If proven, it might be one of Asia’s biggest economic thefts. Just about US$ 4.5 billion was involved in the 1MDB corruption scandal in Malaysia. According to common authorities, Lan appropriated large sums of money by organizing unlawful money to shell companies from first 2018 through October 2022, when SCBContinue Reading
The debut RM500 million ($ 106 million ) Basel III- compliant Tier 2 subordinated Islamic medium term notes ( Tier 2 Sukuk Wakalah ) has been successfully priced by United Overseas Bank ( Malaysia ) ( UOB Malaysia ).
The first people Level 2 Sukuk transaction to be issued by a foreign-owned banks on January 23 was the Malay ringgit business.
More than 40 investors participated in UOB Malaysia’s successful debut in the sukuk business with the tightest spread for a Baht Level 2 transaction, according to William Chua, managing producer, loan capital markets, investment banking, group retail banking, at CIMB.
One of the mutual direct managers for the transaction was UOB, who also served as the transaction’s shared lead manager.
According to a media release, this deal was timed to catch the window when the “market is beneficial with sufficient liquidity” is early in the year.  ,
The Level 2 Sukuk Wakalah is rated AA1, whereas the Tier 1 UOB Malaysia is rated AAA with a robust prospect from RAM.  ,
More than 72 members from 38 different organizations from across the investing area attended the owners ‘ conference on January 10 to support this agreement.  ,
According to the transfer, the transaction was book-built with the deal size being beforehand announced to increase demand, which accelerated the identification of the actual interest and optimal pricing levels.
With a final order book of RM1.7 billion, which registered 3.39 times cover, UOB Malaysia was able to close the book at 4.01 %, the tightest end of the initial price guidance ( IPG).  ,
Insurance at 25 %, asset management at 58 %, private banks at 2 %, banks at 11 %, and other corporations at 4 % were among the distribution partners for the issuance.
Plaza Media Limited. All trademarks are reserved.
After a relatively poor 2022, while some Asian stock markets performed well in 2023, such as India and Japan, others including China, Hong Kong, Singapore and Australia languished as geopolitical tensions, rising interest rates and poor performing domestic economies knocked investor confidence.
There was also a downturn in mergers and acquisitions (M&A) in Asia Pacific (Apac), with 155 deals completed in 2023 with volumes down 23% compared to 200 deals in 2022, according to WTW.
Broadly, investors were spooked by a combination of higher for longer interest rates from the US Federal Reserve, a lacklustre economic performance in China post-pandemic with the property sector dragging confidence, and wider geopolitical tensions.
Will Cai, partner and head of Asia capital markets practice and co-chair of China corporate practice at law firm Cooley, told FinanceAsia: “2023 was a very challenging year for all major capital markets in Asia, with Japan as the only exception. There were several contributing factors: the slower-than-expected post-Covid-19 economic recovery in China, the current regional and global geopolitical tensions, as well as the high interest rates.”
He added: “High interest rates have a significant negative impact on capital market deals. The logic is very simple: if treasury bonds can provide 5% annual return, risk free, investors will expect a much higher return on high-risk equity deals – which unfortunately is not what many companies can deliver in a tough market. We probably need to see a moderate reduction on interest rates before equity investors return to the market.”
Amid the gloom, other avenues in the equity space beyond IPOs, performed relatively well, with banks needing to respond to changing client needs.
Kenneth Chow, co-head of Asia equity capital markets, Citi, said: “These are challenging market conditions and as a bank you need to be nimble and flexible. However, there are always opportunities in Asia, such as convertible bonds and block trades.”
Japan and India rising
There were arguably two Asian ‘star’ performers in 2023: Japan and India.
Despite a weak yen, Japan saw a breakout from years of deflation, corporate governance reform and a solid domestic economy, while India saw strong GDP growth of around 7% and a continuation of reforms.
Udhay Furtado, co-head of Asia equity capital markets, Citi, told FA: “Japan and India have recently emerged as IPO hotspots, while Indonesia has also seen positive momentum. There is an increasing interest in the energy transition story, including the makers of electric vehicles and batteries.”
Japan, with IPO proceeds up 82% compared with 2022, was the standout Asian market last year.
Peter Guenthardt, head of Asia Pacific investment banking at Bank of America, said: “There are many opportunities in Japan with the fee pool increasing 20% in 2023, while overall fees were down by the same figure across Apac. The fee pool was twice the size of China this year. Japan could remain the largest fee pool in Apac in 2024.”
Guenthardt added: “In Japan, there has been an increase of IPOs, block trades and convertible bonds, with that trend set to continue. There has also been a rise in activist investors – for which it is the second most active market in the world.”
He continued: “Japanese companies are also looking to expand abroad for M&A opportunities, with the US being the most popular market and where sectors such as technology are particularly attractive.”
In India, the market saw a big improvement in the second half of the year. While many companies conducted IPOs outside of India, the local stock markets saw the number of issuers increase by over 50% to 239, according to data from the London Stock Exchange Group (LSEG). With the second half of the year doing particularly well, this bodes well for 2024, with some experts tipping the world’s fifth largest economy to lead the way in IPOs globally this year.
Citi’s Furtado said in a media release: “We hope to see a turn in the IPO markets, as we have been seeing in India in late 2023 and we also expect to see [a] continued pick up in convertible bond activity (given refinancing efficiencies), alongside a robust follow-on/ block calendar.”
2024 Hong Kong bounceback?
One of the big questions for Asia in 2024 is can Hong Kong, one of the pre-eminent financing hubs, return to something resembling its former glory after years of protest and pandemic turmoil. Any turnaround in Hong Kong should also indicate improved confidence in Chinese equities given that the majority of companies listed on the Hong Kong Stock Exchange (HKEX) are Chinese.
PwC is predicting HK$100 billion ($12.8 billion) of deals in 2024 with around 80 deals in the pipeline, and KPMG is expecting Hong Kong to return to the top five of the IPO global rankings.
While the fundamentals are still strong in the Special Administrative Region (SAR), a recent reliance on Chinese companies, which have been buffeted by domestic headwinds and rising US interest rates, has damaged the market. In addition, the potential implications of the SAR’s new national security law have rattled global investor appetite.
However, in a sign of optimism, already in 2024, two Chinese bubble tea firms have applied for listings on the HKEX suggesting that market appetite could be rebounding in China – especially for companies supplying consumer staples.
Although stock markets in mainland China are providing stiff competition to Hong Kong, foreign investors and Chinese firms are still attracted to Hong Kong’s greater flexibility. In addition, geopolitical tensions mean that Chinese and Hong Kong firms are becoming more cautious about listing in the US.
Stephen Chan, Hong Kong-based partner at Dechert, told FA: “2023 was relatively challenging for the Hong Kong IPO market, with the number of deals and proceeds raised having declined year on year. We have seen a number of potential listing applicants choose to delay their listing timetable in view of the underperforming stock price of recent new listings.”
A sluggish stock market performance, low valuations for newly listed companies and the macroeconomic environment contributed to potential listing applicants opting for the wait-and-see approach, with the SAR facing strong headwinds.
Chan added: “The US interest rates hikes saw investors opt for products with high interest rates and fixed income.” This dampened the demand for IPOs, and in turn affected the valuation of potential IPOs and hence weakened the urge for potential listing applicants, explained Chan.
He said: “Increased borrowing costs and lower consumer spending in general – due to the high interest rate cycle – have also affected the operational and financial performance of the potential listing applicants. Improvements to both investor sentiment towards the equity market and companies’ operating and financial performance would be essential before companies could reconsider fundraising through IPO.”
Certain sectors have been performing better than others, including technology, media and telecom (TMT) and biotech and healthcare companies. These are likely to continue to lead the IPO market in terms of the deal count and deal size in Hong Kong, especially with January 1, 2024’s HKEX regulatory reform for the new Chapter 18C (known as the GEM reforms) for specialist technology companies, and an expanding market for biotech and healthcare under Chapter 18A which was launched in 2018.
Chan added: “The HKEX has taken the opportunity to introduce a number of modifications to improve the fundraising process including the new settlement platform, FINI, which will shorten the time gap between IPO pricing and trading and hence reduce the market risk and modernise and digitalise the entire IPO process.”
“The GEM listing reform aiming to enhance attractiveness for SMEs to seek listings. . . will also boost the number of deal counts for the Hong Kong IPO market and provide SMEs with development potential a viable pathway for pursuing listing in the main board in the future.”
A continuation of the return of visitors to around 65% of pre-pandemic levels to the SAR in 2023 should also help build momentum in the local economy. In addition, the SAR has been reaching out to the Middle East for investment and is increasing its trade cooperation with Asean countries.
Asia outlook
While China appears to still be struggling to turn its economy around, Asia will continue its overall growth trajectory as the middle class grows, technology evolves and connectivity improves. The relatively young populations of Asean countries such as Indonesia, Vietnam and Thailand will also continue to provide a boon for investors.
Cooley’s Cai said: “In terms of deal counts, there were still relatively more biotech deals in 2023. Part of the reason is that biotech companies must raise capital regardless of market conditions (and therefore, the price). We also see companies from the ‘new consumer’ sectors looking to IPO. We believe these two sectors likely can do well in 2024.”
He continued: “We hope 2024 will be better than 2023, but we may need to wait a bit longer for a booming market.”
There is certainly a long way to go before seeing the region’s previous robust IPO levels.
“2024 is going to be a volatile year with the upcoming elections in the likes of the US and India, but there is a strong pipeline of deals if risk appetite returns, which will partly depend on the pace of monetary loosening,” said Citi’s Furtado.
Alongside a host of elections, there are ongoing conflicts in the Middle East and Ukraine, meaning there is much uncertainty over global supply chains, oil prices and the inflation trajectory.
While investors will be hoping that inflation can be kept under control so the US Fed can start cutting rates sooner rather than later, solid economic fundamentals and growth in many large countries in the region should provide confidence in Asia’s equity markets moving forward.
This article first appeared in Volume One 2024 of the FinanceAsia print magazine which is available online here.
¬ Haymarket Media Limited. All rights reserved.
This is part three of a series, ‘Lessons from the first cyberwar.’ Read part one and part two.
Over the past two decades, warfare has expanded beyond mere physical confrontations to encompass the digital realm.
As a result, cyber capabilities have been growing, leading nation-states, notably Russia and Israel, to use cyberattacks increasingly in support of their political objectives as the following case studies illustrate.
In the spring of 2007, Estonia experienced what came to be known as the first cyberattack on a nation-state. This campaign was linked to a wider political dispute with Russia over the relocation of a Soviet-era monument in Tallinn. The cyberattacks, which began on 27 April, targeted Estonia’s internet infrastructure, including banks, media outlets and government services.
The cyberattacks were mostly Denial of Service (DoS) and Distributed Denial of Service (DDoS) attacks. They overwhelmed servers with massive waves of network traffic sent from botnets and automated requests, disrupting online services at an unprecedented level.
Estonia’s experience was the first instance of a nation facing this modern form of hybrid warfare. The effectiveness of the Russian cyberattacks on Estonia was amplified due to the country’s extensive reliance on the internet. In 2000, Estonia’s parliament even declared internet access a human right and the country has invested heavily in digitization.
These attacks flagged the vulnerabilities in a highly digitized society, demonstrating the risks of embracing extensive digitalization. The attacks demonstrated that cyber warfare is a serious tool for societal disruption in military contexts as it can cause damage but also not be followed with any sort of military retaliation. Following the attack, Estonia established a voluntary Cyber Defense Unit – something that Ukraine is currently considering as well.
A notable aspect of these attacks was their ambiguity as a wide variety of actors including cyber gangs loyal to Moscow conducted the attacks. This practice can enable any state sponsor orchestrating the attacks to remain hidden and deny involvement, as attribution is difficult without proving who is responsible – which is incredibly difficult in cyberspace.
The 2007 attack on Estonia also helped to speed up the creation of the NATO CCDCOE in 2008. It became NATO’s cyber defense center, which today includes over 30 NATO members, with Ukraine having joined the center in 2023.
In August 2008, during its invasion of Georgia, Russia combined cyberattacks with military actions on the ground. This was the first time such a coordinated effort had been seen in warfare. This Russian-Georgian war stemmed from frozen Russian-controlled conflicts in Abkhazia and South Ossetia, which Georgian President Mikhail Saakashvili sought to end.
This early form of cyber warfare was characterized by its alignment with Russia’s military and political objectives, contrasting with the earlier 2007 Estonia cyber incident. Russia’s strategy focused on controlling Georgian military and government communication channels.
Before the physical invasion, Georgian government sites experienced a pre-emptive cyberattack that began on July 20, 2008; the website of the president was overwhelmed by traffic, including the phrase “Win+love+in+Russia”, and was inoperable for 24 hours.
The attacks intensified on August 8 with a series of DDOS attacks coinciding with Russia’s invasion of South Ossetia. These cyberattacks had effectively disabled most of Georgia’s governmental websites by August 10. Faced with a communication blackout, Georgia sought cyber refuge by relocating critical official internet assets to the United States, Estonia and Poland without prior US government approval.
The primary objective of the Russian cyberattacks on Georgia was to isolate and silence the country. This strategy also included disrupting Georgian banks, which faced a deluge of fraudulent transactions, prompting international banks to halt their operations in Georgia to limit damage.
Consequently, Georgia’s banking system was incapacitated for 10 days. This disruption extended to the shutdown of mobile phone services, further severing Georgia’s communication with the outside world.
Russian hackers also took aim at Georgian commercial websites, causing economic damage akin to the disruption experienced by the banking system. During the attacks, 35% of Georgia’s internet networks experienced reduced functionality. The damage peaked during the Russian invasion of South Ossetia between August 8 and 10.
In response to the cyber onslaught, Georgia initially tried filtering Russian IP addresses. However, Russian hackers quickly adapted, employing non-Russian servers and spoofed IP addresses to continue their attacks. This series of events demonstrated Russia’s ability to effectively integrate cyber warfare with conventional military operations, achieving its strategic goals and setting a precedent for future conflicts.
Russia’s cyber offensive also demonstrated the importance of protecting not only military networks but also civilian computer networks. The attacks catalyzed expert discussions about the concept of a “digital Pearl Harbor,” a scenario in which a nation’s infrastructure is overwhelmed and shut down through internet-based attacks.
Many also predicted that Russia’s 2022 invasion of Ukraine would unleash a “digital Pearl Harbor.”
In January 2009, Kyrgyzstan was hosting an American military base, the Manas Air Base, which played a strategic role in US military operations in Afghanistan. Russia, seeking to expand its sphere of influence in Central Asia, wanted to reduce the American presence in the region and was negotiating with the Kyrgyz government over the air base.
While negotiations were underway, Russian hackers carried out a DDoS attack against Kyrgyzstan. The attack took out two of Kyrgyzstan’s four main internet service providers.
The cyberattack was part of a broader strategy by Russia to pressure the Kyrgyz government as it coincided with negotiations and discussions regarding the American military base. Following the cyberattack and amidst ongoing negotiations, Kyrgyzstan announced its decision to shut down the American military base.
Russia’s 2009 cyberattack on Kyrgyzstan continued to demonstrate to the Russian leadership the growing role of cyber capabilities as tools of statecraft and how they could be used to threaten or strong-arm countries.
Since the 1979 Islamic Revolution in Iran, there has been a four-decade conflict between Iran and Israel. The revolution ushered in a new Islamic regime in Iran, which adopted the Palestinian cause and severed diplomatic ties with Israel.
The rivalry has extended beyond direct confrontation to a proxy war, with Iran supporting terrorist groups including Hezbollah in Lebanon and Hamas in Gaza, both of which border Israel.
However, the proxy war would eventually extend into a direct conflict between Iran and Israel in cyberspace. Cyber warfare had become a new front in this conflict by 2010, although the extent remains largely undisclosed as neither nation openly admits to launching cyberattacks against the other.
Israel, often in collaboration with the United States, is suspected of conducting several sophisticated cyber operations targeting Iran’s nuclear program. The most notable attack in the cyber war was the discovery of the Stuxnet virus in Iran’s Bushehr nuclear power plant computers in 2010.
Believed to be a joint creation of Israel and the United States through Operation Olympic Games, Stuxnet was engineered to cause physical damage by speeding up and destroying the IR-1 centrifuges, leading to the destruction of about 1,000 out of 9,000 centrifuges at Natanz.
Stuxnet effectively disrupted production at Natanz by damaging the facility’s equipment. Iran attributed this attack to Israel and the United States.
In response to the Stuxnet incident, Iran significantly bolstered its cyber capabilities, enhancing both defensive and offensive measures. Between 2012 and 2015, Iran’s cyber security budget increased by around 1200% and, after Stuxnet, Iran began focusing the majority of its cyber espionage against Israel.
At a 2019 tech conference, Israeli Prime Minister Benjamin Netanyahu claimed that Iran was constantly conducting cyberattacks that targeted Israel’s critical infrastructure.
In April 2020, Israel experienced a cyberattack on its water and sewer facilities, leading to temporary disruptions in local water systems. Initially attributed to a technical malfunction by the Israeli government, it was later identified as an attack by Iran.
In response, Israel launched a retaliatory cyberattack the following month against the Shahid Rajee Port, targeting the operating systems of private shipping companies. The consequences were widespread, causing prolonged road and waterway congestion.
The Iranian attack on Israel was believed to have been targeting the water supply by increasing chlorine in the water that is delivered to residential areas.
Yigal Unna, the head of Israel’s National Cyber Directorate, believed that if the attack had not been detected in time, chlorine or other chemicals could have been mixed into the water supply, poisoning many civilians.
In 2021, Israel was accused by Iran of conducting a cyberattack that took down many of the country’s gasoline stations by sabotaging a payment system, leaving many people unable to buy fuel for their vehicles.
While nations routinely engage in probing each other’s public utilities to identify vulnerabilities and establish a persistent presence, the escalation to actual attacks is a rarity. But if nation-states want to execute large-scale cyberattacks against civilian infrastructure, the consequences could be deadly for the civilian populations.
A comparison of the cases, starting with the cyberattacks on Estonia in 2007, with the complex cyber operations against Ukraine up to 2022 (see the next installment for those) provides insight into how Russia has conducted its cyber campaigns in the past, how its capabilities have evolved and how cyber strategies support political goals.
David Kirichenko is a Ukrainian-American security engineer and freelance journalist. Since Russia’s full-scale invasion of Ukraine in 2022 he has taken a civilian activist role.
These articles are excerpted, with kind permission, from a report he presented at the UK Parliament on February 20 on behalf of the Henry Jackson Society.
This is the first of a three-part series
Doomsaying, as Jonah complained to God, is a game that a doomsayer cannot win. This applies in spades to predicting a financial crisis. If proven wrong, the doomsayer is discredited. If proven right, he may be blamed for helping to precipitate the crisis by undermining public confidence.
Far be it from me, therefore, to predict a US financial crisis in the coming months. However, indicators that a US financial crisis might occur during this session of Congress, described by this first part of a three-part essay, warrant prompt attention, especially by the Republican Caucus of the House of Representatives, to two questions:
First, if a financial crisis does occur this year, will the still little-tested financial-sector-funded bail-ins authorized by Title II of the Dodd-Frank Act, enacted in 2010, prove adequate to obviate the Biden administration’s asking Congress again, as in October 2008, to appropriate funds to bail out the financial system? The second part of this three-part essay discusses why financial-sector-funded bail-ins might fail to obviate a bailout.
Second, if the Biden administration does ask Congress this year for funds to bail out the financial sector, then how might the House Republican Caucus best respond? For House Republicans to support another bailout of Wall Street, or even to fail to prevent one, would outrage tens of millions of populists who dominate Republican primary elections.
However, for House Republicans to nix a bailout needed to mitigate an incipient economic contraction could enable Democrats to shift onto the Republican Party the preponderance of public blame for that contraction.
The third part of this three-part series suggests that the House Republicans might best respond to a 2024 bailout request by conditioning their support for it on prior enactment of legislation eliminating obstacles to profitable private conversion of banks, which are limited-liability corporations, into proportional-liability financial firms that would be less prone to default and would not need government insurance of their depositors.
To convert all banks into such financial firms – without any change in their employees, payrolls, physical plant, equipment, deposits, depositors or financial assets including outstanding loans – would render financial crises less frequent and less acute, and would lastingly obviate government bailouts of the financial system when such crises do occur.
The obstacles impeding profitable private conversion of banks into proportional liability financial firms appear to be wholly governmental. The greatest of them is government insurance of bank deposits, which reduces the profitability of such conversions.
By conditioning House approval of one last financial-sector bailout on prior enactment of legislation mandating imminent elimination of the governmental obstacles to the profitable private conversion of banks into financial firms that are less default-prone, need no deposit insurance and will generate fewer and less severe financial crises that will not require government bail-outs when they do occur, the House Republican Caucus could avoid blame for refusing to mitigate an incipient economic contraction in a way that does not alienate the affections of working-class populists who loathe having to bail out rich and systematically corrupt financiers.
In doing so, House Republicans would also seize a rare opportunity presented by a financial crisis to remove governmental obstacles to a simple, robust, and profitable private reform of the financial system that would make it lastingly more efficient and more stable. Opportunities to do so much good at so little cost are so rare that if a 2024 financial crisis presents one, all Americans might end up remembering that crisis as a blessing in disguise.
The Quarterly Banking Profile (QBP) for the third quarter of 2023, released by the Federal Deposit Insurance Corporation (FDIC) on November 29, reported that US banks’ “unrealized losses on [non-equity] securities totaled US$683.9 billion in the third quarter, up $125.5 billion (22.5%) from the prior quarter, primarily due to an increase in mortgage rates that reduced the value of mortgage-backed securities” – the same sort of financial instruments’ overvaluation that proved unsustainable in 2007-08, precipitating the last US financial crisis.
That QBP stated that only $76.5 billion of those $683.9 billion in unrealized losses were held by community banks. It also showed that US banks’ unrealized losses on non-equity securities, which were never greater than $75 billion for any quarter from the start of 2008 through the end of 2021, grew to nearly $300 billion in the first quarter of 2022, have exceeded $450 billion in every subsequent quarter and exceeded $650 billion in the third quarters of both 2022 and 2023.
On February 29, the FDIC announced that its QBP for the fourth quarter of 2023, will be released on March 7. For reasons not stated, it will be released a week later after the quarter’s end than the three prior QBPs, which were released on November 29, August 29 and May 29, 2023.
The unrealized losses quantified in the FDIC’s QBPs are merely those of US banks, deposits in which the FDIC may be obligated to insure against bank default. Data on the unrealized losses of the whole US financial system, including non-bank financial firms, seems not to be collected or published by any government agency.
A former economics professor who has decades of bank risk-assessment experience working at the Bank for International Settlements, the US Federal Reserve, the IMF, the FDIC and the Basel Committee on Bank Supervision, recently suggested that the above-cited FDIC data may greatly understate the unrealized losses of the US “banking system in aggregate,” which he estimated to have amounted to about $1.5 trillion at the end of September 2023.
The extent to which the high-interest rates on US government debt that are now distressing the US financial system can still be blamed on money supply contraction seems questionable. Data for the broad US money supply, M2, released by the Federal Reserve on February 27, indicate that M2 increased from $20.565 trillion on October 30, 2023, to $20.949 trillion on January 8, 2024, before falling to $20.751 trillion on January 29 and rising to $20.877 trillion on February 5, 2024, the most recent M2 data publicly available.
In the 99 days from October 30 to February 5, M2 grew by 1.52%, at a rate equivalent to more than 7.9% per year. Diverse indices suggesting that US aggregate price inflation has not decelerated in recent months seem unsurprising in light of the recent M2 data.
Moreover, the Federal Reserve fully controls only overnight interest rates. Even if it stops fighting inflation between now and this autumn’s elections, medium- and long-term default-risk-free interest rates may remain high if high future price inflation is widely expected. The central government’s burgeoning fiscal deficit may render such expectations increasingly difficult to dispel.
The US banking system is afflicted not only by default risk-free interest rates higher than those paid by banks’ long-term debt assets but also by the growing risk of collateral depreciation or default on debt held by banks.
The greatest source of collateral depreciation or default risk to US banks appears to be commercial real estate (CRE) mortgages, especially office building mortgages. On February 12, the Mortgage Bankers’ Association reported that $929 billion in US outstanding commercial real estate mortgages, including $441 billion held by banks, will come due this year – a 28% increase from the $728 billion that matured in 2023.
A large proportion of these CRE mortgages maturing in 2024 are mortgages on office buildings that may have a market value substantially less than their book value due to unprecedentedly high office vacancy rates resulting from increased electronic working-from-home by white-collar workers during and since the Covid lockdowns of 2020-2021.
During 2023, the US office vacancy rate rose to an all-time high and hit 18% in January 2024, according to one industry report, and 19.7% according to another. Diverse reports suggest that a large proportion of outstanding US office mortgages have been bundled into transferable commercial mortgage-backed securities (CMBS) comparable to the residential mortgage-backed securities, Wall Street’s systematic and arguably fraudulent overvaluation of which helped sustain the decades-long US housing bubble that burst in and after 2006.
The same commercial-mortgage industry analysis firm that estimates that the US office vacancy rate was 19.7% in January 2024 also estimates that the delinquency rate (by loan balance) of office mortgages securitized into CMBSs tripled during the past year, from 1.9% in January 2023 to 6.3% in January 2024.
Although US office listing prices reportedly fell only 1.8%, on average during 2023, Capital Economics reportedly estimated in December 2023 that average US office prices paid fell 11% in 2023 and will fall another 10% in 2024. Morgan Stanley reportedly has projected that US office prices may fall as much as 30% from pre-Covid levels.
Some partly empty office buildings that have been able to service decade-old maturing mortgages with interest rates of around 3% a year may prove unable to renew their mortgages at the higher rates now required. Many outstanding office mortgages reportedly are “zero-principal” or “interest-only” debt that leave the creditor owning 100% of the equity in an office building when the mortgage matures.
When such an office mortgage matures and cannot be renewed, the mortgage creditors realize a loss – which only creative accounting can delay booking – equivalent to 100% of the decline in the market value of the office building.
On February 20, the Financial Times reported that US banks’ delinquent commercial real estate loans had grown to about $24.3 billion, equivalent to about 70% of their reserves, from $11.2 billion, equivalent to about 45% of their reserves, a year earlier. The same article reported that the value of delinquent commercial real estate loans held by the six largest US banks has nearly tripled, to $9.3 billion, during the past year.
Of those six banks, only one, JPMorgan Chase, now has reserves greater than the value of its delinquent commercial real estate loans; two of the six banks, Citigroup and Goldman Sachs, have reserves worth less than half the value of their delinquent commercial real estate loans, the FT report said.
Growing default-risk threats to the US banking system are also posed by rising delinquencies on relatively short-term consumer debt, notably credit card debt and automobile loans.
The “charge off rate” on consumer loans from US commercial banks –the proportion of nominal par value lost to default, net of collateral recovery – rose every quarter throughout 2022 and 2023 to 2.65% in the fourth quarter of 2023 – a level higher than has been observed since 2008-2011.
The portion of US consumers’ credit card debt and auto loans that is delinquent by at least 90 days rose throughout 2022 and 2023, to over 6% and nearly 3%, levels not observed since 2007-2011.
US credit card delinquency increased by an even larger proportion in terms of value, for the value of US credit card debt rose steadily from a Covid-lockdown low of 770,000 billion in the first quarter of 2021 to an all-time high of $1.13 trillion in the fourth quarter of 2023. Similarly, US auto loan delinquencies are a growing proportion of a growing volume of US auto loans, driven in part by rising auto prices.
That these credit card and auto loan delinquencies may continue to grow is suggested by an underappreciated datum in recent editions of the Employment Situation Report released monthly by the US Bureau of Labor Statistics (BLS): during 2023, all the growth in US employment was in part-time jobs, while full-time employment shrank.
This trend continued and accelerated in January 2024, during which, per the BLS, “The average workweek for all employees on private nonfarm payrolls decreased by 0.2 hours to 34.1 hours in January and is down by 0.5 hour over the year.”
This is consistent with recent massive layoffs of full-time employees and with the widely-noted transition of the US to a “gig economy” in which employment increasingly is temporary, part-time and with fewer benefits than employers are obligated to give to full-time employees.
Delinquencies and defaults on residential mortgages remained very low but that is scant comfort for the financial institutions that own those mortgages, which typically originated years or decades ago, when interest rates were far lower than they are now and which pay rates lower than banks must pay depositors today.
For those institutions, which now commonly might lose less by repossessing the mortgaged homes than by selling those mortgages, non-default is no blessing.
US consumers are increasingly defaulting on short-term high-interest credit cards and auto loans that are profitable to banks while dutifully servicing long-term low-interest mortgages that are unprofitable to banks. In addition, a growing number of US corporations are at a growing perceived risk of defaulting on debt securities that they have issued, some of which may be held by US banks.
Furthermore, on January 24, 2024, the Federal Reserve announced that on March 11 it would end its Bank Term Funding Program (BTFP), which it began a year earlier, the day after Silicon Valley Bank failed.
The BTFP was set up to lessen temporarily the insolvency risk of US banks by enabling them to borrow funds from the Fed for up to one year against the collateral of debt securities “valued at par” – valuations that can be far higher than market value due to recent interest rate rises. US banks have borrowed more than $160 billion of outstanding loans subsidized by the BTFP.
They appear obligated to repay, by June 12, 2024, the $102 billion that they borrowed under the BTFP between March 11 and June 12, 2023.
“Ichabod” is a former US diplomat.
Digital technologies have many potential benefits for people in African countries. They can support the delivery of healthcare services, promote access to education and lifelong learning, and enhance financial inclusion.
But there are obstacles to realizing these benefits. The backbone infrastructure needed to connect communities is missing in places. Technology and finance are lacking, too.
In 2023, only 83% of the population of sub-Saharan Africa was covered by at least a 3G mobile network. In all other regions, the coverage was more than 95%. In the same year, less than half of Africa’s population had an active mobile broadband subscription, lagging behind Arab states (75%) and the Asia-Pacific region (88%). Therefore, Africans made up a substantial share of the estimated 2.6 billion people globally who remained offline in 2023.
A key partner in Africa in unclogging this bottleneck is China. Several African countries depend on China as their main technology provider and sponsor of large digital infrastructural projects.
This relationship is the subject of a study I published recently. The study showed that at least 38 countries worked closely with Chinese companies to advance their domestic fiber-optic network and data center infrastructure or their technological know-how.
China’s involvement was critical as African countries made great strides in digital development. Despite the persisting digital divide between Africa and other regions, 3G network coverage increased from 22% to 83% between 2010 and 2023. Active mobile broadband subscriptions increased from less than 2% in 2010 to 48% in 2023.
For governments, however, there is a risk that foreign-driven digital development will keep existing dependence structures in place.
The global market for information and communication technology (ICT) infrastructure is controlled by a handful of producers. For instance, the main suppliers of fiber-optic cables, a network component that enables high-speed internet, are China-based Huawei and ZTE and the Swedish company Ericsson.
Many African countries, with limited internal revenues, can’t afford these network components. Infrastructure investments depend on foreign finance, including concessional loans, commercial credits, or public-private partnerships. These may also influence a state’s choice of infrastructure provider.
The African continent’s terrain adds to the technological and financial difficulties. Vast lands and challenging topographies make the roll-out of infrastructure very expensive. Private investors avoid sparsely populated areas because it doesn’t pay them to deliver a service there.
Landlocked states depend on the infrastructure and goodwill of coastal countries to connect to international fiber-optic landing stations.
It is sometimes assumed that African leaders choose Chinese providers because they offer the cheapest technology. Anecdotal evidence suggests otherwise. Chinese contractors are attractive partners because they can offer full-package solutions that include finance.
Under the so-called “EPC+F” (Engineer, Procure, Construct + Fund/Finance) scheme, Chinese companies like Huawei and ZTE oversee the engineering, procurement and construction while Chinese banks provide state-backed finance. Angola, Uganda and Zambia are just some of the countries which seem to have benefited from this type of deal.
All-round solutions like this appeal to African countries.
As part of its “go-global” strategy, the Chinese government encourages Chinese companies to invest and operate overseas. The government offers financial backing and expects companies to raise the global competitiveness of Chinese products and the national economy.
In the long term, Beijing seeks to establish and promote Chinese digital standards and norms. Research partnerships and training opportunities expose a growing number of students to Chinese technology.
The Chinese government’s expectation is that mobile applications and startups in Africa will increasingly reflect Beijing’s technological and ideological principles. That includes China’s interpretation of human rights, data privacy and freedom of speech.
This aligns with the vision of China’s “Digital Silk Road”, which complements its Belt and Road Initiative, creating new trade routes.
In the digital realm, the goal is technological primacy and greater autonomy from Western suppliers. The government is striving for a more Sino-centric global digital order. Infrastructure investments and training partnerships in African countries offer a starting point.
From a technological perspective, over-reliance on a single infrastructure supplier makes the client state more vulnerable. When a customer depends heavily on a particular supplier, it’s difficult and costly to switch to a different provider. African countries could become locked into the Chinese digital ecosystem.
Researchers like Arthur Gwagwa from the Ethics Institute at Utrecht University (Netherlands) believe that China’s export of critical infrastructure components will enable military and industrial espionage. These claims assert that Chinese-made equipment is designed in a way that could facilitate cyber attacks.
Human Rights Watch, an international NGO that conducts research and advocacy on human rights, has raised concerns that Chinese infrastructure increases the risk of technology-enabled authoritarianism. In particular, Huawei has been accused of colluding with governments to spy on political opponents in Uganda and Zambia. Huawei has denied the allegations.
Chinese involvement provides a rapid path to digital progress for African nations. It also exposes African states to the risk of long-term dependence. The remedy is to diversify infrastructure supply, training opportunities and partnerships.
There is also a need to call for interoperability in international forums such as the International Telecommunications Union, a UN agency responsible for issues related to information and communication technologies.
Interoperability allows a product or system to interact with other products and systems. It means clients can buy technological components from different providers and switch to other technological solutions. It favors market competition and higher-quality solutions by preventing users from being locked into one vendor.
Finally, in the long term African countries should produce their own infrastructure and become less dependent.
Stephanie Arnold is PhD Candidate, Università di Bologna
This article is republished from The Conversation under a Creative Commons license. Read the original article.
As Xi Jinping’s regulators tighten their grip on quantitative trading, they are inadvertently giving global investors another reason to make ill-timed comparisons to 2007.
In August of that year, as US subprime debt troubles were starting to bubble up, a bunch of model-driven hedge funds suffered their own “quant quake,” a phrase now being applied to China.
Drawing such comparisons clearly isn’t Beijing’s intention. But they come at a moment when many global investors wonder if China is having its own “Lehman moment” amid cratering property and stock values.
Odds are, China isn’t, as scores of Asia Times articles have argued in recent months. The market forces in 2007 and 2008 that toppled Lehman Brothers were of a different nature than those plaguing China Evergrande Group or Shanghai trading pits.
Yet the quant crackdown fits with a disturbing pattern that helps explain why foreign investors are so skittish on Chinese markets. It’s a reminder of how mixed messaging can cause confusion at a moment when Xi is struggling to revive foreign interest in the stock market — while doing things that scare investors off.
Forty months on, Wall Street is still trying to figure out what’s going on with Jack Ma and the much-anticipated Ant Group initial public offering. Despite countless tries, Team Xi never managed to explain that episode — or myriad crackdowns on tech platforms since.
By late 2023, stung by debates about whether China is “uninvestable,” it seemed Team Xi was turning the page. In the last 10 days of last year, though, regulators unveiled plans for a crackdown on the gaming industry.
Though Beijing tried to walk back the news, it was too late as investors feared broader curbs on tech platforms. Tencent alone saw tens of billions of dollars fleeing its shares.
And then just when investors started to dip their toes again in Chinese tech shares, Beijing announced it had amended the State Secrets Law to expand coverage to high-tech industries. The pivot is effective May 1.
Even if this step, which Beijing says supports the research and application of new technologies, is a wise one, confusion and mixed signals abound. Meanwhile, headlines concerning Hong Kong’s latest move to implement a new local National Security Law hardly help.
The law, foreign investors fear, would go further to remake what was once the globe’s freest economy in Beijing’s highly controlled image. Its vaguely worded provisions allowing prosecution for offenses from “treason” to “insurrection” to “sabotage” to theft of “state secrets” to “external interference” have investment banks and news organizations in a whirl.
Beijing’s quant ban, meanwhile, is triggering the PTSD of all too many investors still trying to make sense of the events of late 2020. The good news is that next week affords Xi and Premier Li Qiang an ideal opportunity to change the narrative and regain reformist momentum.
The annual National People’s Congress opens on March 5. Along with setting China’s gross domestic product (GDP) target, the NPC is a chance to articulate plans for economic reforms and reboot Xiconomics for the duration of Xi’s third term as party leader.
“We continue to expect an ambitious growth target of around 5% of real GDP growth and more supportive fiscal policy this year,” analysts at Goldman Sachs wrote in a note. “Key topics to monitor during this year’s ‘two sessions’ include discussions about the government’s ‘new model’ for the property sector, local government financing and fiscal reforms, as well as other demand-side stimulus such as support to consumption.”
Both Xi and Li proved in recent months that they know how to calm nerves among the foreign investment set, particularly when it comes to the globe’s most important bilateral trade relationship.
In November, Xi told a ballroom full of top CEOs that China is again open for business and ready to work with the US. “China is willing to be a partner and friend of the United States,” Xi told an audience that included Apple CEO Tim Cook and Tesla CEO Elon Musk.
“If we regard each other as the biggest rival, the most significant geopolitical challenge and an ever-pressing threat, it will inevitably lead to wrong policies, wrong actions and wrong results,” Xi said.
He added that “no matter how the global landscape evolves, the historical trend of peaceful coexistence between China and the United States will not change.”
In Davos in January, Premier Li said that “choosing investment in China is not a risk, but an opportunity.” Li said “investing in China will bring huge returns and a better future” and described the CEOs on hand as “participants, witnesses and beneficiaries of China’s reform and opening up.”
China, Li said, “stands ready to seriously look into and solve the difficulties and problems encountered by foreign enterprises” operating in the country. “We will take active steps to address reasonable concerns of the global business community,” Li said.
To Michael Hirson, China economist at 22V Research, the speech was indicative of “Li’s desire to set a confident tone for the global audience.”
Xi’s government, in other words, knows how to talk the talk global investors want to hear. In a January 16 speech to top party officials, for example, Sinologists were intrigued by how much time Xi spent talking about the financial system.
These days, “the financial system is all the rage in policy circles,” Trivium consultancy analysts wrote in a note. That same week, Trivium notes, top Communist Party’s top theorist Qu Qingshan argued that “only by accelerating the construction of our financial power and continuously improving our country’s competitiveness and voice in international finance can we seize the initiative in the game of great powers.”
Yet Xi’s team has significant work to do to clarify where Beijing plans to take the reform process next. At present, many foreign investors are at a crossroads on whether to double down on China or reduce exposure.
“Low valuations are typically associated with higher future returns, although of course there are no guarantees,” says Henry Ince, an analyst at Hargreaves Lansdown. “Our conversations with fund managers have painted a mixed picture: some remain cautious on the outlook ahead but others believe some companies offer compelling value at current market prices.”
The confusion of recent months – years, actually – also has many Chinese innovators unsure on how to proceed. As Fred Hu, CEO of Primavera Capital Group, tells Bloomberg, “Chinese entrepreneurs are lying low, or lying flat. This sense of insecurity, in my observation, in the Chinese entrepreneur community, is really — I have not seen it like this since 1978.”
That was the year then-leader Deng Xiaoping launched epochal reforms to propel China from the Cultural Revolution era. Hu notes that “the single biggest priority in my mind is legal reform, is really to establish true rule of law that is essential for the healthy function of a modern market economy, which China is.” That, Hu says, means ensuring that entrepreneurs feel protected from “arbitrary political interference and worse, even prosecution.”
The bottom line, Hu says, is that if China “really commits to rule of law and market reforms, I do think the confidence will slowly but surely come back, then the animal spirit will be rekindled.”
The NPC is a timely opportunity for Xi to allay fears that he plans to continue concentrating power and enabling state-owned industries to grow their dominance. All this means the most powerful Chinese leader since Mao Zedong is on the clock with markets as never before.
Li, too. Seen by many as a champion of high-tech entrepreneurship, the hope is that Li will have more clout and autonomy with Xi to raise China’s innovative game than his predecessor, Li Keqiang. That might enable Xi’s “common prosperity” plan to gain greater traction to raise living standards at all income levels.
Beijing could do so next week by signaling an acceleration in steps to repair the property sector, strengthen capital markets, champion the private sector, recalibrate growth engines from exports to domestic demand, internationalize the yuan and build bigger social safety nets to encourage households to save less and spend more.
It’s vital, too, that Xi and Li reassure global asset managers that the roughly US$7 trillion stock rout between 2021 and last month is over. And not just because Beijing deployed the “national team” of state funds to buy shares but due to renewed confidence.
Odds are, “recent market turmoil may prompt more decisive and quick moves by the national team to help restore confidence and prevent a self-fulfilling cycle,” HSBC economists write in a note.
It’s more important, though, that Beijing win back global investors’ trust with a renewed commitment to raise China’s financial game.
One area of keen interest is China’s $3 trillion trust industry, which has emerged as yet another threat to financial stability. Beset by scandals, China’s trust companies remain a major thorn in the side of regulators.
Last July, Beijing faced sizable protests after private wealth giant Zhongzhi Enterprise Group and its affiliate Zhongrong International Trust suspended payments on a variety of high-yield investment products.
In November, China tweaked rules to increase risk prevention. Yet Xi and Li have more work to do to prod trust firms to prioritize offering wealth management services over acting as broader channels to markets, which can imperil portfolios.
At the moment, too much of what Beijing is doing to modernize the economy is getting lost in translation with global investors voting with their feet. Some of the concern is China’s economic trajectory in 2024.
“The fragility of the economic recovery” was signaled in February by the authorities’ “stepped-up support for the economy and housing market” via an “unusually large” 25 basis-point reduction in the five-year loan prime rate, a benchmark interest rate that commercial banks use for long-term lending, says Lan Wang, an analyst at Fitch Ratings.
Wang adds that “we expect the rate cut to squeeze net profit at banks, while delivering a minor boost to economic activity.” A bigger one may be needed amid “tepid external demand, slower manufacturing” and disruptions from the Red Sea conflict are likely to slow cargo and container throughput growth for Chinese port operators, Wang notes.
In February, mainland home sales dropped sharply despite Beijing’s efforts to boost the market. New home sales, as reported by the 100 biggest real estate companies, plunged 60% last month year on year, after dropping 34.2% in January. In recent days, officials cut key mortgage reference rates.
“We doubt that those measures alone will be sufficient to restore confidence in the property market,” says Serena Zhou, an economist at Mizuho Securities. “Unconventional measures will likely be essential.”
Meanwhile, Sino-US relations are a big wild card. This week, US President Joe Biden’s Commerce Department opened a probe into perceived national security risks posed by China-made hardware and software in smart cars.
With the November 5 election approaching, China can expect a slew of fresh efforts in Washington to toss sand in its economic gears as candidates on both sides of the political divide vow to get tough on China.
But taking a longer-term perspective, change is indeed transforming China’s economy. Economist Louise Loo at Oxford Economics notes that Xi’s team is making progress in elevating the “new three” industries – electric vehicles, lithium-ion batteries and solar cells – to create new jobs and generate disruptive forces.
At the upcoming NPC, Xi and Li have a unique window of opportunity to spotlight these dynamics and others — and to divert attention from the policy confusion of recent years. China’s leaders would be wise to use it. Otherwise, Beijing’s lost-in-translation problem might sow even more doubt and foreign investor flight.
Follow William Pesek on X, formerly Twitter, at @WilliamPesek
Betong checkpoint to get upgrade to boost exports
The government has vowed to develop and promote the three southernmost provinces into tourist attractions for global travellers and to ramp up investments across the deep South.
Prime Minister Srettha Thavisin made the pledge following a three-day trip to Narathiwat, Pattani and Yala, which ended on Thursday.
As the southernmost provinces have the potential to become the nation’s top tourist destinations, a well-thought-out development plan is needed to turn them into tourism hotspots, he said.
Among the issues the PM noted was the condition of the border checkpoint in Yala’s Betong district, which he said needs to be upgraded to accommodate more movement.
He noted local residents in Yala have begun moving away from cultivating rubber trees to durian, which fetches high prices in markets across the region. However, exports from the district are limited by the number of vehicles which can pass through the small border checkpoint.
“I have already ordered the Foreign Affairs Ministry and the Tourism and Sports Ministry to upgrade all border checkpoints across the country to make it easy for foreign visitors to enter, which will help boost tourism revenues,” the prime minister said.
Mr Srettha also said the Transport Ministry is planning to expand Highway 410, which connects Betong district with Pattani, to other provinces.
“I visited Betong and saw its potential [for development]. Tourism is expected to boom in the future, and there aren’t enough hotels to accommodate visitors.
“But the problem is, will there be enough sources of funding? It is my duty to ensure that banks are offering funding options for those looking to invest in the deep South to boost local tourism and economy,” Mr Srettha said.
When asked to comment on the possibility of upgrading Narathiwat airport so it could accommodate pilgrims from the South and Malaysia, the PM said the government is looking into it.
“The government is trying to develop the area’s tourist attractions and increase flight frequencies to attract more visitors,” the prime minister said.
Mr Srettha then downplayed concerns about the viability of Betong International Airport in Yala, which remains unserved by commercial airliners since Nok Air pulled out of the sector.
He said while it will ultimately “depend on supply and demand”, the government will try to come up with measures to boost the local economy and attract tourists.
“It is impossible to force any airlines [to fly to Betong airport],” he said.
Nok Air, which was the only airline serving Betong airport, decided to discontinue its flights to and from the airport after its “Flying Betong Direct” project ended in October 2022.
Meanwhile, Betong District Tourism Association is urging the government to expand Betong airport’s runway under the prime minister’s tourism promotion plan so it can accommodate larger aircraft and bring in more tourists to the region.
The association submitted a proposal for the expansion during Mr Srettha’s visit to the district on Tuesday, said Narin Ruangwongsa, its deputy president yesterday.
Mr Narin said the association is urging the government to lengthen the runway from its current length of 1.8 kilometres to 2.5km to allow widebody jets to land at the airport.
The expansion will allow the airport to accommodate aircraft with 150-180 seats. At present, only 80-seater planes or smaller can land, he said.
SINGAPORE: More than S$5.4 billion (US$4 billion) of savings have been set aside in over 61,000 bank accounts with a “money lock” feature as of February, said Minister of State for Trade and Industry Alvin Tan on Thursday (Feb 29).
Introduced by the local banks in November last year as a safeguard against scams, “money lock” allows customers to set aside funds that cannot be transferred digitally.
Customers can lock up their money using the bank’s app or internet banking, but these funds can only be unlocked in person at bank branches or via ATMs.
Speaking in parliament, Mr Tan said other major retail banks in Singapore will roll out this new feature by the middle of this year.
Since the launch, local banks have been making tweaks to their “money lock” offerings.
Last week, DBS said it would extend its version called the digiVault to all accounts, allowing customers to “lock up” funds in their existing accounts. This means that customers no longer have to open a separate account to use the bank’s money-locking feature.
OCBC already allows customers to lock funds without opening a new bank account since last November.
Currently out of the three local banks, only UOB requires customers to set up new “money lock” accounts, but the bank told CNA that it is exploring extending features of its LockAway account to existing bank accounts.
TOKYO — With the Nikkei 225 surging to 34-year highs, the conventional wisdom is that the Bank of Japan (BOJ) now has greater confidence — and political cover — to raise interest rates and end decades of quantitative easing (QE).
But what if the opposite is true? Might the Nikkei boom luring tidal waves of capital toward Tokyo actually dissuade the BOJ from normalizing monetary policy? A walk down memory lane suggests BOJ Governor Kazuo Ueda might be too worried about spoiling the Nikkei’s party to tighten.
Consider the BOJ’s track record of hitting the monetary brakes during stock rallies of the past. Case in point: the central bank’s December 1989 rate hike, which signaled the end of the Nikkei’s most infamous bull run.
No one really knew at that moment, least of all then-BOJ governor Yasushi Mieno, who pulled the fateful trigger on Christmas day. That half-percentage point increase in short-term rates to 4.25% seemed like a rational response to upward inflation pressures at the time.
Even then-finance minister Ryutaro Hashimoto said the increase would help maintain price stability. But years later, when Hashimoto served as prime minister from 1996 to 1998, it was clear that the BOJ’s tightening move marked the top tick of Japan’s “bubble economy” era. And the start of a deflationary nightmare from which Japan is only now starting to recover.
Today, economists know that on December 25, 1989, Mieno’s team pulled out the financial equivalent of a precarious Jenga piece, destabilizing everything above and below. Fair or not, Mieno’s BOJ was roundly criticized for collapsing the stock market and setting Japan’s lost decades in motion.
Granted, the titanically large rallies in real estate and stocks might have been better tamed with macroprudential policy tweaks by the Ministry of Finance and regulators than blunt-force BOJ rate hikes. At the time, though, Tokyo’s politics were going through a unique period of volatility.
In 1989 alone, Japan had three different prime ministers: Noboru Takeshita, Sosuke Uno and Toshiki Kaifu. Distracted elected officials left asset bubble management duties to the BOJ.
Once Mieno retired in 1994, it fell to successor Yasuo Matsushita to deal with the economic fallout. That included mountains of bad loans on bank balance sheets. By the time Matsushita passed the torch to Governor Masaru Hayami in 1998, Japan had already fallen into deflation.
In 1999, Hayami became the first major central bank leader to slash rates to zero. In 2000 and 2001, the Hayami BOJ pioneered quantitative easing, or QE. In 2003, it was Toshihiko Fukui’s turn to manage Japan’s QE experiment.
Fukui decided Japan was ready to rip out the monetary intravenous tubes and ended QE. Then in 2006 and 2007, the Fukui-led BOJ managed to hike official rates twice.
The backlash was fast and furious. Politicians and corporate chieftains groused early and often about Fukui yanking away the proverbial punchbowl.
Yet when the economy slid into recession soon afterward and the Nikkei stumbled, the Tokyo establishment blamed the BOJ for messing up – again.
When Fukui’s replacement arrived in 2008, Masaaki Shirakawa quickly restored QE and returned rates to zero. In 2013, Governor Haruhiko Kuroda arrived to turbocharge QE in hyper-aggressive ways. Kuroda’s BOJ cornered the government bond market and nearly nationalized the stock market, becoming the biggest investor by far.
That sent the yen down 30%, boosting exports and generating record corporate profits. In 2013 alone, the Nikkei surged 57%. In the years since then, ultra-loose BOJ policies, coupled with government efforts to strengthen corporate governance, sent the Nikkei to its current highs. The benchmark is up 45% over the last 12 months.
Yet the market’s current bull run, which began last year, appeared to make the BOJ timid about stepping away from QE.
In December 2022, Kuroda tiptoed up to the line by letting 10-year yields rise as high as 0.5%. Global markets quaked, sending the yen and Japanese yields skyrocketing. Kuroda’s team spent the week after December 20, 2022, racing to make large and unscheduled bond purchases to cap yields. After that, Kuroda didn’t attempt to “taper” again.
Enter Ueda, who grabbed the BOJ’s controls last March. Ueda also tested the waters here and there, letting 10-year rates rise to 1% and beyond. Once again, markets took it badly and the BOJ scrambled to reassure bond traders that no big policy changes were afoot.
Since then, Ueda has avoided any hints that QE might be dismantled, that negative yield policies might be abandoned or that an official rate hike might be in the cards. This, of course, is not how global markets saw the Ueda era going.
As 2024 began, the overwhelming conventional wisdom was that Ueda’s team would be hiking rates by next month. But the fact Japan entered 2024 in recession has made the timing of BOJ tightening a moving target.
Analyst Ipek Ozkardeskaya at FXSteet.com speaks for many when she says “the Bank of Japan is in no rush to hike rates this April.”
Etsuro Honda, former special advisor to Japan’s Cabinet, tells Reuters that “while uncertainty is high, I oppose ending negative rates. It’s too early.” Honda adds that “negative rates are used for inter-bank operations, which apply risk premiums when it comes to corporations where no one’s asking for borrowing with negative rates.”
Earlier this month, BOJ Deputy Governor Shinichi Uchida tamped down expectations for near-term tightening moves. Speaking in the western city of Nara on February 8, Uchida said: “If sustainable and stable achievement of our 2% inflation target comes in sight, the large-scale monetary easing will have fulfilled its role and we’ll explore whether it should be revised.”
Complicating the many “if’s” confronting the BOJ is uncertainty about whether inflation is slowing or accelerating. Japan’s consumer prices slowed less than expected in January, with “core” inflation rising at a 2% rate year on year. On the price trend front, “recent data have been extremely disappointing,” says Stefan Angrick, an economist at Moody’s Analytics.
As Hiroshi Yoshikawa, professor emeritus at the University of Tokyo, tells Bloomberg of Ueda’s plight: “I wish him the best of luck. Financial markets and the government are making the BOJ’s exit into a special event and fixating on if the bank is going to act and when. As the governor in charge of the policy, he may have little choice but to be cautious.”
Many are still betting on the BOJ acting. “This means that inflation remains above the Bank of Japan target, validating market expectations for a rate hike in the first half of the year,” says Francesco Pesole, economist at ING Bank.
This view, however, ignores how the ghosts of 1989 are colliding with the economic uncertainties of 2024 — and, to some extent, the ghosts of the mid-2000s, too. Not only did Japan’s crash in the early 1990s and the resulting bad loan crisis cause deflation — it also pushed the financial system to the brink.
In November 1997, Yamaichi Securities collapsed. The failure of a then-100-year-old Japan Inc icon shook markets everywhere, coming amidst the Asian financial crisis slamming Indonesia, South Korea and Thailand. Japan, punters worried, wasn’t too big to fail, but was too big to save. Thankfully, officials in Tokyo kept the episode from becoming a systemic shock globally.
But that near miss might also be factoring into Ueda’s calculus as he mulls withdrawing liquidity. The year since the demise of Silicon Valley Bank in California has put a spotlight on Japan’s vast network of profit-starved regional banks.
Across this aging nation of 126 million people are 100-plus regional institutions serving less economically vibrant regions. These banks have long been reluctant to consolidate or fully embrace the digitalization trends disrupting the globe.
As the population ages and the corporate exodus to Tokyo accelerates, there’s less demand for loans from rural lenders. And the trauma from 20 years of deflation left mid-size lenders more conservative than ever.
Rather than use BOJ liquidity to increase lending, many regional banks spent the last decade buying government and corporate bonds, leaving balance sheets vulnerable to higher long-term rates.
This pivot will sound familiar to students of last year’s SVB collapse in California. Ueda’s BOJ worries that rate hikes could push some fragile rural lenders toward insolvency as longer-term yields surge, SVB-style.
For these reasons and others, Ueda hasn’t been the maverick some thought the Massachusetts Institute of Technology-trained economist might be. A big one could be the BOJ not wanting to be blamed again for wrecking a bull market in stocks.
As Kei Okamura, portfolio manager of Japanese equities at Neuberger Berman, notes, “we are still at the very beginnings for foreign fund inflows.”
Jean Boivin, a managing director at BlackRock, says “Japan’s equity rally has room to run” and that the market “can best their all-time highs.”
JPMorgan strategist Rie Nishihara adds that the Nikkei boom “will spur corporates to increase growth investment and improve capital efficiency and make institutional and individual investors take more interest.”
If the BOJ is perceived to be the spoiler once again, the risk is that the political empire in Tokyo might strike back.
The extent to which the ruling Liberal Democratic Party’s leadership is unpopular with voters can be seen in the 17% approval rating with which Prime Minister Fumio Kishida entered 2024. The LDP and its actions would surely push back hard on any hints Ueda might shock global markets.
There’s an argument that the feel-good factor from the Nikkei rally could improve Kishida’s support numbers and impart a “wealth effect” that makes businesses and households feel better about the economy.
But the Nikkei’s surge could also be the tail wagging the dog at BOJ headquarters. Remember how wrong the conventional wisdom was about the BOJ last year? It could be even more wrong about what’s afoot in 2024.
Follow William Pesek on X, formerly Twitter, at @WilliamPesek