Losing Money in Japan's Yucho

http://netwmd.com ^ | October 20, 2005 | Andrew Jaffee

[forty_years]

Now that Japanese Prime Minister Junichiro Koizumi has a clear mandate for economic reform, he has wasted no time in transforming his electoral capital into practical results. Japan’s stock market – indeed, its entire economy – is poised for years of sustained growth. This growth will help to bouy the world economy, too.

Last Friday, Japan’s Diet (Parliament) approved legislation that will privatize the $3 trillion held by Japan’s postal service. The postal service? In Japan, the “Yubin” is more than just mailing letters. For the last 130 years, post offices have also served as local savings banks for conservative grannies and grampas to stash their hard-earned money. <

Japanese have stuffed $3 trillion into the “Yucho” or postal savings accounts, but have not received much in return. The “Ordinary Savings” account bears a whooping 0.005% APR. But more aggressive investors can get 0.060% from a “Teigaku” 3-year certificate of deposit.

In other words, investors are losing money in the Yucho – if you take inflation and taxes into account. The Japanese would have done better burying their yen in a coffee can in the back yard – or stuffing it into mattresses.

Prime Minister Koizumi has put an end to this economic farse, but not without some slick politics:

Parliament's upper house, whose rejection of the bills in August triggered a general election that the ruling camp won by a landslide, approved the legislation by a vote of 134 to 100 following adoption by the more powerful lower chamber on Tuesday.

Privatizing the postal system has been the cornerstone of Koizumi's agenda to wean the long-ruling Liberal Democratic Party (LDP) from its addiction to the wasteful public spending that had won votes but bred scandals and inflated government debt.

The big election win by the LDP and its junior coalition partner in the September 11 lower house poll -- cast by Koizumi as a referendum on postal privatization -- convinced most ruling party members of the upper house who had previously opposed the bills to vote in favor of the legislation this time.

Now that tremendous assets of the Yucho can be used for investing in and building Japan’s economy. We are not talking about rolling the dice with grampa and granda’s life savings, we are talking about banking in terms of a normal savings and loan model.

There are certainly smart business people in Japan. They will see that the Yucho’s assets can be used for small business loans, or investment in stocks, bonds, annuities – in other words, a balanced portfolio in which savers can receive a fair return on investment, not 0.005%. The Yucho’s assets can be invested in Japan’s economy, not buried in a coffee can. Previously, the Yucho has “funneled postal savings funds to money-losing projects and kept nonviable companies on life support.”

In the last year, the Japanese economy has once again starting acting like the powerhouse it should be. According to Toshihiko Fukui, Governor of the Bank of Japan (Alan Greenspan’s Japanese analog):

Japan’s economy has steadily strengthened its foundation through structural reforms, as seen in the substantial decline in major banks’ nonperforming loan ratios. Improvement in the corporate sector has been spreading to the household sector, and the economic recovery supported by domestic private demand is expected to continue.

Continuous efforts to accelerate and strengthen structural reforms are called for to raise productivity, which is needed to respond to the unprecedented rapid pace of aging of our population, and to meet the growing challenges of globalization. In particular, fiscal consolidation remains the top priority on the government’s policy agenda, and steady implementation of fiscal structural reform efforts will continue, with a view toward achieving a primary surplus for the combined central and local governments in the early 2010s.

This is not hype. The numbers back up what Fukui says. Japan is awakening from its 15-year hangover. As the world’s second largest economy, a strong Japan means a strong world. Japan is poised once again to be the House of the Rising Sun – but this time without all the militarism.

http://netwmd.com/blog/2005/10/20/59

[lOKKI]

Now may be the time (finally!) to invest in the Japanese stock market. For many years, the stock market has been stagnant because companies did not have to go to the stock market to raise capital - they got it from Japanese banks at impossibly low rates with unspecified loan lengths...

As a result there was no pressure on companies to show any increase in stock values.

Now they may have to pay some attention to the individual investor.

[tom paine 2]

What ETF covers the Japanes stock market?

[doggieboy]

I agree. I suffered through the 90's with a Pacific Fund (Vanguard) and finally dumped it in 2000. I just bought back in this week. I also sold my energy fund around the beginning of this year as I figured the energy prices had peaked. I'm a financial genius.

[skinkinthegrass]

Japan Ping? :)

[forty_years]

There's the iShares Japan ETF (EWJ) or you can go managed with the tried and trusted Japan Fund (SJPNX).

[Billthedrill]

Used to watch my elderly neighbors queue up at the Yokosuka Post Office - older Japanese are really really really really really really conservative when it comes to this stuff. It drives the bankers absolutely nuts.

[tom paine 2]

Duomo arigato gozaimasu