There are times when I almost faint. The Bank of Japan—which has said a million times that it would never do any such thing— suddenly announced, without any warning whatsoever, that it was going to buy equities from the Japanese banks to help them, as they approached the mid-term reporting date of Sept 30.
I have been here covering the financial scene on and off since 1964 when I opened the Tokyo office of The Financial Times, and I have never heard of anything so extraordinary.
Let me explain that. I have seen many a PKO in my time—PKO standing for “price keeping operation” and being a take-off on the UN “peace-keeping operations” (PKOs) that the Japanese involved themselves in during the 1990s, for example in Cambodia.
They weren’t called PKOs when I first came here, but they amounted to the same thing—the government stepping in to prop up the stock market when it was too weak for comfort.
That is where I came in, honestly. A massive PKO was launched in early 1965, when the Japanese economy suddenly ran out of steam. After the Tokyo Olympics, stock prices plunged and, almost overnight, all the Big Four securities companies were in peril, even Nomura. Basically, three were bust and one—Yamaichi—never recovered.
The PKO of mid-1965 pulled the market round eventually.
We saw the same thing in the 1990s. On several occasions the government stepped in to prop up the stock market, there being no other way to keep the thing alive.
The thing of it is this: The stock market here is a casino where many a player is a crook. You don’t have a broad investment community with deep roots. You have a bunch of yakuza. The brokerage houses, by and large, are bent.
No matter that roughly one-fifth of the market is now foreign-owned and half the trades are by foreign investors, still the market is, in its essentials, a casino.
It is the last place one expects the prim old lady that is the Bank of Japan to step forward. So the question is what on earth did the governor of that institution, Mr. Masaru Hayami, have in mind when he announced on Wednesday, Sept. 18, that he was going to wade in and buy equities from the banks, to shore ’em up?
My friend Nobuyuki Nakahara told The Financial Times that Mr. Hayami had “jumped the gun.” Nakahara-san should know; he served on the policy board of the central bank for the four years up to April. He knows the inner workings of the old lady. What he was saying in polite language was that the governor had gone stark raving bonkers.
I know Mr. Nakahara well. He is my oldest friend in the Japanese business community. Our friendship dates to 1965 when we visited Kyoto together to see the temples and shrines. I can read between the lines of his remarks. Let’s make no bones about it, and just nationalize the banks is what he had in mind.
Don’t get me wrong. It is not a new idea. It is an old idea. For decades, in fact since their creation in the 1880s and 1890s, Japanese banks were always nothing more than extensions of the Ministry of Finance. They were departments of the government. They were not real banks, as we think of them in the West. All their stocks were quoted at the same yen price during the first 20 years I worked here. No one thought that odd, because they were not business organizations.
They don’t have anyone in the banks who knows how to do business. That is still true. So what Mr. Nakahara—and one or two other wise birds—have had in mind has just been to acknowledge the reality, nationalize the banks back, and put a bit of muscle into tidying up their bad loans.
That Augean stables mess of theirs has got to be cleared away, so Glen Hubbard, chairman of the U.S. Council of Economic Advisers, has been saying, time and again and everyone serious here knows he is right.
So what was Mr. Hayami up to? What did he have in mind? No one that I know knows, or if they do they haven’t told me. My thought is that he just lost his cool.
That’s not hard to do in these circumstances. One of his pals in one of the banks called him up and said something like “do you realize what our balance sheet looks like as of Sept. 30? We are way under water, and that applies to every single bank in the country, with the possible exception of Tokyo-Mitsubishi.”
And Mr. Hayami responded, “Blimey, is that true? Then we’ve got to do something!”
It is really an incredible situation. Here is this admirable country called Japan—incidentally Japan is the main source of the funds needed to keep the U.S. going, the daily requirement there being 1.5 billion—and they can’t get their stock market to sit straight, and they’ve got a banking system which is up the creek.
We need—America needs— Japan. We need this country to manage its affairs in an orderly fashion. And the truth is that they are unable to do so, as of now.
The problem is that there is no center, no bridge. Years ago it used to be the Ministry of Finance. I used to go in there, as a young reporter, more or less on bended knee, I can tell you. It was holy ground. It was like going to see the black stone at Mecca. It was seriously sacrosanct territory.
These days, no one gives a damn about the old MOF. It has a new name, which I have not bothered to learn, it is so unimportant. However, every time I walk past that building—it is right in the heart of Kasumigaseki, check it out—I say to myself how are the mighty fallen. The problem is that nothing replaced it.
I am one of the world’s supreme optimists on Japan. I cannot believe that the same people who grew their economy, as they say, from ground zero in 1945 to be the world’s second largest economy, all within the space of 25 years (1945-70), have just lost it. There is a deep-rooted confidence within this society, otherwise—I know this is unkind to say—the bond market would have collapsed once Mr. Hayami did his song-and-dance in the middle of September.
Last month, we lost an entire stock market—the Nasdaq Japan market. It just suddenly went poof and was gone. This month, we saw the little goings on at the BOJ. Stunning, I say, completely confounding.
But do you know what? The Japanese are going to have to get their act together. They have no choice.