr Murakami about today's events. The first is: "Don't break the law when you're breaking the law" (even if this "Law" is the unwritten law of the land know as "custom"). For if you do, they will surely bury you, with what the Miller Brewing Co. used to called "gusto". The second piece of advice is: IF you are going to accumulate very large positions in rather pedstrian and illiquid lines of stock, you had best not be: (1) leveraged (2) be subject to investor calls on capital for an amount of time less than that measured in "years", and (3) Never, never, never, let the market know your positions. If you get caught violating all three at any time, I must say, one might deserve whatever "Mr Market" might deliver...

Baby Blues

The BBC announced today Link that fertility rates in Japan have dropped to their lowest levels since record-keeping began more than 60 years ago, weighing in at 1.25 per couple in 2005, vs. 1.29 in 2004. This is versus a steady-state replacement fertility rate of 2.1. While a number of western European nations (most notably Italy, Spain and Eastern Europe) face similar issues, Japan's issue is particularly acute since, by my calcualtions, in but a mere 40 generations, the Japanese will follow the path of the Dodo, and be no more.

So why is this advanced mature nation, with far less sexual hang-ups than Western Europe and that are so adept at producing consumer electronics and automobiles having such a difficult time producing babies? Cost? Environmental stress & degradation? Health? Male impotence? Competition? Urbanization? Nintendo? Manga? Ego-centric hedonism? Pathological disorders? Maybe none. Or maybe a bit of all of the above.

My own guess is that following the industrial revolution and the technological revolution of the 20th century, mortality rates fell dramatically, as hygiene improved, diseases were treated, food security and wealth increased with global trade and the division of labour. But there was a several generation lag in the off-setting fall in fertility rates that exponentially mushroomed the human pestilence across the planet, to levels that, one might speculate, are beyond the stress-free carrying capacity of the land. Urbanization and modernity followed, but perhaps this has been not without consequence. Perhaps we are witnessing an unconcious natural reaction in humanity to the stress and pressure of excess population, driven by living costs, health, etc. that will ultimately see human population numbers move away from forecast Malthusian heights returning towards more sustainable numbers. That is, of course, if we can convince the various religions, particularly evangelical christians, and muslims that "going forth and multiplying" is, while historically useful when mortality was high, is rather passe, unhelpful and terribly uincivic-minded for the planet when mortality rates are low.

The MoF as Radio Moscow

I have been an information junkie ever since I was a wee lad. I was the proud owner of a 100lb "Hallicrafters" shortwave radio set with more dials than a kid could imagine or ever want. I become so enthused with listening to the far and exotic edges of the earth (way before Hubble, Skylab, the Shuttle or the Internet) I graduated to a wonderfully sophisticated, Japanese-made Yaesu, and today still, I never travel anywhere without a small Sony to - at the very least - allow me to stay tuned to the BBC World Service.

It is important to point out (at the risk of showing my actual age) that this was during the height of the ideological cold war between the "west" and "communism". A time when people wrote and sent "letters" and still others actually answered them. "Aerogrammes" were the preferred mode of contact for boy pinching pennies. The Amerians, too, invested in radio propaganda (in the overly nasal and earnest "Voice of America"), but their efforts couldn't match the sheer weight of Soviet & Chinese efforts to persuade anyone in the english-speaking world of the inherent superiority of People's Socialism or Communism. Radio Habana Cuba, Radio Praha, Radio Moscow, Radio Kiev, Radio Bucharest, Radio Peking, and the most outrageous and hilarious of the lot, even to a twelve-year old, Radio Pyong-yang. They all were keen to share the heroic exploits of Tractor Combine Factory's #5 production triumphs, or wade into the peace-loving benefits of SS-17 Warheads vs. the evil Neutron weapons the US desired to point at the East flank of NATO. My powers bullshit detection were greatly heightened by the exercise of trying to triangulate "truth and objectivity" from the various sources of news all with differing views on the same event. Whether listening to Radio Pakistan vs. All India Radio's take on the Indo-Pakistani war, the Voice of Chile's pronouncements on the wondrous and benign regime of General Augusto Pinochet, or the Afrikaaner's hardened view on the dubious merits of Apartheid, there was rarely a dull moment when one's bullshit-o-meter could be turned off. And so I sarcastically adopted "Radio Moscow" as the metaphorical label for the obviously kitsch untruths & utter crap that one might encounter.

So what does this have to do with Japan, stock markets or the MoF? The NHK, Japan's National broadcaster, was, after all a relatively unbiased (if unprovocative) source of internatonal news and opinion. The connection is that Sadakazu Tanigaki, the Minister of Finance, is talking pure crap-ola about deflation and the impact of Yen appreciation and higher interest rates upon the Japanese economy, and he must be held accountable and internationally shamed for his persistent perversion (surely I mean sub-version??) of the truth. This has earned him my "Radio Moscow" award for this week.

For Bloomberg reported today that Chief MoFo Tanigaki (and other ministry officials) wentr on the offensive by saying that depsite six months of positive increases in prices, deflation stil, persists in Japan. "We still can't say that the economy has emerged from deflation", he said. Chief Cabinet Secretary Shinzo Abe, in pole-position for Koizumi's job, echoed this populist sentiment by saying: "Today's report [+0.6%) confirms deflation isn't over". What they are cynically, if not intentionally ignoring for Japan's marginal but parochial gain, is that international capital flows are more or less free and open. Sitcking to ZIRP when things are rather obviously booming in Japan is akin to leaving the tap open in the bath and letting the tub overflow. But because of the nature of relative interest rates, Tanigaki and the Japanese are metaphorically living on the third floor apartment, and all the liquidity is falling through a hole in the causing great damage to the flats below. And when we yell upstairs "HEY! W.T.F.??!!", we get Tanigaki, Abe and friends of MoF & LDP doing their Radio Moscow imitation "...leak? What leak....?"

The Forest & The Trees

All too often, one's sense of perspective can get lost. Occassionally this results simply from the passage of time, while in other cases it is the result of deeply held opinions that one cannot jettison or merely happenstance that has in some Darwinian way, survived. Whatever the cause, accurate perception of current reality may be the resulting casualty it occurs.

One such example is the 10-Year Japanese Government Bond ( the "JGB"), seen here depicted in yield terms (courtesy of Bloomberg Professional) in the chart below. The JGB's yield (if one can really call it yield at all) has been SO low, for SO long, that people have stopped questioning whether or not it should be yielding thus. They have been ground down, and rather are worn out. In this respect, the MoF has won. But the cruel irony of financial markets is that the game is NEVER over. They have won but a round, an inning, a frame (maybe even several), but not the game.

Some of you may then ask: "where it is going from here?" I would suggest the answer is rather obvious, jumping off the page. So obvious (when one looks at it from afar) irrespective that people have stopped asking the question of it's proper yield; ignoring that hedge funds have stopped shorting it; and despite the sight of the BoJ AND the MoF patting each other on their backs in salute of their "victory" over trade surplus-related YEN appreciation, one's conclusion can only be that JGB yields are going higher. And they are going higher, make no mistake, because of six-years of ZIRP and 7%-of-GDP fiscal gaps. Just look at it for a moment and ponder the possible alternate realities of the future. 4% (at least!) by the end of 07' is my variant vision of the future.

Greenspan's Shame?

I was snowed-in, high in the Arlberg so I missed this gossip in Mark Thoma's Blog "Economist Voice" that Alan Greenspan, not more than two weeks retired as Chair of the FRB, was giving a private briefing for a few of Lehamn Bros privileged few. Fortunately, this subject was raised to my attention last night and I must admit to being rather astonished. More worryingly, I must admit to agreeing with Bloomberg's feisty conservative, columnist, Caroline Baum. Yes, I think that there is something wrong with the former Chairman of the Federal Reserve Board giving a private chat to the 10 or so largest gun-slinging hedge fund managers, including Moore Capital's Louis Bacon and Tudor's enigmatic namesake, Paul Tudor Jones.

First let me say, I have nothing against hedge fund managers, per se, since I AM one myself. And I must quickly dismiss the notion that I might be jealous, since I neither trade nor speculate in bonds or currencies. So what is it that Mr Greenspan has done by trying to earn a few honest quid that so gets my proverbial goat? After all, supporters of Mr Greenspan (as well as the priviliged few attending the private speaking engagement) will quickly point that no laws were broken (to which I argue not). And unlike other critics of his private briefing with the kings of hedgefundland, I do not think it is even against the spirit of the regulations and directives governing what he may or may not do.

But yet, a horrid taste remains in my mouth, for reasons not mentioned by Ms. Baum or by Dr Thoma & friends in the "Economists Voice" post. Dr. Greenspan should NOT have given a private briefing simply because he should not allow it to appear that markets are "rigged", "unfair", or "undemocratic", by holding private court with the wealthiest and most powerful investors in America, and possibly the world. This is a very unhealthy thing for a market economy predicated as it is by attempts to insure fair and uniform public disclosure of information. This directly relates to confidence of the people in the integrity of markets and money itself, and former government officials should have an obligation not to jeopardize THIS spirit in any way shape or form. They must be beyond reproach.

It is even more offending that Dr Greenspan has - whether intentionally or unintentionally - raised the spectre of unfairness in financial markets for the paltry sum of $250,000. I appreciate that this amount is greater than Dr Greenspan's ANNUAL salary as Chair of the FRB, but in relation to the worth and value of even insigfnificant mutterings in private, this amount is laughably small. This amount, split between the wealthy and powerful hedge-titans is a rounding error on a morning's interest. This is not meant to imply Dr Greenspan should sell private potentially valuable information to the highest bidder, but it is meant to put into perspective that *IF* he were to do it, the price should be much much higher.

I have no problem with Dr Greenspan speaking to capitalize upon his hard-earned notoriety after years of public service at an admittedly lower-than-market-value wage. But this should be honorary keynote stuff; graduation-day speeches, motivational lectures; academic philosophical discussion groups; or in the least televised, media-fed, OPEN lectures with open and transparent Q&A's for everyone's consumption. We don;t own Dr Greenspan, or his still lucid and keen mind, but he (and other public servants) with information that could remotely be construed as priviliged have a public repsonsibility to insure that the decorum of fairness and equal access to market information is upheld. This private "briefing" for a privileged few movers and shakers miserably failed THAT smell-test.

Dumb, Dumber, Dumbest

In the interests of economy I will sacrifice eloquence for speed today in my attempt to highlight one of the more interesting characteristics of recent Japanese price action: From the point of view of return relative to the average security, the only thing worse than being a high-momentum stock is being a low momentum stock.

This is say that "High-momentum" stocks - that pool of securities outperforming all others in terms of price return during the prior formation periods - has done very badly indeed since the beginning of the calendar year. This is true across all formation periods - short and long alike. With negative returns running from between 12 and 20 relative percent.

there are few fundamental factors or pockets that have done worse than that and many of your favorite Japanese long-only and hedge funds will be reflecting this fact, since the only way pedestrian stocks get to graduate to the elite high-momentum gentleman's club is by your not-so-selfless agent/portfolio manager buying them, and buying them and buying- most likely at higher and yet-higher prices. Now before you excoriate (or excommunicate) them, let it be said that the adept may have gotten out, and their gains on the way in may exceed their losses on the way out. Jeff Vinik is a fine an example of such an adept player.

But what is fascinating is that perhaps the only thing that has done worse than extremely buying extremely high momentum (in any formation period), is buying extremely low momentum, again in any every time frame where negative returns have ranged from -20 to -30 relative percent since the beginning of the calendar year. This is even true for short-term horizons which have historically been fertile places to look for "a bounce", "bottom fish", or "catch the falling knife" with some moderate success.

So what is one to make of it since, every financial advisor is jolly-well smitten with Japan? Well "momentum" is conceptually vacant. Today's high or low momentum is different than last month's high or low momentum and they may reflect highly contrasting phenomena. Some may be "justifiably high or low, and some may not. At the moment, I would suggest that the immediate future will remain difficult for BOTH high and low momentum. BOTH are expensive, with the current Class of 2006 high momentum as highly valued as the ignominious class of 2000 (and we know what happened to them!). But low momentum, while often a nice place to scour for tomorrows' undervalued darling has a decidedly pasty fundamental pallour. And while there may be some hidden gems, buying underperformance or low momentum as a matter of course is likely to remain unrewarding. Finally, for the ever-popular players of the "good-stock/bad-stock" game, the risk is likely to be elevated relative to the pedestrian expected returns and so one is likely to see their favorite Japanese quality-biased long-short manager underperform the more adept and forward-thinking one. We are likely to be entering a phase where avoiding the wrong stocks (proverbial potholes and torpedoes) yields far more relative return than selecting the right stocks.

The Best Little Stock Trader in Japan

Nomura securities reported yesterday that the BSPC (Banks' Shareholdings Purchasing Corporation) suspended new purchases as of the end of April 2006, though it may continue to puchase securities for it's general account up until the end of the window permitted by its articles of association. This follows nine rounds of purchases of shares from Banks that commenced in Feb 2002 up through the present - most of which were cross-held shares that financial institutions desired to get off their books to minimize the variability of their core capital due to the vagaries of share price movements.

To date, the BSPC bought an aggregate amount of YEN 1,586.6 billion (at cost) worth of shares (USD$14.3 billion at today's exchange rates). This is only a smaller part of the total shares bought by the various Japanese authorities and agencies (including the Daiko henjo pension givebacks; the Bank of Japan's purchases (The DIC - Deposit Insurance Corporation) from failed financial institutions, as well as those whose ownership was assumed when other failed institutions were nationalized. But if you think this was a charitable undertaking - think again. Impressively. the BSPC is believed to sitting upon
YEN 1,000 billion of unrealized capital gains, making them one of the wildest financial gunslingers in the world surprassing the HKMA's feat of buying copious amounts of stock to support the market during the Asian Crisis of 1998. Yes, that's right, YEN 1 Trilion (USD$9 billion in market-to-market gains at this morning's exchange rate.

So will this stock find its way onto the market anytime soon, and rain on the bullish party sweepiong Japan? Legally, the Corporation must be dissolved by 2017, and they claim to have no immediate plans to sell stock. But if you're looking for a large line stock, perhaps you should give them a call...

Rabbit Out Of A Hat

Quietly and inauspiciously, the yield on the 10-year JGB has surpassed 2% for the first time in six years. Yes, you read both numbers correctly: 2 (two) percent and 6 (six, seis, sext, VI) years in coming. Anyone who had studied economics at an American university (in between beer-bongs, and debauched frat parties) would be asking themselves: "If you give something away for free, won't it's supply increase, thereby driving the price down (and if you're a bond trader) the yield up?" What dyslexia pray-tell has overcome the Japanese to invert such laws of supply and demand for so long? A 2% 10-year JGB following 52-months of continued expansion and SUSTAINED ZERO PERCENT SHORT TERM INTEREST RATES is the Houdini-inspired equivalent of a rabbit out of a hat.

But what's the truc du chef? It seems that for the past seven or so years, during which time ZIRP has been the policy du jour, there's been a leak in Japanese monetary plumbing (not to mention that of the international monetary system). All that YEN they've been so eagerly giving away, surreptitiously managed to find its way out of the beautiful isles of Japan. But gosh, golly that's a LOT of YEN!! Where'd it go? Well you see not all of it went abroad. Some stayed in Japan and helped the banks buy the JGB's that financed the 7% of GDP fiscal gap. And two percent is, after all, two percent, which it must be said is still a very nice loan spread when one is able to borrow for free. It is, for a bank, the very definition of "free money" (though even moderately astute observers or US S&L victims will attest it is not without its own risks). The rest of it is/was/has been happily taken it up by foreigners - banks, brokers, hedge funds, astute property developers, and everyone else who can and is in need of a unit of money, today, at no-cost - zip, zero, ZIRP. Of course, when they borrowed YEN, they would need to remove it from the domain of the Emperor, and in so doing they'd be required to sell the YEN in the currency market. Which I daresay was convenient for everyone. The banks made a turn in the FX market. The MoF (and most Japanese blue-chip exporters) were rather keen to see the YEN not appreciate, even depreciate especially vs. the USD and the Euro. And given the sizable trade surplusses being run by Japan Inc, the repatriation of which would most certainly have wreaked havoc upon the exchange value of the YEN, was averted.

But all good things that are free (clean air, clean water, Ketchup in fast food restaurants) must inevitably end. And the ZIRP is no exception. Whether due to victory by BoJ technocrats afraid of repeating the horrible episode of Japanese inflation, the concerted though unwanted attention from the G7, or through a plunge in the unit of exchange of the junkie-of-a-nation mainlining the free juice (the US Dollar), Japanese short-term interest rates will rise, and rise rather substantially.

So although inching across the 2% threshhold may seem inconsequential, it is delineating a trend. And as we know, the more a trend is delineated, the more persistent and inertial it tends to become. And that means a return to normality. Regression to the mean (or at least some longer-term process). What might that be? Let your imagination go wild.

IF officialdom raises rates, the carry trade explodes. If the markets do it, they push down the dollar, and force the unwind of the carry trade that way (or a mixture of both). For the dynamic is that there remains lots of speculatively financed borrowings in Yen which ultimately must be closed out. The smart ones have done this pre-emptively. The dumb ones will be in for a rude awakening. How rude? Recall Oct 1998. Everyone went to bed one night and the YEN was 132 to the dollar and woke up to see it at 118. It had risen from a denoument of ~145, some some had managed to get out, and even get short. But there was little if any trade between 132 and 119. A gap. A chasm. A painful impalement upon something very unpleasant. Of course, I can say precisely when. Or how much. But as Cassandra, I am issuing a pari-passu warning of an impending unwind in one of the largest fiascos the modern financial system has ever seen, and it won't be pleasant, and there will be collateral damage. Evenn Sakakibara cannot help with one....