Toshio Matsuda, Commentator & Intl Economist

Straight from the Shoulder No.496

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On Thursday October 23 U.S. time, the Dow-Jones industrial average fell by $280 at one point, but then bounced back to close out the trading day with a gain of $172. As Friday Oct. 24 dawned in Tokyo, Nikkei futures plummeted 830 yen from the previous day’s closing price of 8,450 yen to 7,620 yen. Then in the second session that begins from 4:30 p.m., prices continued on south, dipping as low as 7,100 yen during continuous trading hours.

I have repeatedly said that, eventually, Japanese and U.S. stock prices will disengage. What I meant by this is that there will be times when the Nikkei goes up, despite the Dow going down. Yet, this latest nose-dive was a phenomenon completely contrary to what I had discussed ? something I would tentatively label “negative reverse engagement.” On the previous day, when the Dow fell by $660, the Nikkei declined by only 250 yen. Yet, after the Dow finally rose by $172, on Friday in Tokyo the Nikkei plunged. Who predicted that? In the previous installment of this column, I mentioned the option, to those with surplus funds in hand, of picking up Japanese equities if and when the Nikkei falls into 7,000-yen territory. Frankly, though, I never expected that price range to be reached so soon.

Stock prices have continued to slide since the summer of 2007, dragged down by the crisis in the U.S. financial system prompted by the subprime mortgage fiasco, the collapse of the housing bubble, qualms over a possible recession and other negative factors in that nation. In stock investing, there is talk about factors being “taken into account” or “discounted” by the market. I can only wonder, though, just how long the same old bearish factors will continue to be allowed to keep a stranglehold on the marketplace? It reminds me of the old proverb: “A fool can keep only one thought in mind.”

The current market is clearly abnormal. I mean, it has continued to sing the fears of the very same negative factors, with little or no pause, for 15 straight months now. The time is bound to come, sooner than later, when market participants will regain their composure. From its high posted in the summer of last year, the Nikkei average has lost more than 10,000 yen, or some 60% of its value, in a year or so. Stock prices are often called the barometer of a nation’s economy. That tempts me to pose the rhetorical question, of whether the Japanese economy itself has lost over half of its value over the past 12 months. In the same context, have the family budgets of the Japanese people dropped by 60% during the same time? It’s about time, I feel, for actions to be based on realities. As a rather glaring case in point, the market is ignoring the reality that over 40% of Japan’s listed companies are effectively debt-free!

The same old mistaken notion that “a strong yen is bad for Japanese companies” continues to enjoy play on the Japanese market. I have repeatedly reminded my readers of the yen’s climb to its all-time high against the U.S. dollar of 79.75 yen on April 19, 1995. The following March, Japan’s export industries posted ordinary profit at levels never achieved in the past. Let’s examine this phenomenon once again. While it is true that export volume declines with an appreciation in the yen, export companies are able to find buyers for that surplus on the home front. Add to this the reduced costs for importing raw materials and semi-processed goods, along with the drop in shipping charges, insurance and other export-related expenditures, and you have the formula for even more robust competitiveness ? i.e., improved profitability. To export industries, the strong yen should means, “Happy days are here again!” The stern looks and comments projected by exporters each time the yen gains in strength are nothing more than attempts to keep in check the labor unions ? organizations that display little working knowledge of the fundamentals of the global economy. For the Japanese economy, where exporters comprise a key industry, the strong yen is one of the most bullish indicators you’ll ever find.

So, I should also mention that, during trading hours on Oct. 24, the spike in the yen to 92 yen against the dollar threw Japanese investors into a tizzy of panic-driven selling. Foreigners stepped in to pick up Japanese shares, supporting further gains in yen’s value. Japanese investors, meanwhile, continued to dump their holdings. In short, the tried and true pattern of the losses of Japanese investors becoming the gains of foreign players continued to play out. Investors have been witness to the aforementioned super surge in the yen on April 1995, and then again in October 1998, leading to subsequent stellar performances of export industries on both occasions. It is a mystery to me, therefore, why Japanese investors are once again rushing to cast off their shares with this latest strength in the Japanese unit.

When it comes to the noble mass media pundits who go on about the so-called “strong yen recession,” I can only wonder who’s side they are really on. Are they cheerleading for foreign investors? Do they care about the Japanese? The higher the yen goes, the more normal it becomes to buy up Japanese stocks. Although the yen fails to appreciate when Japanese buy domestic stocks with the yen they already have, what happens when foreigners unload their own currencies to purchase Japanese shares? The yen soars all by itself. I’m hoping that the pundits and everyone else will pick up on the skillful manipulation of the Japanese media and market experts by foreign interests as soon as possible.

I’ll say it again. Over 40% of the companies listed on Japanese stock markets are debt free. Where else in the world can you find such a country? Foreigners understand that the Japanese economy is the world’s one true safety zone, and are buying up the stocks here. That’s why the yen alone is rising in value, while all other national currencies head down. Let me say, however, that foreigner investors are guilty of nothing in this saga. It is the ignorant Japanese who are losing out.

As I have said over and over again, the U.S. economy cannot survive without an inflow of capital from overseas. When President Bill Clinton was in office, the information technology (IT) boom lured the world’s money to U.S. shores. During the years of President George W. Bush, it was the housing boom. In both cases, excessive capital influxes fueled bubbles, which both burst. After the collapse of the IT and housing bubbles, respectively, the U.S. economy fell into recession. In the aftermath of the unraveling of these asset-driven bubbles, the U.S. typically finds itself with no engine industries capable of attracting overseas capital. At such times, Washington has repeatedly waged war. Following the collapse of the IT bubble in 2001, U.S. forces soon moved into Afghanistan and eventually Iraq. As a result, in 2002 the U.S. economy cast off all recession worries and cruised into a major boom. Today as well, efforts are afoot to use a fifth Middle East war as the impetus to fend off the winds of recession. The economic scene has been depressed of late, with the general consensus being that any recovery is not likely before next year. A fairly well kept secret, however, is that the guarantee for such an upbeat scenario is war.

The world economy has been buffeted about by the U.S., which no longer able to sustain the dollar with its real economy has fallen into a proverbial “debt hell” exceeding 5,000 trillion yen. This year I visited a major Swiss bank that refuses to let either American citizens or U.S. companies open accounts. In the thick of the current international financial recession, this bank has continued to expand its employees, branches and profit levels.

What does this tell us? In my view, it is an indication that the world has at last commenced the search for truly bona fide banks, and truly bona fide economic playing fields. In that sense, this current surge in the yen may very well signal that the world has begun to grasp the fact that Japan, on paper and in fact, is a stellar example of a bon fide country in the midst of the current global turmoil.