Forex Queries

               Throughout the 1980s, Japanese banks were significantly undercapitalized. Although by the end of 1989 most of Japan’s big banks had achieved the 8 percent capital ratio required by the Bank for International Settlements, the criteria for “capitalization” were dubious. Under Japanese regulations, big banks could count 45 percent of their “hidden assets” as capital-assets that are largely comprised of stock-market holdings. (Most Japanese banks use specially designated funds, the tucking, to camouflage their exposure in the stock market.) As a result, when the Nikkei plunges, the portion of bank “capitalization” based on stock market speculation takes a serious beating.

           Should this highly leveraged banking structure take further losses in the 1990s, the whole financial system would be under tremendous pressure. If the Japanese were to move into a recession and bankruptcies of financial institutions began to proliferate, systemic weaknesses would quickly come to light.

           Concerns about the general health of the Nikkei also restricted the maneuverability of monetary authorities in Japan. During the 1980s, the booming Tokyo stock market became an investment vehicle for everyone from individual housewives (who purchase stocks from door to-door securities brokers) to pension funds, banks, and such “nonblank” as leasing companies, credit-card firms, and consumer-finance companies. With that kind of involvement in the stock market, Japanese authorities find it difficult to impose strict money-tightening measures. If the authorities were to raise interest rates too high in an attempt to choke off inflationary pressures and lower over inflated land values and asset prices, then Japanese housewives and institutional investors might be prompted to flee stocks and reinvest in money-market instruments. Should that happen, the Nikkei would plummet even farther than it did in 1990.