Posted by: Kenji Hall on July 15, 2008
Are Japan’s mega-banks vulnerable to the U.S. mortgage crisis? Some investors obviously felt that way today. The worrywarts drove the benchmark Nikkei 225 stock index 2% lower to a 3 ½-month nadir, egged on by a report in the Japanese financial daily Nihon Keizai Shimbun that estimated the three top banks held some $45 billion worth of bonds issued by U.S. mortgage lenders Fannie Mae and Freddie Mac. Insurers had invested just under $40 billion.
Mitsubishi UFJ Financial shed 5.3% and Mizuho Financial lost 5%. Other markets in Asia took a pounding as well, with Hong Kong’s Hang Seng declining more than 3%. The MSCI Asia index dropped to its lowest level in nearly two years.
Scary stuff, right? Not exactly. The fact is, Japan’s banks have come through the subprime mortgage fallout relatively unscathed. Why? The collapse of Japan’s markets in the late 1980s and early 1990s saddled them with a huge bad loan problem and left them afraid to invest in higher-risk securities. They mostly stood on the sidelines while their Western counterparts were busy getting aggressive in the mortgage markets.
My colleague, Ian Rowley, has explained how Japanese banks have gone on an investment binge, snapping up stakes in Western banks in recent months. For the record, in late June, reports said Sumitomo Mitsui Financial plans to inject $927 million into Britain’s Barclays. That followed Mizuho’s purchase of a $1.2 billion stake in Merrill Lynch in January, a third of the preferred stock the U.S. financial group issued to shore up its balance sheet. Analysts reckon Mitsubishi UFJ is shopping around as well.
The overseas buying spree would seem natural. Japanese banks have a huge pile of cash on their balance sheets that they’ve been looking to put to work. If need be, they can also borrow money at home at ultralow rates, thanks to the Bank of Japan, the country’s central bank. The BOJ’s target interest rate—the overnight call rate—sits at a lowly 0.5%. Today, the BOJ’s policy board kept the rate steady, the 20th time in a row it has done so. (The BOJ board meets once every two to three weeks.) You can imagine that overseas investments offer far bigger returns than just parking cash in a 1.7% coupon 10-year Japanese government bond. The June 2018 bond traded this afternoon at 1.55% (it’s price had gone up, in inverse relation to the yield).
In the end, despite today’s knee-jerk reaction in equities, the Paulson/Bernanke rescue plan for Fannie Mae and Freddie Mac—both private companies—could cap banks’ losses. By how much is still unclear. We’ll have to wait to see whether the government bailout leaves investors in the lurch. For now, the best way to assess the day’s fall is to blame jittery investors who are playing out doomsday scenarios in their heads.