Another Bad Day Dawns in Asia

The Japanese stock market was in positive territory for a while, then bobbled between up and down versus the Friday close, and has now taken a nosedive, down over 6%. Most other Asia-Pacific markets showed large losses save Australia, which was down a comparatively modest 1.5%ish. The yen is now (3:00 AM) just above 93 to the dollar. Oil has been down around 1% so far today (Brent is $61.33 per barrel, WTI $63.62) and gold has been weaving around flat, first up a tad but now down a tad at $725 an ounce.

The G-7 tried scolding the yen for its recent volatility (see the G-7 statement) but that didn’t have much effect. The locals were unimpressed. From Bloomberg:

The Group of Seven industrialized nations failed to halt the yen’s advance to near a 13-year high against the dollar after expressing concern about the currency’s “excessive volatility.”

The G-7 made an unscheduled statement after a request from Japan, Finance Minister Shoichi Nakagawa said in Tokyo today, adding that his government was ready to act if needed. The G-7 fell short of pledging concerted action to halt the yen’s gain.

“Issuing such a statement is a sign of failure to intervene,” said Eisuke Sakakibara, a professor at Tokyo’s Waseda University who was the Finance Ministry’s top currency official from 1997 to 1999. “The Japanese government may have consulted with their counterparts in the EU and the U.S. and they couldn’t persuade them to intervene.”

FYI, Sakakibara is known as “Mr. Yen”.

A big reason for the worsening of mood in Japan is that its banks, which have heretofore looked solid by global standards, are suddenly looking as if they too might need to raise capital. The reason? Japanese banks, a legacy of the zaibatsu days, hold substantial equity positions in other companies (note these stockholdings are much smaller than they were in the bubble years, when banks were important members of industrial groupings, later called keiretsu as the linkages weakened). The BIS, in a concession to this Japanese peculiarity, allowed a portion of the value of these shares to be counted towards regulatory capital requirements (forgive me for not checking the current rules, but it used to be 50%).

From the Financial Times:

Shares across Asia fell on Monday amid lingering fears that more government measures would be required to help fend off a global recession and as the Group of Seven industrialised companies indicated it was concerned over the volatility of the Japanese yen.

The Nikkei 225 dropped 6 per cent to 7,191.05, heading for its lowest close since November 1982, but spending much of the day sliding in and out of positive and negative territory. The broader Topix declined 6.9 per cent to 750.64.

Japanese banking shares were particularly hard hit after a report said they would have to raise capital to cover the falling value of their stockholdings.

A local report said Mitsubishi UFJ Financial (MUFG) was planning on raising as much as Y1,000bn to cover a decline in its capital adequacy ratio stemming from its investment in Morgan Stanley and a drop in the value of its shareholdings.

The report said the bank was considering raising the capital through issuing preference shares and common shares through respective private and public offerings. MUFG said there had been no decision made.

Separate reports said that Mizuho Financial Group and Sumitomo Mitsui Financial Group (SMFG), Japan’s second and third largest banks respectively, were also considering the same thing…..

In South Korea, stocks dropped 3.7 per cent to 903.38 even after the Bank of Korea cut rates by 0.75 percentage points to 4.25 per cent. The rate cut helped lift banking stocks and initially the Kospi gained in response but it failed to buoy the overall market for long….

In Australia the S&P/ASX 200 index slid down 1.6 per cent to 3,809.2. The Reserve Bank of Australia, meanwhile, confirmed that it had intervened on Friday to shore up its currency, which has been sliding against the US dollar and the Japanese yen. The Australian dollar was recently trading at $0.6124, slightly stronger than Friday’s lows of $0.6055.

Stocks in the Philippines sank 12.3 per cent to 1,713.83 on fresh fears about the country’s economy and after Banco de Oro Unibank, the country’s largest lender by assets, reporting a quarterly loss on provisions for securities linked to bankrupt Lehman Brothers.

The Hang Seng dropped 4.2 per cent at 12,086.27. The sub index of mainland Chinese shares trading in Hong Kong dropped 6.9 per cent to 5,402.73.

In Shanghai, shares fell 4.2 per cent to 1,763.181, reaching fresh two-year lows.

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  1. Uncle Billy, Sleepy

    Asia, Australia…

    How come we don’t have Rupert Murdoch jetting around and mouthing off like T-Bone Pickens and George Tsooris? What is that guy up to?

    Any thought given to the idea of a single world currency when we’re done imploding? I have yet to hear a single convincing argument as to why it’s a bad idea. Seems like it would provide stability in a world that needs just that.

  2. eh

    Like I suggested before I think the selling is getting a little bit ridiculous at this point. Although in Japan the strengthening yen is no help to exporters. And exactly what are the reasons for the spectacular rally in the yen? I mean, Japan’s economy has been in more or less the doldrums for, what, 20 years? With zero or very low interest rates for a long time as well. Is it unwinding of the yen carry trade? Is the yen seen as a safe haven? It seems non-sensical to me, as did TBH oil near $150 earlier this year. At this point I don’t blame people for blaming greedy excess and speculation, because on the surface it seems the best explanation. Regarding this sort of cowboy capitalism, with more talk about reform — which means more regulation — ‘Give ’em enough rope is…’ is looking close to the truth.

  3. Yves Smith


    Carry trades unwinding mean the yen goes up. And Japan (and China) are two of the few places in the world not massively in debt. Every place with a big debt overhang will drive its currency down big time at some point. It’s the standard central bank prescription. Thus the yen is a very solid currency relatively speaking, and relative is all that counts.

  4. Uncle Billy

    Okeedoke, in the spirit of one hand clapping — how come the graphs for Hang Seng on yahoo, google, and marketwatch all read Oct. 24th? Where can one view the carnage in realtime?

  5. Chris

    Hi Yves,

    Can you clarify how government debt and citizenry debt is different? I’m sure that’s what you are referring to with respect to Japan as their government debt is something like 180% of GDP.

  6. Yves Smith

    Even allowing for Japan’s high level of government debt, it does not resort to capital imports to fund it. We do, big time. Our large and growing current account deficit is why the dollar has been on a downtrend for the last few years. The last two months are a very big aberration for largely technical reasons (as in dollar trades unwinding, which require the purchase of dollars to effect that) with flight to liquidity compounding that.

    Aggregate debt matters, but its relationship to internal savings also matters, We are in a precarious position with both a very high debt load (public + private) and a savings rate that in the last couple of years has hovered around zero.

  7. Steve

    The Hang Seng has crashed. Off ~15+% heading into the close, tape delayed.

    Dow futures lately under 8,000.

    Euroland futures all looking pukey, -5+%.

  8. Anonymous

    Hi Yves,

    A hypothetical for you: if most western banks end up being nationalized, how long do you think the real economies of western nations will take to get back on their feet? What steps will need to be taken? Second New Deal and the like?

    Thanks in advance. Love your blog.


  9. Anonymous

    Obviously parts of the carry trade are unwinding and I would expect two distinct phases of effect as a result. Firstly as the carry trade unwinds the Yen will rise causing the demand for Japanese products to dive. This could be bad news for Japan’s manufacturing base and I would expect the Japanese Treasury to try to intervene soon.

    Post unwind after a number of currencies have tanked and significant damage has been done to various economies there will be little to support the differences in interest rates between countries. Unless the US treasury recognises this then a new carry trade may start up around the dollar.

    This is all happening while US investors sell stocks in emerging markets which is causing a significant impact on the emerging market stocks and ultimately economies. At the same time the dollar is rising shutting down the export driven manufacturing in the US.

    We now have multiple countries all issuing debt to raise money for bailouts and I cannot help but think the source of finance for those debts is finite. I conclude that some countries will get into difficulty and be forced to balance there budgets as a result with the UK and others in Europe probably seeing that fate. Eventually I guess the financing for even the US deficits will dry up as foreigners use their resources to solve their own problems.

    One of the conundrums will be what happens with commodities. Everyone expects commodity prices to fall as demand drops, but I am not so sure. China is using up iron ore stockpiles as it tries to renegotiate prices (this will end eventually), corn prices are below production costs, gold comex values are below prices that bullion fetches, oil demand has not yet dropped by 1.5 million barrels that OPEC is cutting production by.

    Just as individual countries are providing liquidity to their banks where does liquidity for the global community of governments come from (IMF is not big enough – see Brad Setser’s blog)?

  10. Anonymous

    Anon at 7:07 said…’Eventually I guess the financing for even the US deficits will dry up as foreigners use their resources to solve their own problems’.

    I am so glad that some are beginning to see the triggers for nationalisim and the financial disaster that will follow. At some point even the best efforts at cooperation will cease due to various countries internal political pressures.

    The IMF will not succeed with band aids applied to gushing arteries. Globalisim will rapidly decline. Multinational Corporations will be caught astride finger pointing countries. All in all, a recipe for disaster.

    Has the possibility for an international financial meltdown been averted? Some forces; hurricanes, tornadoes, earthquakes, tsunamis…Cannot be stopped by man. It might turn out that the current financial leverage tsunami unwind will be in the same catagory. Winding up leverage was a many years process, unwinding is happening too rapidly for governments to cope.

  11. Anonymous

    Abandon hope, all ye who enter here!

    It seems we’ve reached a point where it is impossible to make any forecast about where the global economy goes from here. There’s an interesting article ( that shows that the Great Depression could not have been forecast using economic data either. We seem to be in a chaotic process where the usual causative principles break down. So the normal economic motives of hope and fear are no longer relevant. We can do nothing which will have a reliably predictable effect.

    Perhaps that guy that keeps on about the Large Hadron Collider is right, and the economy is already entering a black hole, from which it is well known that neither electromagnetic radiation nor, consequently, information can escape.

  12. Ruy Lopez

    “some are beginning to see the triggers for nationalism and the financial disaster that will follow”

    That is the greatest risk. The last global upheaval of this magnitude ended with WWII.

  13. rtah100

    Hi Yves,

    The zaibatsu were the pre-war and wartime holding companies. The keiretsu were the multilateral groupings that succeeded them post-war.

    McArthur reversed the effective break-up of the zaibatsu (which some wanted to end in the de-industrialisation of Japan) with the onset of the Cold War and Korean Wars in the interests of having a strong ally/unsinkable aircraft carrier in East Asia.

    It doesn’t change the sense of the post but it is worth correcting the impression that the zaibatsu/keiretsu change was (a) much of a change and (b) a result of the 80’s bubble popping rather than 40’s geopolitics.

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