Author:

The Japanese government has scaled back its privatisation plan for Japan Post to hold more than a third of its shares, keeping a grip on the mammoth state-owned financial conglomerate that is the single largest holder of government bonds.

Japan Post is the country’s biggest financial institution, with financial assets of about ¥300trn ($3.3trn) – more than the GDP of France.

It holds about a third of the near ¥700trn Japanese government bond (JGB) market, thus making it potentially pivotal in supporting Japan’s deteriorating public finances.

The six-month old Democratic Party-led government said it plans to roughly double the limit on the company’s deposits and insurance by June, although it may review that around April 2012 depending on the impact the changes have on the banking sector.

Bond dealers said the news supported government bond prices on the view that the increased deposit limit would draw funds from other banks to Japan Post that would then be invested in JGBs.

“The new plan is supportive to longer-dated Japanese government bonds as the duration of bond holdings in Japan Post Bank’s portfolio is said to be longer than other banks. Japan Post Insurance is a life insurer so it is expected to invest more in longer-dated bonds,” said Chotaro Morita, head of Japan fixed-income strategy research at Barclays Capital.

The five-year to 20-year spread tightened 1.5 basis points to 163 basis points, shrinking from a decade high above 167 basis points earlier in March.

However, Vice Banking Minister Kohei Otsuka said he does not expect Japan Post’s assets to grow sharply given that average financial savings of Japanese households is about ¥11.2m, only just above the current ¥10trn deposit limit.

Although Japanese interest rates have been kept near zero for much of the past decade, Japanese savers have been reluctant to take risks in shares and foreign assets, prefering to put most of their savings on deposit in Japan.

Only one percent of total household assets in Japan are held in foreign currency or foreign securities accounts.

Awash with funds, banks in turn have been buying government bonds, helping to keep government bond yields low despite Japan’s dire fiscal condition.

Banking Minister Shizuka Kamei said that the plan is not intend to create a megabank to regularly buy Japanese government bonds.

But most analysts think it is unrealistic for Japan Post to reduce its bond holdings as it could destabilise markets.

Otsuka said it would be up to the management of Japan Post to consider its investment stance but added it would be difficult for Japan Post to reduce the weighting on government bonds in the near term.

Back-pedalling?
Prime Minister Yukio Hatoyama had frozen the previous privatisation plan, seen as the symbol of former prime minister Junichiro Koizumi’s market-friendly reforms, on the grounds that it ignored the needs of consumers.

The previous plan envisioned spinning off the two financial subsidiaries, Japan Post Bank and Japan Post Insurance, and selling two-thirds of the holding company by 2017.

Otsuka said the government will likely reduce its holding of Japan Post’s shares in the future but has not decided whether it would set a deadline to do so.

Japan Post’s financial services are considered the golden goose because the traditional demand for mail services is under pressure from increased use of electronic mail and Japan’s shrinking population.

The government also said it planned to keep over one-third of the shares in the parent company of Japan Post.

It plans to merge deliveries and post office services into the parent company, hoping that profits from the two financial firms will subsidise deliveries and post office services.

As a state-backed bank, Japan Post Bank has long had a deposit limit of ¥10m per person. But the government said it aimed to lift that to ¥20m to support its profitability.

Private banks have said that would give Japan Post an unfair competitive advantage given that Japan Post Bank is larger than any other banks in the country and still enjoys an implicit government guarantee.

California aims to avoid major economic shocks with its carbon cap-and-trade system slated to start in 2012, the state’s chief climate change regulator said recently, adding that the most populous US state would try to harmonise its system with any federal plan.

California vaulted to the vanguard of US climate change in 2006 with an aggressive law that aimed to cut greenhouse gas emissions to 1990 levels by 2020 and make it the trend-setter in clean energy and technology.

But critics say the law will only raise energy prices and drive away businesses and jobs.

Hoping to settle the matter, the state plans to release a revised economic analysis of the law, after an early version of the report was criticised by all sides. The new results show the law having only a marginal net impact on the economy and is a net creator of jobs, California Air Resources Board Chairman Mary Nichols said in an interview.

“The wind is at our backs. It is not pushing us in the opposite direction,” she said. “Jobs will continue to be created.”

Fine line
Cap-and-trade plans like those in Europe and proposed for the US Northeast aim to cut emissions of carbon dioxide and other greenhouse gases linked to global warming by limiting total emissions and then letting power plants and other polluters buy and trade credits to emit.

Market forces in theory spark positive change as companies that can cut emissions for the least cost do so and sell their credits for a profit.

System designers must walk a fine line between creating prices so high that they shock the system and so low that they have no effect. One key to the cost of the system is whether emitters are given credits or must buy them.

A California economic advisory group earlier this year recommended all credits be auctioned, an approach that economists and environmentalists support, but which businesses tend to say would be too expensive.

“The idea is to make the implementation as seamless and as simple as possible,” said Nichols, who favours a less abrasive approach than auctioning all credits. “That is not a very feasible option, at least for the beginning of the programme,” she said. “Generally my preference would be to do something that increases over time.”

California may also have to contend with a new federal plan, if Massachusetts Senator John Kerry and his allies in Congress are successful with a plan they see as a compromise with previous, more ambitious efforts.

“The programmes can absolutely blend together,” Nichols said. California Governor Arnold Schwarzenegger, a strong proponent of the state’s global warming law, had discussed plans with Kerry, who was supportive of the state’s right to run its programme in parallel with a federal programme, she said.

Other federal proposals could clash with state plans.

California had been considering including transportation fuels in its first round of cap-and-trade in 2012, which may not fit into the plan being formulated by Democrat Kerry, Republican Senator Lindsey Graham and independent Senator Joseph Lieberman.

“In general we are looking at trying to do something that can be phased in successfully with what is being considered at the federal level, which would argue against putting transportation (fuels) in at the very beginning,” Nichols said.

Beijing’s groans over US demands to let the yuan rise have been grand theatre, but domestic currents favouring a stronger currency are likely to prevail when Chinese leaders cool down to plot policy.

China’s denunciations of US pressure have, combined with other recent tension between the two powers, fostered the view that Beijing will put stubborn resistance to foreign hectoring ahead of arguments for yuan appreciation.

The core of this view is the assumption that the Communist Party and a nationalist public would find it intolerable to appear to cave in to external pressure.

But this image of a China boxed in by pride does not stand up to scrutiny. In a country where maintaining economic strength is sacrosanct policy, even prickliness over perceived US bullying could fade way.

Government advisers and analysts say Beijing still has plenty of political space to implement currency appreciation if it decides that a stronger yuan makes economic sense.

“If we didn’t adjust the exchange rate just because of US pressure, that really would be manipulation. China is still moving towards market-based reforms of its exchange rate, but is waiting for the economy to improve,” said Li Wei, head of the Americas division in the commerce ministry’s research unit.

“The main thing is that we will do it according to our own judgment.”

Regardless of US threats, Beijing is likely to resume appreciation in the second half of this year when the global economy strengthens and Chinese exporters indisputably find themselves on more solid ground, Li said.

China has in effect re-pegged the yuan at about 6.83 to the dollar since mid-2008 to shield its exporters from the financial crisis.

Currency manipulator?
President Obama’s government is under pressure to call Beijing a “currency manipulator” in a Treasury department report due on April 15.

The possible use of that designation, not invoked since 1994, has been greeted with thunderous rebuttals from Chinese officials.

Yet for all the denunciations, Beijing may be able to live with the ugly label.

“Calling China a manipulator and passing some kind of punitive legislation are different,” said Tao Xie, an expert on Sino-US relations at Beijing Foreign Studies University. “A label does not come with any punishment.”

If China is deemed a currency manipulator, the US Treasury must quickly launch talks with Beijing, though no sanctions are required.

A newly introduced Senate bill would be tougher, demanding tariffs on Chinese products if the yuan does not rise.

Beijing can be excused for feeling that it is has seen this movie before. Lindsey Graham and Charles Schumer, the US senators behind the bill, crafted similar legislation in 2005. Their attempt fizzled out when China launched gradual appreciation in July 2005.

The yuan climbed 21 percent over the next three years.

“The Chinese government may be thinking, ‘Let’s wait and see. The storm will pass’,” Tao said.

Commerce Minister Chen Deming hinted at the distinction between words and actions in a speech recently.

“If the US Treasury gave an untrue reply for its own needs, we will wait and see,” he said. “If such a reply is followed by trade sanctions, we will not do nothing.”

Preparing the ground
There are signs that China is preparing the ground for a resumption of yuan appreciation.

Since the re-pegging nearly 22 months ago, the rhetoric out of Beijing has grown predictable: a stable yuan has helped the economy and the global recovery.

In the last few weeks, this has started to change.

State newspapers have run a series of reports about officials visiting export hubs to ‘stress test’ how firms would cope with appreciation.

And in his most important news conference of the year, Zhou Xiaochuan, China’s central bank governor, described the “special yuan policy” as a temporary stimulus policy that would end “sooner or later”.

It will probably be for President Hu Jintao and Premier Wen Jiabao to decide whether to let the yuan rise again.

The official policy description – keeping the yuan “basically stable at a reasonable and balanced level” –  has been consistent since 2005, leaving them with considerable discretion to resume mild appreciation, said Victor Shih, a political scientist at Northwestern University in Illinois.

“Things change very fast. If inflation does increase, arguments can change. If exports do recover very quickly, arguments can change,” Shih said.

“They can say, ‘no, we are not doing it because some laowai (foreigner) is telling us to do it. We are doing it for these other reasons’.”

Hence the relatively mild market jitters thus far.

While the war of words with the US has made headlines, forecasts of a pick-up in both exports and inflation still dominate the outlook for the yuan.

A New Zealand banker defrauded clients of $13m to fund a lavish lifestyle of prostitutes, property and wine, according to local media.

Stephen Gerard Versalko, 52, was convicted of stealing NZ$17.8m from the clients of his employer, ASB Bank, and jailed for six years, the Dominion Post newspaper reported.

Court officials could not be reached for comment.

The biggest single employee fraud case in New Zealand came to an end after one of Versalko’s clients saw a documentary on fraudster Bernard Madoff and saw similarities in behaviour.

Between 2000 and 2009 Versalko spent at least NZ$3.3m on prostitutes, NZ$4m on luxury properties, as well as more than NZ$300,000 on wine, along with cars and a boat.

One prostitute received NZ$2.5m over that time, and the bank is taking legal action to get property she bought with the money, media reported.

Like the high-profile Madoff, Versalko ran a so-called ponzi scheme using NZ$4.6m of the defrauded money from new clients to pay off earlier investors.

Versalko’s victims were largely elderly women, living outside of New Zealand, who were led to believe their money was in high-return, government guaranteed investments.

The bank has repaid all the investors not only the amounts involved but also the interest they were promised.

Malaysia is considering proposals to end its subsidy regime and phase in a new goods and services tax as it begins dismantling a four-decade race-based economic system that has deterred foreign investment.

The economic regime adopted after race riots in 1969 has given a wide array of economic benefits to the 55 percent Malay population, but investors complain it has led to a patronage-ridden economy that has resulted in foreign investment increasingly moving to Indonesia and Thailand.

The cabinet has seen the reform proposals, which will be reviewed again before Prime Minister Najib Razak presents them at the “Invest Malaysia” conference, a government source who has seen the plans told reporters.

“The proposal cites political implications for some of the measures and calls for the government to make some tough decisions,” said the source, who could not be named because of the controversial nature of many of the policies.

An aide to Najib declined to comment, saying the plans, which will be open to public discussion before taking effect in June,  would be unveiled only at the end of this month.

The government recently abandoned politically sensitive plans to introduce a goods and services tax just weeks after scrapping petrol price increases aimed at cutting its subsidy bill, and an electricity price hike. It cited a need to “engage with the public” as reason for the delay.

The government will end budget crippling price controls and subsidies, mainly for fuel, food and power “with minimal exceptions”, according to the reform plans, drawn up by a government advisory body.

“The savings should then be allocated to widen the social safety net for the bottom 40 percent of households,” the source said.

The shift mirrors the opposition’s policy of targeting benefits at the poor regardless of race, although as the majority of poor are Malays, it may have little change on outcomes or on the wider system of preferences enjoyed by Malays.

The reform plans also call for reductions in personal and company tax rates, although the levels were not specified.

Najib has already rolled back elements of the Malay affirmative action policy, relaxing a rule that companies must offer stakes to indigenous ethnic Malays.

Policy flip-flops
A series of policy flip-flops in recent years have dogged Malaysia’s reform efforts and the country has seen net foreign direct investment outflows to the tune of 26.1 billion ringgit ($7.88bn) over the past two years.

Malaysia attracted 31 percent of the total FDI that went to Malaysia, Indonesia and Thailand in 2008 versus half of that total in the 1990-2000 period, according to UN data.

Foreign ownership Malaysian shares dropped to 20.4 percent of market capitalisation at the end of 2009 from 26.2 percent at the end of 2007, according to official data.

Malaysia will seek to position itself in high growth industries under the new reform proposals, aiming to achieve per capita gross national income of $17,000 by 2020, which would make it a developed nation by World Bank standards. Countries such as South Korea and Singapore have already made that leap.

Without a radical reshaping of its economy and a move away from low-value added electronics exports and labour intensive commodities industries, Malaysia risks losing ground to the likes of China and Vietnam and not making it to developed nation status, a recent World Bank report said.

It is unclear how far the proposals will go in reshaping Malaysia’s social system, blamed by some political analysts and economists for fostering graft and an uncompetitive economy.

“If the government wants to do it right, you will have to rope in everyone including the opposition,” said Shaharuddin Badaruddin, Associate Professor at Universiti Teknologi Mara in Kuala Lumpur.”This is the biggest difficulty now for the government in terms of implementing economic reform politics.”

Malaysia’s political system has been polarised by the trial on sodomy charges of opposition leader Anwar Ibrahim, who says they are part of a political conspiracy.

The current system gives majority Malays a range of benefits, from cheap loans and discounts on property to preferential access to education and preferential equity in companies.

The government has repeatedly sought to reassure Malays, its core voter base, their rights would not be eroded even as it tries to woo back ethnic Chinese and Indian voters who deserted the coalition in droves in the 2008 general election.

The report said a backlash against the proposed reforms could come from industries that have enjoyed protection from competition as well as from politicians whose constituents did badly out of the planned changes.

The blueprint offered no details on cutting the budget deficit other than through “prudent spending”, although a higher growth target of 6.5 percent annually would boost tax revenues.

The economy shrank by 1.7 percent last year.

Under its 2010 budget, the government had planned to reduce subsidies by 3.6 billion ringgit this year by altering its petrol subsidy regime from May, a measure that will now not likely happen until after elections, due by 2013, but which political analysts say could come in early 2011.

Tanzania has scope to raise spending on infrastructure projects in the fiscal year starting in July against a background of higher economic growth and slowing inflation, the IMF has said.

The east African nation’s economy is likely to expand by 6.2 percent in 2010 versus 5.5 percent last year, the fund said in a statement. It said inflation could fall to eight percent by June from 9.6 percent in February.

“Creating additional fiscal space to enable the desired scaling-up of infrastructure investment can be achieved through a combination of measures,” the IMF said, citing higher revenues, efficiency measures and new financing.

“Accessing new financing sources – there are a range of possibilities, including Public Private Partnerships, syndicated loans or Eurobonds – needs to be handled carefully and in the context of a strategy that comprehensively weighs the risks and returns,” the fund said.

Like neighbouring Kenya, Tanzania is taking another look at plans to issue a debut sovereign bond, which the global financial crisis forced it to shelve.

The IMF statement, which was issued at the end of an assessment mission to Tanzania, said the country had fared well in the face of the crisis, thanks to its policy responses and the pace of recovery of the world’s economy.

“A stronger-than-anticipated rebound in the global economy has helped offset the impact of disruptions from the regional drought, floods, and power outages, with the result that we have revised slightly upwards our growth forecasts for Tanzania to 5.5 percent in 2009 and to 6.2 percent in 2010,” the IMF said.

Like other economies in the region, Tanzania unveiled in June last year a fiscal stimulus programme aimed at cushioning growth from the second-round effects of the crisis, which included falls in foreign investment and tourist arrivals.

Although the growth was nascent and mainly in lightly-taxed areas, which caused government revenue collection to fall behind targets, a reversal in the revenues trend and the end of anti-slowdown measures could help in the next fiscal year, the IMF added.

It added that the country must balance fiscal and monetary policy to support growth of the economy that is mainly based on agriculture, mining, tourism and regional trade, while at the same time scaling back the fiscal stimulus.

Tanzanian banks had also weathered the global crisis well, helped by limited exposure to toxic assets and increased supervision by the central bank.

“However, the continued absence of a social security regulator is an important weakness in financial sector supervision,” the IMF said.