Financial Sector

May 2008

Nomura To Create Y340bn Turnaround Fund In Europe 
Nomura Holdings Inc. plans to establish in Europe a corporate rehabilitation fund totaling 2.1 billion euros, or around 340 billion yen, The Nikkei learned Friday. The fund is expected to acquire stocks, securitized products and subordinated loans from companies that have fallen into tough times due to the subprime mortgage crisis in the U.S. These assets have lost much of their value amid the global credit crunch, so the brokerage house aims to buy them on the cheap and sell them for a profit in the future. The fund will also provide capital to help cash-strapped firms get back on their feet. While many European and U.S. financial institutions are struggling to expand their operations because of the subprime fallout, Nomura believes the fund will provide it with an opportunity to boost earnings. The Nomura group will likely provide 25% of the fund's capital, with the remainder solicited from investors in Europe, the Middle East and Japan -- 25% each. After the collapse of Japan's economic bubble, many European and U.S. funds invested in failed Japanese companies. These funds often recouped profits when selling their holdings in the companies after they were rehabilitated. Nomura hopes to apply the same business model in Europe and tap its own experience working to turn around Ashikaga Bank. (The Nikkei; Saturday, May 31, 2008)

Convenience Store Operators Bumping Up Shareholder Distributions
Lawson Inc., FamilyMart Co. and others in the convenience store industry are planning additional measures to distribute profit to investors for the current fiscal year, with the top four firms' dividend payout ratio projected to average slightly more than 50%. As the domestic market matures and earnings level off, convenience store operators have been shifting on-hand reserves toward shareholder distributions. All four companies hiked dividends for the year ended Feb. 29. Their average payout ratio for fiscal 2008 is expected to be 22 percentage points higher than five years earlier. Lawson plans to increase dividends to 160 yen for the year ending February 2009, up 50 yen from fiscal 2007. This would bring its payout ratio to 76%. The firm is also considering buying back 10-20 billion yen of its own stock. Lawson's operating profit is forecast to decline for the first time in six years on higher subsidies to franchise owners. But with cash reserves totaling 62 billion yen at the end of February, the company aims to maintain annual dividends of at least 160 yen for the next three years. FamilyMart plans to boost annual dividends by 4 yen to 64 yen for a payout ratio of 37% based on a projected record profit. Should earnings turn out better than expected, it may decide to repurchase shares or raise dividends further. Seven & i Holdings Co., which includes Seven-Eleven Japan Co. under its umbrella, expects to keep dividends at 54 yen a year, but to buy up to 170 billion yen of its own stock. The maximum allocation would exceed the firm's estimated net profit of 137 billion yen. Despite forecasting a 23% decline in net profit, Circle K Sunkus Co. seeks to hold its dividend at 40 yen for a payout ratio of 51%. (The Nikkei; Saturday, May 31, 2008)

Stocks: Fall Over 2% On U.S. Stocks Plunge, Oil Worries 
Tokyo stocks fell over 2 percent Monday morning with investor sentiment dampened by the plunge of U.S. stocks Friday due to surging oil prices fueling inflationary fears and worries over sluggish consumer spending in the United States and elsewhere. The 225-issue Nikkei Stock Average lost 312.35 points, or 2.23 percent, from Friday to 13,699.85, falling below the 14,000 level it had just regained Friday. The broader Topix index of all First Section issues on the Tokyo Stock Exchange was down 28.53 points, or 2.07 percent, to 1,348.16. All 33 sectors on the TSE declined, led by rubber product, insurance, and oil and coal product issues. On Friday, New York stocks took a plunge, with the Dow Jones index falling nearly 150 points, as rising crude oil prices deepened investor concerns over the future of the U.S. economy. Brokers said the Wall Street decline was also due to the latest U.S. housing data. Although the results for U.S. existing home sales for April were better than market expectations, data also showed the rise in stock of unsold homes, reinforcing views of continued weakness in the housing sector. ''Selling gained the upper hand in Tokyo as the market here mirrored the situation in the United States,'' said Hiroichi Nishi, the equities chief at Nikko Cordial Securities Inc. Nishi said the Tokyo market sees the rise in oil prices, which stoked inflation fears in the United States as well as in the rest of the world, as a ''cause for worry,'' as such a rise leads to higher costs for firms, hurting their profits, as well as weaker consumer spending. (Kyodo; Monday, May 26, 2008)

MARKET SCRAMBLE: Will European Funds Keep Buying Japan Stocks?
European pension funds have been stepping up their purchases of Japanese shares, driving the recent stock market rally, but with diversified investment becoming the norm those funds may be quick to jump ship to other markets. The Nikkei Stock Average posted a third straight day of gains Wednesday, closing up 164.82 points, or 1.18%, at 14,118.55. Though corporate earnings for the year ending March 31 are expected to show the first collective decline in profit in seven years, the key Nikkei index is still about 20% above its March lows. Last summer, European pension funds and others were among the first to sell Japanese shares in anticipation of a global economic slowdown. But since mid-March, these investors have made their way back to Japan. The renewed interest in Japanese shares among overseas investors is clearly highlighted by their purchasing. Cumulative net buying by foreigners since April has topped 1.2 trillion yen. A survey of institutional investors this month by U.S.-based Merrill Lynch & Co. highlights an improvement in market sentiment. After last August, investors were more bearish about Japanese shares than they were bullish. But the May survey showed that a larger percentage of institutional investors are bullish toward Japanese share than bearish. At the moment, banking and real estate stocks appear to be benefiting the most. "But if the inflow of pension fund money accelerates, the buying could spread to major blue chips such as automakers and electric machinery firms," says Tomochika Kitaoka, a strategist at Mizuho Securities Co. European pension funds are known for their emphasis on holding diverse investments such as stocks, bonds, commodities and real estate. At the same time, they are quick and flexible with their investments, always ready to seize investment opportunities. According to the World Federation of Exchanges, the Tokyo stock market accounted for a mere 7% of global stock market capitalization on a dollar basis as of this spring, a sharp decline from 33% in 1990. China's Hong Kong, Shanghai, and Shenzhen bourses overtook the Tokyo market in 2007. To some extent, the renewed interest in Japan by European pension funds may be because Tokyo stocks have become undervalued from a global perspective. But not all Japanese companies stand to benefit. Firms that make an effort to boost their appeal will be able to woo investors such as pension funds. But companies that fail to chart growth paths could find themselves subject to selling. If the current market upswing loses momentum, the winners and losers in the Japanese stock market could become pronounced. (The Nikkei Veritas; Thursday, May 15, 2008)

Japan Stocks See Biggest Outflow Of Foreign Money In Over Decade In FY07
Selling of Japanese stocks by foreign investors outpaced purchases by 1.52 trillion yen in the year through March 2008, representing the largest net outflow of investor money from the Japanese market since fiscal 1996, the Ministry of Finance said Wednesday. The preliminary balance of payments report showed that foreign investors turned into net sellers of domestic stocks in fiscal 2007 amid the fallout from the U.S. subprime mortgage crisis, after their purchases surpassed sales by 8.94 trillion yen the previous year. Meanwhile, Japanese investors remained net buyers of foreign stocks for the second consecutive year in fiscal 2007, with their purchases exceeding sales by 3.49 trillion yen. The trend is attributable to strong sales of investment trusts incorporating foreign stocks to domestic investors. According to the April report on securities investment by overseas and domestic investors released the same day by the ministry, foreign investors bought 1.18 trillion yen more in domestic stocks than they sold -- representing their first net buying in six months. (The Nikkei; Wednesday, May 14, 2008)

Shonai, Hokuto Banks To Merge Under Holding Company By '10
Shonai Bank and Hokuto Bank have decided to merge by the end of 2010 to gain more sales bases and stronger earning power amid the stalled economy in the Tohoku region of northern Japan, it was learned Tuesday. Shonai Bank, based in Yamagata Prefecture, and Hokuto Bank, headquartered in Akita Prefecture, plan to merge under a joint holding company to be set up in two years. The Tohoku area has long been thought to have an overdeveloped banking infrastructure relative to its economic size. A merger of the two institutions would represent the first banking union beyond prefectural boundaries in the region. The merged bank would rank around 50th among 109 regional and secondary banks nationwide, with the banks' deposits totaling roughly 1.8 trillion yen at the end of March 2007 and their net profits standing at about 3 billion yen in the year through March 2007. A formal announcement of the planned merger will be made as early as Wednesday. Ahead of the union, Shonai Bank is likely to buy about 8 billion yen worth of new shares issued by Hokuto Bank, which is struggling due to deteriorating finances. The business environment surrounding regional banks has been worsening due to weak local economies as well as the launch in October 2007 of the massive Japan Post Bank. The situation is particularly dire in the Tohoku region, where the population has continued to shrink and banks are having difficulty finding borrowers. Regional banks have been hit hard by the financial market turmoil caused by the U.S. subprime mortgage crisis, which came at a time when they were turning to securities investment for survival. The negative turn of events has prompted many to realign with other banks in pursuit of economies of scale. (The Nikkei; Tuesday, May 13, 2008)

U.S., Europe Lead In Setting Financial Rules, Leaving Japan Behind
With the world still shaken by the fallout from the subprime mortgage crisis, Japan, the U.S. and Europe are scrambling to come up with better ways to ensure the stability of international financial markets. However, there is a danger that efforts to reform the current system might go ahead without Japan. In April, at the Group of Seven meeting of finance ministers and central bank chiefs, the Financial Stability Forum (FSF) -- a group comprising financial authorities from Japan, the U.S. and Europe, among others -- proposed measures to deal with turmoil in the financial markets and prevent it from happening again. The recommendations, which won wide support at the meeting, cover a wide range of issues, including steps to strengthen information disclosure about securitized products by this summer and set up a new body charged with overseeing global financial giants. The group did not go as far as to propose injections of public funds. Despite the fact that these recommendations were issued jointly by top officials of the member countries, including Financial Services Agency Commissioner Takafumi Sato, Japanese authorities feel uneasy about the move because the new requirements strongly reflect the views of the U.S. and Europe. On Feb. 19, 16 major financial companies in the U.S. and Europe were summoned to the Federal Reserve Bank of New York by the Senior Supervisors Group, the "inner circle" of international financial watchdogs, which is made up of five countries -- the U.S., the U.K., France, Germany and Switzerland. About two weeks later, the SSG released a report that listed underlying problems in the sector, such as lax risk management by financial institutions and inadequate disclosure of information. The fact that this report served as the basis for drawing up the FSF recommendations has alarmed the Financial Services Agency, given that once international rulemaking proceeds under the leadership of the U.S. and Europe, it will be extremely difficult to reverse course later on. Japan is not included in the inner circle because the damage it sustained from the confusion in the financial markets was not as serious as that in the U.S. and Europe. But if the "prescriptions" written by these countries turn into international rules, Japanese banks and financial authorities will have no choice but to comply with them. Still haunted by the bitter memory of the 1980s, when America and Britain took the initiative in devising new capital adequacy rules that wound up undermining the international competitiveness of Japanese banks, FSA executives decided on April 18 to get more actively involved in efforts to monitor and supervise major financial companies in the U.S. and Europe. It is probably a good time for Japan to regain its presence in the global financial industry now that the U.S. and Europe are in trouble, but domestic affairs appear to stand in the way. European financial authorities have been sounding out their Japanese counterparts on the idea of FSA Commissioner Sato becoming chairman of the International Organization of Securities Commissions. With him in that position, Japan would be able to obtain critical information swiftly. "The decision (for Japan) to take up the post or not will make all the difference in the world," said a high-ranking FSA official. But Japan has so far responded negatively, saying "it would be difficult" because the number of overseas trips the FSA commissioner could take would be limited due to the Diet's schedule and other matters. Unless the FSA, jointly with the financial sector, steps up efforts to change the situation, it is increasingly likely that Japan will find itself cut out of the loop when new global financial rules are drawn up.(The Nikkei; Friday, May 2, 2008)