October 01, 2004
And on the seventh day the BOJ rested.
The Bank of Japan is finally done buying out Japanese banks of (a portion of) their losing stock holdings. Otsukaresama! The entire project has taken 2 years and cost the central bank 2.18 trillion yen, which was one year longer and 180 billion more than originally had been earmarked for the buyback program, but still under the 3 trillion yen revised ceiling. The object of the BOJ’s plan was to lessen the risk of further falls in the bank’s capital holdings caused by falling stock prices, while providing a needed injection of funds for the banks to boost their capital.
Unlike U.S. banks, which are prohibited from holding stock, Japanese banks are allowed to own stock, as well as to count 45% of unrealized gains on these stocks towards the Tier-2 portion of their capital adequacy ratios. Unrealized gains came about because of an accounting regulation that was in place until March of 1998 allowing banks to reflect on their balance sheets only the lower of either the book value (price at the time of purchase) or the market value (current value) of stocks they held. The difference between these two values, usually quite large given that many of the stocks were purchased in the first decade after the war, is the unrealized gain.
So, a tremendous amount of paper losses have now been transferred from the private financial sector to the government. Now all that remains is the question of what is the Bank of Japan going to do with 2.1 trillion yen worth of stock? The BOJ has announced a ten-year plan to begin selling off its holdings in October 2007. But as the Asahi print edition pointed out today, misjudging the time of sale could leave the central bank to eat a large loss or create a severe and negative effect on the stock market.
But that's three years from now, and if there is one thing to take solace in it's that one thing the Japanese government has been extremely adept at in the past is sakiokuri.
Unlike U.S. banks, which are prohibited from holding stock, Japanese banks are allowed to own stock, as well as to count 45% of unrealized gains on these stocks towards the Tier-2 portion of their capital adequacy ratios. Unrealized gains came about because of an accounting regulation that was in place until March of 1998 allowing banks to reflect on their balance sheets only the lower of either the book value (price at the time of purchase) or the market value (current value) of stocks they held. The difference between these two values, usually quite large given that many of the stocks were purchased in the first decade after the war, is the unrealized gain.
The down side to this is that since Japanese stock prices went into freefall in early 1990, banks began to accumulate unrealized losses on their holdings, as the market value of their stock holdings began to fall closer and closer to their book value. This had a significant weakening effect on their overall capitalization. (All this was in addition to their problem with non-performing loans, which only worsened the situation by further weakening capitalization.)
So, a tremendous amount of paper losses have now been transferred from the private financial sector to the government. Now all that remains is the question of what is the Bank of Japan going to do with 2.1 trillion yen worth of stock? The BOJ has announced a ten-year plan to begin selling off its holdings in October 2007. But as the Asahi print edition pointed out today, misjudging the time of sale could leave the central bank to eat a large loss or create a severe and negative effect on the stock market.
But that's three years from now, and if there is one thing to take solace in it's that one thing the Japanese government has been extremely adept at in the past is sakiokuri.
# posted by Saru : 4:30 PM
