Accelerating the disposal of 77 trillion yen of bad debts weighing on banks is the focal point of a G7 meeting this weekend, but investors are sceptical that the government is willing to promote the shake-out they say is indispensable to recovery. "I'm wondering if Hashimoto [the prime minister] will take decisive action, because cleaning up bad loans will require tens of trillions of yen" and face public opposition, said Yousuke Miyake, bond manager at Nissay Asset Management. "Hashimoto is the kind of person who won't roll up his sleeves unless he stands on the edge of a cliff," said Akitsugu Bando, at Okasan Capital Management. Hashimoto promised on Wednesday to overhaul the country's economy, prompting the US to sell dollars to boost the yen, sending stocks throughout Asia soaring and bonds plunging. The Nikkei rose 1.6 per cent last week and the benchmark government bond yield rose six basis points to 1.270 per cent. Japan's commitment to allowing weak financial institutions to fail was called into question when it was reported that the government was considering merging two struggling lenders: Long-Term Credit Bank of Japan and Nippon Credit Bank. That report, denied by both institutions, disappointed investors who hoped the government would earmark public funds to set up a "bridge bank" that would take over assets of failing lenders, spurring sales of financial shares.
The yen's rally spurred selling of exporters that were bid up on expectations the yen will continue to slide. "When you have a trend during one month where the dollar goes from 130 to 145, everybody's going to buy exporters," said Christophe Aurand at Taiyo Life Gamma Asset Management. "We are seeing that correction rather than a real worry about exporters themselves."
Still, investors expect that buying by government-linked pension funds will keep the benchmark index from sagging far below 15,000. At that level, they say, shares in exporters such as Sony and Bridgestone will be purchased because they offer strong earnings prospects at the currency exchange rate.
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