Capital rules weigh on Japan stocks
By Kosuke Takahashi
TOKYO - Japan's economy has moved out of recession, but the country's stock
market continues to suffer from the impending imposition of tougher
international capital rules to be compiled by the end of this year in Basel,
Switzerland.
The nation's financial sector, led by Japan's three megabanks - Mitsubishi UFJ
Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group -
is dragging down the recovery of Japanese share prices, on concerns that the
lenders may seek additional capital increases by issuing common stock in
preparation for the tighter capital-adequacy rules that will apply to globally
active banks. A weak point of Japanese banks is that
without ample ordinary shares they lack capital.
A recent spate of capital-raising in the already weak market in Tokyo, combined
with a rising Japanese yen and a heightened sense of uncertainty about the
fiscal policies of new Prime Minister Yukio Hatoyama's administration, are also
hampering stocks.
On Wednesday, Mitsubishi UFJ Financial Group said it plans to bolster its
capital base by issuing one trillion yen (US$11.2 billion) in new shares - a
record public sale of additional common shares. This gave rise to speculation
that other banks would follow suit.
Japanese stocks have been the worst performer among major economies this year.
The key Nikkei stock index has risen only 7.2%. More notably, the broader Topix
index of all the Tokyo Stock Exchange First Section issues has fallen 2.4% -
the only major broad-based stock index in the world that has lost ground this
year. The Topix Index on Thursday fell for a seventh day, its longest losing
streak since July, and slid to the lowest level since April 28, although it
recouped some of its losses on Friday. The benchmark Nikkei average fell to its
lowest level since July 17.
By contrast, the Dow Jones Industrial Average has gained 17%, while China's
Shanghai Composite Index has climbed more than 80%, followed by Brazil's nearly
80% rally and India's more than 70% advance.
"It is true Japanese financial stocks are falling due to dilution concerns
involving new shares," said Tetsuya Inoue, chief researcher for financial
markets at the Nomura Research Institute in Tokyo and a former Bank of Japan
official. "The new rules will also force Japanese banks to reconsider their
traditional practice of holding shares in other companies over the long term."
Even so, he did not belive that new capital rules being finalized in Basel are
specifically targeting Japanese banks. The change "has been discussed for many
years and was finally agreed in principle in the Group of 20 (G-20) Pittsburgh
summit in September."
The earlier BIS (Basel Capital Accord) agreement on strengthening the
risk-capital adequacy requirement in the late 1980s and early 1990s "might have
targeted the 'overpresence' of then burgeoning Japanese financial institutions,
which foreigners often criticized," Inoue said. "But not so this time."
The Basel Committee
With the global financial crisis receding, international policymakers are
working on adjusting rules on capital standards so as to avoid a repeat of the
mistakes that can come from highly leveraged capitalism, exemplified by the
failure in September last year of US investment bank Lehman Brothers. The
planned changes will push banks to have a sufficient cushion of high-quality
capital.
In September, leaders from 20 leading countries agreed at a summit in
Pittsburgh, Pennsylvania, to impose tougher capital requirements on banks
operating internationally. Before this summit, central bank governors and
banking regulators of 27 major countries and regions participating in the Basel
Committee on Banking Supervision also arrived at the same agreement, designed
to standardize minimum capital requirements for banking institutions.
The agreement requires banks to raise the ratio of so-called core capital such
as common stock and retained earnings. Although the specifics of the
requirements will be worked out by the year-end, the new bank capital rules are
widely expected to require banks to hold core Tier 1 capital - mainly common
stock and retained reserves - equal to at least 4% of total risky assets.
Reuters on Thursday reported the Basel-based committee is likely to require at
least 6%.
The tricky thing is that Japanese banks, which are seen as less affected by the
subprime loan crisis than their US and European counterparts, generally have
lower ratios of common stock in their capital than major US and European
lenders.
The core Tier 1 capital at Mitsubishi UFJ Financial was 6.8% as of the end of
September, at Mizuho Financial 5.4%, and at Sumitomo Mitsui Financial 5.9%,
according to their latest press releases.
On the other hand, US-based Citigroup held 9.1% of core Tier 1 capital, and
Bank of America 6.9%, thanks to huge injections of public funds into those
banks, according to the Mainichi Shimbun newspaper on September 3.
Late last year, Mitsubishi UFJ issued around 790 billion yen in common shares
and preferred stocks. Mizuho raised up to 526.3 billion yen in July by issuing
new shares, while Sumitomo Mitsui issued 862.9 billion yen in new shares in the
previous month. All seem to have aimed at bolstering their core Tier 1 capital.
With the contours of Mitsubishi UFJ's capital-raising plan for the second
consecutive year now announced, attention turns to its two main competitors, in
particular Mizuho, which lags in terms of core Tier 1 capital. Market players
in Tokyo expect Mizuho and Sumitomo Mitsui to issue new shares early next year,
possibly between January and February. This could further buffet the already
sluggish stock market in Tokyo.
Political vacuum
Nomura's Inoue said it is unfortunate that the "political vacuum" created by
the transition process following the Democratic Party of Japan (DPJ)'s sweeping
victory over the long-ruling Liberal Democratic Party (LDP) in a House of
Representatives election on August 30 coincided with the intensive discussions
regarding banking standards going in the US and the Europe.
Japan's then finance minister, Kaoru Yosano of the LDP, did not attend a
meeting of G-20 finance ministers and central bank governors in London in early
September, which was aimed at determining the priorities of the G-20 summit in
Pittsburgh on September 24 to 25. His absence, attributed to health reasons,
raised concern about Japan's low-key presence at the ministerial meeting.
The authorities in the US "have in effect been introducing a tougher de-facto
standard for capital adequacy since bank stress tests in May, although it is
unclear whether that was intended or not. For the Japanese side, frustration
has arisen," Inoue said.
Kosuke Takahashi is a Tokyo-based journalist. Besides Asia Times Online,
he also writes for Jane's Defence Weekly as Tokyo correspondent. He can be
contacted at letters@kosuke.net.
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