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S&P downgrades Japan to AA- : "Yen madness on Thursday — following Standard & Poors’ downgrading of Japan’s credit rating to AA- from AA. Just some hours ago we were discussing with a HF manager what would happen if the JGBs crash. While this is unlikely to be the start of it, the outlook is anything but rosy.

I had an interesting conversation with a hedge fund manager today, during which it became quite clear to me that we may be mere years away from profound economical and political changes in Asia. Japan's Debt It is a well known fact, that Japan has a tremendous amount of outstanding public debt, amounting to around 200% of Japan's GDP. In comparison, Greek public debt stands at an equivalent of about 110% of GDP. The reason this pile of debt doesn't trigger a crisis alike to that of Greece, is that the Japanese government bonds (JGBs) have a very loyal investor base, consisting almost entirely of Japanese domestic investors, most of them institutional. The yield on long term JGBs is extremely low, and recently touched 0.9% before getting back into 1% territory. Why do the investors hold onto anything that is yielding so little? One reason is deflation. As Japanese investors are in JPY, the actual return is yield + rate of deflation. Second, and more important reason, ...

I highly recommend this article in FT Cautionary tale about exit strategies from 1930s Japan Quote As the policy debate intensifies, investors might spare a thought for Takahashi Korekiyo, Bank of Japan governor from 1911 to 1913. He also served as finance minister and prime minister in the 1920s and 1930s. Outside Japan, few western investors know the name. For while there is discussion about what can be learnt from Japan’s lost decade, little attention has been paid to earlier periods. The experience of 1930s Japan is thought-provoking. Not only does it help explain the decisions that Tokyo leaders took during the lost decade; it offers a cautionary tale about exit strategies. Unqote ■

Below is the link to an article on Economist.com, which highlights a possible shift in the way domestic institutional investors treat JGBs. For better and for worse. http://www.economist.com/node/16593589?story_id=16593589&fsrc=rss ■

My comment to the article published on Economist.com (see the link below) http://www.economist.com/node/16271499/comments#comment-563496 It is probably fair to say that smaller Japanese companies are starved of capital and additional lending by banks would be beneficial. However, I seriously doubt that lack of liquidity is at the root of the problem. Rather, I would say it is the overregulated and highly concentrated markets within most industries, and onerous risk disclosure rules for banks that are to blame. P.S. Curious photograph for the article: it seems that the semitransparent tape that binds the bills has a Korean inscription on it. ■

Below is a post on Japan Private Equity News  blog. I really hope the momentum holds, but unfortunately this has too little to do with Japan and too much with China. Some big gamble... Exports Up 40% In April; Trade Surplus Soars : "Ministry of Finance announced that Japan's trade surplus in April is 742.3 billion yen from 48.9 billion yen in the same month a year earlier. Japan's exports rose 40.4% on year in April on strong overseas demands for Japanese cars and electrical parts. Export to Europe were strong, up by 19.8%, exports to US gained 34.5% and those to Asia climbed 45.3%. " ■

Nikkei Shimbun, a leading Japanese business daily, reported today (original text in Japanese), that a plan to reorganize Morgan Stanley's (MS) securities business in Japan, including possibly bringing it under one roof with Mitsubishi UFJ (MUFJ), is under consideration. The strategy is to be elaborated by June 2009.

Bank of America is a big bank. In terms of total assets almost twice as big as Merrill Lynch that BoA is acquiring as a result of the unexpected deal arranged last month (USD 1,716 bn vs 966 bn; source: Google Finance ). And in terms of the current market cap, BoA is four times bigger. A giant and a dwarf, one might say. So, the deal looks logical in the American context. Not necessarily so in Japan, where BoA's both corporate and investment banking offices fit comfortably at the 15th floor of Sanno Park Tower, mostly known among financial professionals in Tokyo, as home to Deutsche Bank Securities; whereas ML has its iconic bull logo several feet across on the side of its office in Nihonbashi Ichome Bldg, an office in Osaka and several joint offices with Mitsubishi UFJ across the country. It is no coincidence that ML is so big in Japan. ML bought Yamaichi Securities in the late 90s, and the employees of the failed Japanese securities house are still the backbone of ML's Japane...