JIN-198 -- What is the Bank of Japan After?

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J@pan Inc Magazine Presents:
T H E J @ P A N I N C N E W S L E T T E R
Commentary on the Week's Business and Technology News
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Issue No. 198
Wednesday, October 2, 2002
Tokyo

CONTENTS

++ Viewpoint: What is the Bank of Japan After?

++ Noteworthy News
- Medical Robot Succeeds in Removing Brain Tumor
- Tankan Finds Pace of Improvement, Investment Impetus Slowing
- No Stable Financial System, No Payoff Cap: Takenaka

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++ Viewpoint: What is the Bank of Japan After?

JIN readers may have overdosed on Japanese media coverage of prime
minister Junichiro Koizumi's recent Cabinet switches, especially the
replacement of former financial services minister Hakuo Yanagisawa
with Heizo Takenaka, who also is the economic and fiscal policy
minister. The media says Koizumi's decision was meant to show the
world that he is committed to tackling the problems of the Japanese
banking system by giving Takenaka, a known supporter of public money
injections into banks, more power.

While the media's attention has shifted from the Bank of Japan's
price-keeping operation to public money injections, BOJ officials have
said that the bank will start its purchase of bank shares as early as
this month. Last month, the BOJ announced its groundbreaking decision
to purchase shares directly from banks to help them offset the impact
of sliding share prices and to let them accelerate the disposal of
trillions of yens in bad loans.

Although the move was surely appreciated by Japanese banks, central
bank governor Masaru Hayami is faced with both domestic and
international criticism for the decision, which has never been tried
in other major industrialized nations. IMF chief economist Ken Rogoff,
for example, credited the BOJ for "showing willingness to think
outside the box," but said the decision wouldn't be enough to resolve
its economic problems. "It is not clear that in isolation the BOJ
action is sufficient to deal with what we see as the major problem:
non-performing loans in the banking system and the need for corporate
restructuring," Rogoff told reporters at a briefing on its latest
global economic forecasts.

Although Hayami claims that the so called price-keeping operation's
aim is simply to provide liquidity to the banks, some critics even
argue that the BOJ's decision to start the operation is just a gesture
to show its willingness to help Koizumi's cabinet and may not have
much impact after all in buoying falling share prices.

Hayami admits that the BOJ stock purchases will not be that large in
volume. "We haven't decided on the details yet, but it's not going to
be that big of an amount," Hayami told budget committee members last
week in response to a question by upper house member Tadashi Hirono.
"This measure is not designed to raise share prices or to provide more
funds. It's just there to take away the price-volatility risk
associated with the shareholdings of financial institutions."

So, how much will the BOJ buy? In an interview with the Japanese daily
Asahi Shimbun, BOJ executive director Takahiro Mitani said he expects
the amount of purchases to at least top 1 trillion yen. He said the
stock buying may be implemented in both fiscal 2002 (April-March) and
the following fiscal year. "Whether the purchases will total
3 trillion yen or 4 trillion yen will depend on the BOJ's earning
capacity in fiscal 2002 and 2003," he reportedly said.

The central bank has already said that it will not purchase high risk
shares. Then what is the BOJ after? One of the major Japanese language
weekly magazines, Aera, speculated that the BOJ may be eyeing Toyota's
shares. Aera quoted a Goldman Sachs estimate that major Japanese banks
hold a high percentage of Toyota shares. In UFJ, for example, Toyota
made up 17 percent of total shares (market-capitalization-wise) held
by the bank at the end of March, with Mitsui Sumitomo holding 12.3
percent and Tokyo Mitsubishi 9.7. Aera claims that Honda and Nintendo
are next on the list.

According to Nomura Research Institute, if the Nikkei average falls
under 9,000, the solvency ratio of major Japanese banks will drop to
9.08 percent; if the Nikkei drops below 8,500, the ratio will fall to
8.43 percent. At this level, some banks' solvency ratio will drop
below the crucial 8 percent, an international standard required by
BIS. So, the government needs to keep the Nikkei average above 9,000
-- we will see just how much the BOJ is willing to help.

-- Sumie Kawakami

Sources:
"BOJ May Start Buying Banks' Shareholdings Oct," September 25, 2002,
Dow Jones, quoting Asahi Shimbun
http://www.asahi.com/english/english.html

"Our Main Bank is BOJ," October 7, 2002 issue, Aera

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++ NOTEWORTHY NEWS
(Long URLs may break across two lines, so copy to your browser.)

** Medical Robot Succeeds in Removing Brain Tumor

In Brief: Shinshu University professors announced that they
successfully removed brain tumors from a patient by using a medical
robot developed by Hitachi. It was believed to be the first surgery of
its kind in the world.

Surgeons only needed to make a one centimeter diameter hole in the
skull in order for the robot to remove the tumors, a Hitachi official
said. In order to remove the brain tumors, the surgeons normally have
to make a cut of at least several centimeters to open the skull, he
said.

Commentary: The surgery was done by two Shinshu University professors
after the approval of the university's committee on ethics. The robot
was developed by Hitachi and other partners as part of a project
supported by a semi-governmental body.

Medical robots have been used in a few abdominal surgeries, but this
was the first brain surgery using a robot, Hitachi claims. Hitachi
hopes to put these robots on the market within two or three years.

Link:
"Robots R Us" from February 2002 issue of J@pan Inc
http://www.japaninc.com/article.php?articleID=724

** Tankan Finds Pace of Improvement, Investment Impetus Slowing

In Brief: Business sentiment among major manufacturers improved in
September for the second straight quarter, but the pace of improvement
slowed and corporations planned less capital spending compared with
the previous survey, the Bank of Japan said Tuesday in its quarterly
tankan business confidence survey.

The index for major nonmanufacturers gained three points to minus 13,
also showing an improvement for the second consecutive quarter and
likewise improving at a slower pace than in the previous survey.

Commentary: Business sentiment may be improving, but it may be too
early to conclude that the worst is over. The Daily Yomiuri quoted
economists saying that the survey indicates the economy remains
sluggish and stands poised between heading for recovery and losing
momentum.

Large manufacturers may have some reasons to be bullish -- the index
for the automobile industry rose by 22 points, for example. But the
index for small- to-medium-size manufacturers worsened for September.

Source:
Daily Yomiuri Online (October 1, 2002)
http://www.yomiuri.co.jp/index-e.htm

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** No Stable Financial System, No Payoff Cap: Takenaka

In Brief: Heizo Takenaka, Japan's new financial service minister, told
Japan's economic daily the Nikkei Shimbun that the much discussed
implementation of a deposit insurance cap must not be reintroduced
until Japan's financial system becomes more stable.

Commentary: Takenaka may put an end to the drawn out discussion of
when to introduce the cap. The Financial Services Agency (FSA) last
month said it may postpone by five months, until September 2003, its
plans to impose a 10 million yen refund limit on interest-free liquid
bank deposits, including ordinary deposits. The imposition was
originally planned for next April.

According to the FSA, the possible postponement is due to concerns
that financial institutions may not have enough time to prepare their
systems to exempt interest-free deposits, such as checking and
ordinary deposits, from the deposit insurance cap. The FSA has earlier
ruled that interest-free deposits for the settlement of business
transactions be exempted from the refund cap; those depositors will
continue to receive 100 percent refunds even if the bank goes
bankrupt.

Source:
Nikkei Shimbun (October 2, 2002)
http://www.nikkei.co.jp (English text is password protected)

Link:
"Financial Authorities Pack a Punch" from our December 2001 issue
http://www.japaninc.com/article.php?articleID=534

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