'Abenomics' - all set to fire up Japan?
Japanese financial markets started the year on a high note as the newly-formed government led by Shinzo Abe started announcing the measures to support their pre-election pledge of leading the Japanese economy back to growth.
Even before coming to power through the general election on 16 December, in a well-orchestrated media blitz, Abe successfully created expectations for looser monetary policy, more government stimulus and positive inflation. Now that his government is in place he is acting upon it: a ¥10.3trn stimulus package of the sort we know from previous LDP-governments, a central bank bullied into accepting an explicit inflation target of 2% and a policy of talking down the yen.
Markets are responding as expected: equity investors are welcoming the additional spending boost by pushing stock prices up, and currency traders drive the yen lower on the back of the hints that Japan will start inflating its way out of its pile of debt. Even the stubbornly low 10-year JGB yield moved from a pre-election low of 0.69% to 0.84% early in January, small in absolute terms, but significant on a relative basis.
As the headlines point to bullishness and sentiment is turning more positive for equity investors, the expiry in March this year of the moratorium on loan repayments by small businesses is expected to offer opportunities for an altogether different kind of investor. The measure dates back to 2009 when the raging financial crisis brought the then DPJ-led coalition government to pass the Small- and Medium-Sized Enterprise Financing Facilitation Law, which obliges banks to be lenient with requests for amendments to terms and conditions of loans. Although the law was a success initially, helping SMEs to maintain access to credit while they restructured their businesses, over time the number of applications rose to the degree that many SMEs used the facility to continue operating non-viable businesses, while banks were unable to turn-down request for loan restructurings at the risk of being blacklisted by the supervisor. The expiry of the Law, after being extended twice in previous years when the economic environment was deemed too poor, is expected to lead to a flood of refinancing opportunities, turned down by banks but of potential interest to stressed or distressed credit investors. It is also expected to increase bank repossession activities with subsequent buying opportunities for the repossessed assets, mostly real estate, via court-led foreclosure auctions.
Recent announcements of fund launches by some of the most conspicuous distressed investment houses point towards an increased interest in Japan from these what are sometimes termed ‘vulture funds’ buying assets at deep discounts directly from bank balance sheets or through foreclosure auctions. Fortress Investment closed on its second Japan Opportunity Fund in December raising $1.65bn to invest in real estate related debt and other assets in the coming 24 months. Its competitor Aetos Capital is still in the market targeting to raise $1bn to buy distressed debt and assets such as office, residential and retail properties held by banks as collateral on loans turned sour.
The fact that investors in this segment can face quite peculiar idiosyncratic risks is highlighted by the increased involvement by Japan’s notorious Yakuza in the foreclosure process. In general the foreclosure process in Japan is very clean and well-organised: real estate or other assets such as land, serving as loan-collateral are, after repossession by the bank, brought to the Civil Court whose execution chamber organises an auction. More than 200 assets are auctioned off in any average month within the 23 wards of Tokyo alone. All auctions are held via postal mail, where any bidder with an interest (foreigners included!), after having reviewed on-line a heavy stack of documents with details about the property in question, can mail its bid to the court until about a week prior to auction date.
The Yomiuri newspaper reported however that crime syndicates have apparently found a loophole around the strict laws against handling any of their funds by any actors in the regular economy. Whereas any bank would flatly refuse selling an asset to an entity related to the Japanese mafia, apparently courts cannot refuse participation by Yakuza in foreclosure auctions nor refuse them the ownership-rights to the asset in case they win the auction by bidding the highest price. According to Yomiuri, the various crime-syndicates have, over the years since 1985, built an impressive portfolio of at least 32 offices, mostly serving as gang-headquarters in prefectures ranging from Hokkaido in the north to Nagasaki in the south.
Knowing Japan, this loophole will undoubtedly be closed swiftly, but meanwhile the faint of heart investor might as well stick to mainstream Japanese equities and count on ‘Abenomics’ to drive values up a little further.
Oscar Volder CFA is Head of Institutional Sales at BNP Paribas Investment Partners Japan