JGB Holdings of Largest Japanese Banks

Given Japan’s precarious financial situation, working knowledge of the Japanese banking system may come in handy at some point.  Below is a chart of the five largest Japanese banks by assets along with the amount of assets that they hold as Japanese Government Bonds.

The five largest Japanese banks combined hold ¥805 Trillion of assets, which is about 50% of all assets at Japanese depository institutions.  About one third (~¥270 Trillion) of those assets are held as JGBs, which means that those institutions also hold about one third of all Government Debt, which was ¥812 Trillion at the end of 2012.  Combined the top five banks have  ¥35T in capital.

The largest holder of JGBs is Japan Post Bank which is really more of a savings institution than a savings and loan.  It’s the largest deposit holder in the world and funnels almost all of its deposits into securities:  73% of its assets are in JGBs.

Japanese Bank JGB

Nikkei Long Term Chart

In concert with the Yen’s 20% depreciation since October, the Nikkei has rallied 35% over the same time period.  It’s a large move to be certain, but, also like the Yen, in the context of the index’s long term chart, it is almost inconsequential.  Below is a chart of the Nikkei since 1984.  The index is still 70% below its all time peak set in 1989 and 35% below it’s 2007 peak.  Of course, if one were to price the index in dollars the picture would be slightly altered, but the value destruction is inescapable.

Is the Yen Crashing?

Considering the magnitude of the move, the Yen’s recent depreciation vs. the dollar has garnered surprisingly little attention.  Since September the Yen has gone from USD/JPY 77 to 93.  That’s a 20% decline from peak to trough, which is a relatively extreme move for a currency.  Below is a rolling three month change chart for the Yen going back to 1971.  This is the 2nd largest three month move for the Yen in that time frame.

By comparison, the largest 3 month decline for EUR/USD was 20% in 2008 under the stress of the financial crisis.  During the heart of the European financial crisis in 2010/2011, as the world worried that the Eurozone would collapse, the most that the currency depreciated versus the dollar was 13% in a three month period.

What Happens To Japanese Government Interest Expense if Rates Rise?

Recently there has been more talk that the Bank of Japan would increase its asset purchases again in order to create inflation there.  Given the high level of government debt in Japan, increasing inflation and rising interest rates could cause some unique problems.  In particular, rising rates would mean rising interest expense for the Japanese central government.

Currently the government spends about ¥9.8T on interest expense, which works out to about 1.23% on ~¥800T in aggregate debt.  At that level of debt, every 1% increase in the government’s interest rate means another ¥8T in expense.  This implies that at a 5.2% average rate, interest expense would exceed current receipts of ¥42T.
Japan Government Debt
It’s important to note that this analysis doesn’t take into account the tenor of the current debt load.  Since ¥440T has a maturity of 10+ years it would take some time for interest expense to match any increase in market rates.  I also haven’t modeled in any changes in the aggregate debt load.

Comparison of Japan and US Monetary Base

Before the Fed eased last week, I wrote that the ECB’s actions could force the Fed to ease in order to maintain the value of the dollar relative to the euro.  Today, the BOJ’s decision to purchase another 10T Yen worth of assets confirms that global central banks are in a prisoner’s dilemma race to the currency bottom.

Below is a chart of the relative size of the Japanese monetary base compared to the US base.  The Japanese monetary base is about 50x larger than the US base (measured in nominal local currency units), but for most of the last 2 decades it has been more like 100x the size.  The chart implies that as the US monetary base grows compared to the Japanese, the Yen could strengthen further, which is a problem for a Japanese economy that relies on exports.  Unfortunately for Japanese exporters, the Fed has announced an easing program which is likely to be larger than the BOJ’s.
BOJ balance sheet vs. Fed

Japan Short Term Long Term Bond Spread

Earlier today I posted a chart of the flattening US yield curve.  I thought for reference it might be interesting to look at Japan’s yield curve over the last few decades.  The curve hasn’t ever quite inverted, but has gotten to a 0.5% spread on a few occasions.

It’s important to note that it’s not clear what the maturity of the short term bond is from the data source that I pulled this from, so this isn’t necessarily an apples to apples comparison to the US chart.  It looks to me like the short term chart may be more equivalent to a fed funds rate than a 2 yr bond.  It’s an interesting chart in its own right and is posted below.

Japan has been in ZIRP for over a decade.  There remains no empirical evidence that ZIRP is effective in stimulating economic growth.

Nikkei Priced in Dollars

Yesterday’s post about the S&P 500 priced in Euros got me thinking about other markets that might be interesting to view priced in foreign currencies.  Below is a chart of the Nikkei priced in dollars.  Because the Yen has generally appreciated against the dollar over the course of Japan’s (somewhat mythical) lost decades, the Nikkei’s fall is a little softer when viewed in dollar terms.

Comparison of Japan, US and European Consumer Balance Sheet

When comparing the economies of Japan, Europe and the United States, it’s important to remember that the structure of the financial systems of each area are very different.  Below is a great chart put together by the BOJ which compares what the asset side of households’ balance sheets looks like.

US consumers hold a much larger share of their financial assets in equity markets compared to Japanese or Euro area residents.  This is why when the equity markets sell off in the US there is a much greater effect on the real economy than there is in Japan or Europe.  In Japan and Europe, the consumer doesn’t get the signal of a weak economy until unemployment rises, or the banking system hurts to the point that deposits are impaired.