The Most Important Set of Graphics You’ll Find in a BIS Speech
I’m still in catch-up mode, but I keep coming back to this presentation (PDF)—four times now. It’s a speech by BoJ member Masaaki Shirakawa in Tokyo on the 22nd of December last year to the Board of Councillors of Nippon Keidanren (Japan Business Federation), entitled “Globalization and population aging – challenges facing Japan.”
Go through the whole thing, but—most especially for U.S. readers—Chart 5.
Pay especial attention to Bank Lending and Housing Prices. Then Riddle Me This, as it were: If U.S. housing prices are stable or basically plateaued overall, then there isn’t a growing decline in credit quality from that sector (the way there was in Japan over the comparable period).
So why is bank lending in the U.S. so low and going lower?
My answer: need for debt destruction and (related) no mark on asset “prices”.
I am betting on deflation in RE prices.
The mattress or an overnight account at the fed or ECB for cash.
No ROI on the horizon except from arbitrage.
There is no need for US banks to increase lending. Credit card profits and the US gov carry trade provides sufficient profit. There is no incentive for a bank to take any more risk than necessary to recapitalize. It sort of argues for the Fed to begin to increase window rates in some fashion or across certain traunches above a threshhold to reduce the profitability of not lending.
The biggest difference between Japan and the US is that Japan had its two bubbles — technology and housing — concurrently while the US had its two bubbles sequentially.
The major difference between Japan and the US is that the US floated on a sea of new debt, 2002-2007.
Private debt take-on reached 20% of income:
during the peak bubble. That was incredible.
We’re dealing with the reality of not having that $1T/yr tailwind now. We’re faking it with a $1T/yr federal deficit, but we’ll see how long we’ll be able to play this game I guess.
I don’t pretend to understand macro but I think Japan is in a stronger position than us, given that their import-exports are in rough balance.
We’ve got a $500B/yr hole in our economy that they don’t have.
Complicating matters is the yuan-yen cross. This is resulting in ridiculously low wages in China for Japanese concerns; there is no reason for the Japanese companies to not offshore anything they can to China. At 12.2 yen to the yuan, a monthly Chinese salary of CNY1500 corresponds to JPY18,000 in Japan, just about a day’s factory wages (what used to be $120 when the yen was in the mid-100s not too long ago).
“So why is bank lending in the U.S. so low and going lower?”
`One needs to keep in mind that a Japanese bank is not exactly equivalent to a US or European bank. Most (all?) large Japanese banks are members of industrial complexes (Kieretsu) with interlocking ownership. In general, I’m pretty sure that Japanese banks do not lend to all comers, but rather make most loans to members of their own Kieretsu. And they don’t really have the option of not making the loans. Thus we are comparing loan demand by businesses in Japan with the willingness to loan in the US.
I suspect that if Japanese banks had the option of only making sound loans to credit worthy entities, their curve might look a lot more like the US.