Japan's Foreign reserves rise above $1 trillion

Japan's foreign reserves exceeded $1 trillion in March, thanks to gains in the appraisal values of its US Treasury bond holdings and euro-denominated assets.The nation's foreign reserves totalled $1.02 trillion, up from $9.2 billion in the previous month.Japan held $905.53 billion in foreign securities as of March 31 while its foreign currency deposits amounted to $84.2 billion.

The nation had $7.43 billion of those deposits in foreign central banks and the Basel-based Bank for International Settlements, $20.9 billion in Japanese banks and $55.88 billion in foreign financial institutions.Gold reserves totalled $22.55 billion.

Japan was the world's second-largest holder of foreign reserves after China, according to IMF data. Japan's foreign exchange reserves consist mainly of securities and deposits denominated in foreign currencies, gold, and reserve positions and special drawing rights at the IMF.

Samurai-- the market or the battlefield ??

Samurai market is usually used by non-residents of Japan, with a reference to the iconic Japanese warrior - the samurai. It is the slang term for the stock market in Japan. This market is where non-Japanese entities can launch public bond issues to raise yen finance.Issuance in the samurai bond market has more than tripled over the past several years. Some observers have attributed this growth to a systematic underestimation of credit risk in the market.

This Tokyo Foreign Bond Market(the so-called Samurai market)was created in 1970,with a public offering of yen bonds by the Asian Development Bank. Japan was then one of the largest debtors of the World Bank. Supported by consecutive current account surpluses, the government decided to create the Samurai market, graduating from the World Bank and becoming a capital-exporting country.

Japan's Samurai bond market is in danger of degenerating into a junk market. The traditional dignity of the Samurai title is being threatened by the influx of dubious issues and speculative instruments into the Tokyo market.

Criss-crossed capitalism

When Japanese shares plunged to a 26-year low on October 27th, it was not just investors who felt the pain. Billions of dollars of corporate assets were also wiped out because many Japanese companies own stakes in their peers. Cross-shareholdings (when two firms hold each other’s shares) and stable-shareholdings (friendly firms holding shares they almost never sell) are the blood-brotherhood of corporate Japan. 

Such holdings are regarded as a way to cement business relationships, rather than as investments.

After falling for a decade, the level of cross-shareholding has crept up since 2004 (see chart). Greater shareholder activism, mostly on the part of foreign investors, and fear of hostile takeovers prompted managers to adopt mutual shareholdings to insulate themselves from nettlesome outsiders. Over 20% of the shares on the Tokyo Stock Exchange are owned by Japanese companies and financial groups.

The practice is most common in traditional industries such as steel, paper and energy. But big global carmakers and electronics firms participate as well. Toyota, Honda and Nissan are all involved in webs of interlocking shareholdings with their business partners and suppliers. In 2007 Toshiba and Sharp bought stakes in each other, as did Sharp and Pioneer. Panasonic, which is considering taking a controlling stake in Sanyo, held shares in over 300 companies as of March 2008, valued at ¥446 billion (around $4 billion).

Cross-holdings cement alliances, but also make firms captive to their partners. They make it harder to work with firms outside the circle, reinforcing the inflexibility of Japan’s business environment. 

The most visible impact is in financial services. Banks need to recalculate the value of their assets daily, since the shareholdings are part of the core capital they lend against. When shares hit a trough last month, Japan’s three “megabanks” wrote down around $12 billion in paper losses from some $120 billion in shareholdings. Their capital ratios fell by half a percentage point, putting the banks in uncomfortable territory. The result was a scramble to recapitalise.

Japanese bosses say cross-holdings are an aspect of their business culture that will endure, however much foreigners object. . Because banning the practice is impossible, the head of JTP wants regulators to require that firms at least disclose their stakes, so that transparency can help investors press managers to use their company’s capital more wisely.