Terrie's Take: Bad Loans Propaganda, J-Financial News, and Sexual Affairs are Hugely Popular!

Terrie's Take - AkihabaraNews.com

Terrie’s Take is a selection of Japan-centric news collected and collated by long-time resident and media business professional Terrie Lloyd. AkihabaraNews is pleased to present Terrie’s learned perspective; we all could use another take on the news - here’s Terrie’s:

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Terrie’s Take on April 14, 2014

Feature:

  • Bad Loans Propaganda

Briefs:

  • Department store sales plummet 25%
  • Losing steam on inflation
  • US Junk bonds most popular
  • Nikkei stocks tank, following US
  • 1m married Japanese looking for affairs

Bad Loans Propaganda
On Friday the Nikkei carried a feel-good article about the fact that Japan's top three banks, MUFG, Sumitomo-Mitsui, and Mizuho, had cut their Non-performing Loans (NPLs) to small and mid-size companies by 13% over the 9 months from April to December 2013. The newspaper used words like "upgrading" and "normal" a lot. When we read this kind of "news", a little red light goes off -- government propaganda has its own language and smell.

A giveaway of such propaganda is when the reporter has to pad the article with a minor example of how things are improving. In the Nikkei's case, the example is one Tabuchi Electric of Osaka, which luckily saw new solar business kick-in to help it recover from previously declining electrical equipment sales, caused, no doubt, because of drastic price competition from Chinese firms. Tabuchi was able to record a profit in March 2013, and as a result its erstwhile primary lender, the Bank of Tokyo-Mitsubishi UFJ (MUFG), upgraded the company's credit status to "normal" and gave it a JPY2bn line of credit.

Hmmm, how nice. However, now that the Abe government has basically spiked the solar sector with reduced Feed-in Tariff benefits and has just this week announced that nuclear power is back, we would be interested to see if Tabuchi can actually survive the next couple of years on its new solar business -- we bet not. In any case, the Tabuchi example is the Nikkei's way of implying that since the other 2 big banks had similar reductions in debt exposure, things must be improving financially at Japanese SME companies for such rating upgrades to be happening.

Or, in other words, isn't Abenomics wonderful?

Fortunately for discerning readers, the Nikkei also likes to include numbers in its articles, and these help us get a better understanding of what is really going on despite the hyperbole. First of all, a reduction of 13% still leaves 87% of bad loans sitting where they were this time last year. That pretty much tells you there is not yet a lifting of all ships. SMEs are typically not exporters, and apart from the 3 months prior to the April Consumption Tax increase, they all had a pretty difficult year. Further, and what the Nikkei article avoids enlarging on, is the fact that of the 13% problem loans reduced, only about 4% were due to lender improvements (JPY150bn according to the article).

So what happened to the other 9%? Like banks anywhere, Mitsubishi, Sumitomo-Mitsui, and Mizuho have a series of not-quite-arm's-length debt servicer companies, that buy the bad debts for 5%-10% of the original loan value, then try to extract at least the purchase price and some interest out of the company owners by more aggressive means than their more illustrious parent companies use.

Being a delinquent debtor in Japan is tough. We recall the news a few years ago of how a Takefuji debt collector told a customer that they should sell an eye or a kidney to pay back their loan. While we don't think that the big banks' servicing firms go quite to this length, they do indeed go for every physical asset the former business owner has: bank accounts, salary attachment, house, sellable art works, golf club memberships, car, etc. This is one of the draw backs of owning a company in Japan -- you're never really dealing in a limited liability capacity.

Another big flaw in the Nikkei article is that while there may have been an oh-so-slight 4% improvement in the SMEs that are customers of the big 3 banks, in fact, most SMEs never get to deal with these brands. Looking at Mitsubishi's 2013 Fact Book for example, it shows that the banking giant actually cut its loans to SMEs by about 12.5% in the last 5 years -- even in the face of considerable political pressure brought to bear by the Kamei debt moratorium and subsequent "guidance" by the Financial Services Agency (FSA).

Instead, SMEs largely get their loans with regional regular banks and the so-called Shinkin banks. We notice that the Nikkei article made no effort to report the status of these financial lenders, even though as a group they provide at least 30% more loans to Japanese companies than do the big three. Therefore, if the SME bad loans problem for the big 3 is being reported as around JPY2.3trn (US$22.3bn), we can deduce the total SME non-performing loans across the country is probably about 3-4 times that when you include the regional and shinkin banks meaning the nation's bad loans for SMEs may be as much as JPY10trn (US$100bn) or more.

In reality, we don't think there is anywhere the improvement in bad loans that the Nikkei would have you think. Instead, the bad loan problem is still quite large and serious, and the Nikkei's numbers do not include consumer bad loans and non-performing loans at large companies. If you were to include all sectors, then the banks and their debt servicing organs could be exposed to about JPY20trn of potential loan defaults in the future (not including new loans). [Ed: Are there no foreign economists interested in digging into this subject further and carving out a name for themselves...?]

Also, let's not forget that an NPL means the lender can't even pay interest on their loan, let alone the loan principal itself. So they are either just treading water or more likely going backwards. Without funds from somewhere, anywhere, the current re-tightening of the domestic economy means that many of these firms, the bedrock of the economy and main employers of Japanese workers, will eventually go bust. You can take your pick of which future event will trigger the failures: the next Consumption Tax increase, the lack of laborers and other unskilled workers, or the aging CEO simply running out of the will to keep going. 

Department store sales plummet 25%
Everyone expected it, and it's happening. Tokyo department stores are reporting that sales for the first week of April have fallen about 25% after the torrid buying of March stimulated by the increasing consumption tax. Leading store Takashimaya has said that it still expects a group net profit of JPY20.5bn for FY2013, but that it will "temper its outlook for the near future". Takashimaya said it would use "aggressive" cost cuts to make up for the short-fall, until things improve. ***Ed: That doesn't sound good for the store's employees, nor for all the people working in other retail stores around the country.** (Source: TT commentary from nikkei.com, Apr 9, 2014)

Losing steam on inflation
When the BOJ set 2% as its annual inflation target the FY2013 wholesale inflation rate did in fact come in at around 1.9%, the highest rate of increase since 2008. Unfortunately the pace of increase seems to be slowing, and the increase for March was just 1.7% compared to the same month a year ago. This is the lowest pace of increase in the last 9 months, and is probably another point of impetus for the BOJ to do a new round of stimulus measures in the next couple of months. (Source: TT commentary from wsj.com, Apr 11, 2014)

US Junk bonds most popular
Despite their reputation for being conservative, Japanese investors have decided that higher yield is important, and have been jumping into a Fidelity fund that specializes in U.S. junk bonds. As a result, the Fidelity US High Yield Fund now has JPY1.2trn under management, compared with the previous long-running king of the hill, Kokusai Asset Management, with its JPY1.18trn Global Sovereign Open fund. Kokusai's portfolio focuses on safe U.S. and European sovereign bonds, and yields just 4.5% annually, while Fidelity investments are currently yielding about 15%. ***Ed: Hmmm, junk bonds in the USA, just as the stock markets are tanking -- may not be a healthy long-term trend.** (Source: TT commentary from ft.com, Apr 11, 2014)

Nikkei stocks tank, following US
One reason why the Japanese version of the Wall Street Journal appears to be doing well is that Japanese investors never lose a chance to take their cues from evening movements on the U.S. stock market, in deciding whether to buy or sell the next morning at home. This behavior was confirmed once again on Friday when, despite generally good news here in Japan, the plummeting NASDAQ in the USA caused investors here to dump stocks as well. As a result, the Nikkei 225 had its worst trading week since the earthquake in 2011, with stocks falling to the lowest level this year, to 13,960. One expert noted that it wasn't just the action on the US markets that had investors worried, but the lack of reform effort by the Abe government as well. (Source: TT commentary from cnbc.com, Apr 11, 2014)

1m married Japanese looking for affairs
Who says the Japanese are sexless? Infidelity website Ashley Madison says that after a slow start from its launch in June 2013, the site now has over 1m people. Yes, that's right, almost 1% of the population and 2% of married people have signed up! The site is intended for cheating marrieds, both men and women, and has found that 55% of Japanese women have affairs because of a lack of sex in their married relationship. Furthermore than only 2% of them feel bad about it -- [Ed: a reasonable indicator that they will repeat the behavior.] (Source: TT commentary from thedailybeast.com, Apr 2, 2014)

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That was Terrie's Take.

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