Re: Japan

["J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>]

     My understanding is that a lot of the overblown loans
made by Japanese banks in fact had land as the main
collateral.  Because of BIS rules supposedly these are
supposed to be currently valued, but I have little doubt
that the lag in adjusting has been much slower than the
lag in the decline of actual land values.
     In any case, what makes a bad loan is nonpayment
of interest, not the decline in value of the initial collateral.
Barkley Rosser
-----Original Message-----
From: Greg Nowell <GN842@xxxxxxxxxxxxxxxxx>
To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
Date: Friday, February 25, 2000 9:37 PM
Subject: Re: Japan


>One of the questions here is whether the land values in the banks'
portfolios
>are marked to market, i.e., priced at current values or kept on the books
at the
>value of their origination.  This obviously is a big deal, when looking at
the
>banking system, and may not show up in listed land prices.
>
>Land value is also only loosely connected to whether or not the loan is
actually
>performing.  A non-performing loan may be secured against land that is
still
>valued at par (=origination value) on the market, but the bank in question
may
>have no intention of foreclosing against company X that is part of the
Keiretsu
>or owned by the bank president's best buddy or son-in-law.
>
>Japan has, it seems, a higher-than-average incidence of such arrangements.
(See
>Katz, Japan: the Miracle that Soured)
>
>But naturally the decline in land values has been linked to the decline in
bank
>solvency which is also connected to the decline of the stock market.
>
>-gn.
>
>"J. Barkley Rosser, Jr." wrote:
>
>> Geoffrey,
>>       Very interesting data source.  It definitely shows a
>> peak in land prices around 1991 with gradual declines
>> since.  This contradicts what is in Ito and Iwaisaku.
>> Barkley Rosser
>> -----Original Message-----
>> From: GGard97342@xxxxxx <GGard97342@xxxxxx>
>> To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
>> Date: Thursday, February 24, 2000 9:03 PM
>> Subject: Japan
>>
>> >In a message dated 24/02/2000 15:32:43 GMT Standard Time,
>> >bmoore@xxxxxxxxxxxxxxxxx writes:
>> >
>> >> I agree wholeheartedly that we must find an explanation for Japan. Why
is
>> >>  it that low rates there have not induced the private sector to
deficit
>> >>  spend, so that the government must do it?
>> >>
>> >>  I have a student working on this, and think one reason may be asset
>> >> deflation:
>> >>
>> >>  Stock prices fell sharply from 89 to 91, but land prices did not. (My
>> >>  student is trying to find a series for Japanese land prices. Have you
>> seen
>> >>  one?)
>> >
>> >Very good questions, Basil Moore. Open the mind and try these answers
for
>> >size.
>> >
>> >Japanese land prices are available from the Japanese Real Estate
Institute
>> at
>> >
>> >http://www.reinet.or.jp/index-e.htm
>> >
>> >Start your student off by reading Thornton or Tooke to learn the
>> following:-
>> >If a country's interest rates are lower than all other countries' rates,
>> >money is lent abroad, not at home. This causes price deflation in the
low
>> >interest rate country and price inflation in the high interest rate
>> country.
>> >(Schumpeter gives a good summary and references.)
>> >
>> >The theory that the opposite relationship is true derives from the
answer
>> >given in 1832 by the then Governor of the Bank of England, J Horsley
>> Palmer,
>> >to question 678 of the Althorp Committee. They are in the report of the
>> "The
>> >Secrecy Committee" of the Bank of England (see Schumpeter page 698).
Send
>> >your student to the Bank of England's Archives - Mr Gillett, the
archivist,
>> >is a very nice man - and ask him of her to read the answers to the other
>> 912
>> >questions which Palmer answered. Among them he will find some empirical
>> >evidence, given by Palmer, which refutes his own armchair theorising
about
>> >interest rates.
>> >
>> >Next get in touch with Professor David Llewellyn of Loughborough
University
>> >to learn something about the way the Japanese banks were affected by the
>> >Basle Accord of 1988. A popular version appeared in the January 1992
>> edition
>> >of "Bankers' World", then the journal of the Chartered Institute of
Bankers
>> >in London. To comply with the Accord the Japanese Banks had to raise
their
>> >tier one capital adequacy ratios, and as unprofitable banks cannot raise
>> >extra capital, they probably had to reduce lending. Get him to check out
if
>> >this is true. The value of property depends upon how much one can borrow
to
>> >buy it, so reduced lending means crashing property prices.
>> >
>> >It can mean crashing share values too, if people have been borrowing to
buy
>> >shares. Japanese banks' capital base is commonly invested in company
>> shares,
>> >so if lending to buy them is reduced, the prices go down, and the
capital
>> >base of Japanese banks falls, leading to further reduction in lending
>> >capacity. For an account of the origins of the Basle Accord see "Essays
in
>> >International Finance No. 185", December 1991, International Finance
>> Section,
>> >Department of Economics, Princeton University.
>> >
>> >It is of course a clever wheeze to buy the shares of companies to whom
you
>> >lend money, and the Japanese possibly thought they were improving upon a
>> >German practice. But the German banks have long term liabilities in the
>> form
>> >of their internally invested pension funds, so they do not have to take
the
>> >risk of using their shareholders' funds to buy equities.
>> >
>> >To add to the problems the Japanese Government fell for the propaganda
of
>> the
>> >Henry George claque, and introduced a "Land Value Tax" in 1996. A land
>> value
>> >tax is a disguise for full or partial land nationalisation so it
naturally
>> >lowers land values.
>> >
>> >On second thoughts the first thing you should do is remind your student
of
>> >the wise words of Dr Samuel Johnson, "You must rid your minds of cant."
>> >
>> >The Japanese could be justified in thinking that the Basle Accords were
an
>> >Anglo-American conspiracy to wreck the Japanese banking system.
>> >
>> >Have fun,
>> >
>> >Geoffrey Gardiner
>> >
>> >
>> >
>> >
>> >
>> >
>> >
>> >
>
>--
>Gregory P. Nowell
>Associate Professor
>Department of Political Science, Milne 100
>State University of New York
>135 Western Ave.
>Albany, New York 12222
>
>Fax 518-442-5298
>
>