Large domestic banks, not exporters, would feel impact of Europe's monetary woes

Market braces for EU debt crisis blow


Staff Writer

As Europe continues to walk a tightrope over Greece’s bloated debt and a continental sovereign crisis, money men in Japan are advising the public to buckle up before any shock waves reach domestic soil and damage the economy.

“The amount of exports from Japan to Europe is not that high,” Bank of Japan Gov. Masaaki Shirakawa said earlier this month, explaining that the impact for traders will be limited even if Greece defaults.

According to the latest statistics from the Finance Ministry, exports from Japan to the European Union in August totaled approximately ¥619 billion, compared with ¥1.07 trillion to China and ¥803 billion to the United States.

But the true blow from of the monetary crisis in Europe would be felt in Japan’s financial market, most notably the foreign bonds held by large domestic banks that may quickly lose their value.

In its Financial System Report released earlier this week, the BOJ said the nation’s three major bank groups — Tokyo-Mitsubishi UFJ Group, Mizuho Financial Group and Sumitomo Mitsui Banking Group — hold about $45 billion worth of bonds from Portugal, Ireland, Italy, Greece and Spain, known as the PIIGS and the five countries considered most vulnerable.

Japanese life insurance companies also manage some of their assets with foreign bonds, it said.

The BOJ report also warned that ripples from the unease overseas can quickly reach Japan and have an impact on the stock market.

Pundits say that damage from the crisis in Europe could expand further depending on how fast the fire would spread if Greece defaults. Fears have already reached Italy, for example, with rating agencies lowering their outlook on the third-largest economy in the eurozone. A recession across Europe would likely slow down emerging economies across the globe, which would in turn impact Japan and other developed countries.

Kazuko Yamazaki, senior analyst at Daiwa Institute of Research Ltd., noted that European banks hold a majority of the bonds from the PIIGS. But that doesn’t mean the impact of a default by such countries would be limited to the continent, the expert added.

“As we have already been seeing, the euro is now much more weaker” and has already affected Japan’s economy, she said during a meeting with reporters Thursday.

Finance Minister Jun Azumi earlier this month also acknowledged that the yen’s strength is “directly related” to the crisis in Europe. The yen’s surge, which has caused considerable losses for Japanese exporters, “will come to a halt and result in stable growth of Japan’s economy once Europe becomes stable,” he predicted.

Meanwhile, a report released Wednesday by Daiwa Institute warns that Japan should observe with maximum caution developments in Europe, touching on how the so-called Lehman shock crushed Japan’s economy only a few years ago.

It was initially believed that the Lehman Bros. crisis would have a limited impact on Japan, because the epicenter was in the United States. But Japan in 2009 ended up recording its worst economic growth since the war at a minus 6.3 percent. The nosedive eclipsed even that suffered by the U.S., which recorded minus 3.5 percent growth that year, the report says.

The triple threat of a financial crisis, a global recession and a quick hike by the yen in the currency market damaged the economy. “Past experience with economic recessions exemplify how the Japanese economy is extremely feeble against external shocks,” the report explains.

So far the Japanese government appears to be willing to lend a hand to Europe but is waiting to see first if the EU can save itself. Following a Group of 20 finance ministers meeting at Paris last Saturday, Finance Minister Jun Azumi told reporters Japan is “ready to cooperate” if the situation calls for Tokyo’s involvement, including increasing purchase of ESFS bonds to finance Europe’s debt.

The next few weeks will see crucial meetings on Europe’s sovereign-debt issues, with a summit of EU member nations scheduled for Sunday and the G-20 summit to be held in Paris on Nov. 3.

“It is important for the meetings to come up with solid solutions instead of making proposals just to buy them more time,” Daiwa Institute’s Yamazaki said.