As the Financial Times points out today, we are witnessing a replay of the pattern seen during Japan’s credit bust, except in reverse. Western banks were leery of extending credit to the Japanese and charged a premium over normal interbank rates. Now that the Japanese credit markets are more liquid than many others, foreign bank borrowers now find that some Japanese banks require a higher rate.
From the Financial Times:
Western banks have seen the credit crunch increasingly choke off their usual funding lines in capital markets and among themselves and so have been forced to scour global markets for alternative sources of money.
Some have been turning to the yen money market, attracted by the relative stability of the markets so far.
However, some regional Japanese banks appear increasingly reluctant to lend to foreign institutions through the yen money markets as the fallout from the subprime crisis brings anxiety about creditworthiness to yet another shore.
A significant portion of the demand in the yen market for three-month term money is from foreign institutions raising money that is converted into currencies such as dollars, sterling or euros, says Masayuki Ebira, director of money markets at Barclays Capital in Tokyo.
This is pushing up the rates at which all banks lend to each other in the money markets as measured by the Yen Libor rate, or the local Tibor rate.
“There is a lack of credit access from Japanese banks to non-Japanese banks,” Mr Ebira says.
If the Japanese banks were to increase their limits, it would be easy for the others to borrow but “they are so conscious about credit conditions at banks that about half the regional banks never lend money to non-Japanese”.
A post on the Wall Street Journal Economics Blog, “U.S. Situation Could Be Worse Than ’90s Japan?” suggests these concerns may be valid:
“People say the U.S. isn’t like Japan 10 years ago,” Societe Generale strategist Albert Edwards wrote in a note to clients today. “I agree. Actually it’s WORSE!”
Mr. Edwards has been making Japan comparisons ever since the dot-com bubble burst. Many people disagreed with such assessments, pointing out that U.S. banks and real estate were in far better shape. That’s not the case anymore, says Mr. Edwards, who also notes that Japan didn’t experience a real credit crunch until years after the bubble burst in 1990. And while there’s a view that Japanese banks were glacial when it came to writing off bad loans, part of the problem was that bad loans kept on turning up as the situation worsened. Sound familiar?
What could make the U.S. situation worse, he says, is that Japan’s citizens had deep reserves of saving to tap into, whereas the U.S. personal savings rate is near zero. And Japanese companies were unwilling to fire people, which, while it may have made for a sclerotic economy, helped prop up spending.
Meantime, CLSA Asia-Pacific Markets strategist Christopher Woods, who writes as “GREED & Fear,” thinks that the U.S. will need to swallow the same sort of bitter pill that Japan eventually did. The Fed’s actions, in his view, amount to nothing more than a Japan-style staving off of the inevitable.
“[T]he stock market has now embarked on a rally driven by the view that the Fed will now ‘do anything’ to prevent a systemic problem,” he wrote in a note today. “If the moral hazard trade remains as seductive as ever, GREED & fear remains firmly of the view that the Fed’s unprecedented action has only delayed market clearing Japanese style and certainly does not mark a definitive bottom. Investors should, therefore, use any classic bear market rally led by the financials to sell any Western financial stocks they still own.”