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Old 10-02-2007, 12:47 AM
DcifrThs DcifrThs is offline
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Default $1.6trillion...where will it go???

Interesting stuff going on in japan.

the japanese postal bank, since the 19th century, has been both a post office and deposit bank backed entirely by the govt (all deposits are guaranteed).

it just now got the go ahead to act as a private bank with the goal of going to market in a few years.

this means that much of the ~$1.6 trillion of deposits it currently holds will be redeployed in the form of more strategic/tactical investments and new loans.

this makes the japanese postal bank the largest bank in the world.

the japanese postal bank holds about 70% of its deposits in JGBs, which, i'd think, are now poised to fall precipitously as the postal bank holds 21% of the entire market for JGBs. the central bank is not likely to cut rates anytime soon (and is less liekly to do so since part of the reason for the privatizing move of the bank is to help revitalize the japanese economy) also.

depending on when and how the bank redeploys its assets, a few short positions in JGBs are probably a good idea.

further, japanese shares are probably going to benefit as a result of the sales as will some structured products and int'lly held shares and products.

any guesses where the bank will move these funds?

two trade ideas i can see from this are the short on the JGBs and a possibly short yen position (though fundamentals at this time still point to an appreciating yen imo).

thoughts?
Barron
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Old 10-02-2007, 01:37 AM
kimchi kimchi is offline
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Default Re: $1.6trillion...where will it go???

Yeah, it will be interesting to see what happens to that investment money...gold? Iowa Farmland? Nintendo stock? who knows...

I'm not sure whether the governement will guarantee deposits after the bank has listed. I suspect they will guarantee up to a maximum just like how the banks in the UK are guaranteed. Since I suspect the bank holds mostly retail savings, most accounts probably won't have $millions on deposit anyway.

Japan's interest rates have been tiny/zero for some considerable time. I'm sure these savers could have found far better places for their savings - like under the bed. I'm surprised more Japanese savers don't have foreign currency savings accounts. I'm also sure, once private, the bank will find better use for the money.

I imagine the bank will have to diversify away from currect assets (probably Japanese gilts) and into some higher yielding/riskier assets such as corporate bonds, mortgages and other consumer debt products. I'm sure they'll invest heavily in domestic/foreign equities too and could provide a shot in the arm for The Nikkei's long long slump.

Should be interesting to see how it all pans out.
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Old 10-02-2007, 02:05 AM
Badger Badger is offline
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Default Re: $1.6trillion...where will it go???

What happens when they read this and decide to short JGBs and or yen? The world blows up, or just Japan? I really wish currency made more sense to me.
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Old 10-02-2007, 09:01 AM
jumbojacks jumbojacks is offline
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Default Re: $1.6trillion...where will it go???

I read about their JGB position in a Reuters article. Barron, do you feel that even if they unwind a large part of their position at a very very slow rate, would there be enough of a market impact to make a short profitable?

Edit: http://www.reuters.com/article/bonds...T8013120070928
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Old 10-02-2007, 09:44 AM
DcifrThs DcifrThs is offline
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Default Re: $1.6trillion...where will it go???

[ QUOTE ]
I read about their JGB position in a Reuters article. Barron, do you feel that even if they unwind a large part of their position at a very very slow rate, would there be enough of a market impact to make a short profitable?

Edit: http://www.reuters.com/article/bonds...T8013120070928

[/ QUOTE ]

yes. and i don't think it will take anywhere near 10 years to do this.

the timing of it is obviously key, but overall there is definitely room for a short here.

what do you think is a very very slow rate? 115million yen/day ($1million dollars)? that would be about 28billion yen or 250million dollars per year. that is slow and it would still have an impact, though extremely small.

of course they will try to minimze the impact. and the JGB market (apparantly at $5.3 trillion dollars mkt cap) can withstand a few billion here or there without an impact...

1 billion/day would be 250billion/year. that isn't "slow" but isn't very fast either and that would make a sizeable impact...

but at even 1 billion/day it would take 4.48 years to unload the whole, and 2.24 years to unload half of it. asnoted, that would be felt as it is about 5% of the entire JGB market.

the plus side to this trade though is that if i'm wrong, what is the worst case scenario? US slows precipitously, import demand falls, china has some random sudden slowdown, demand for japanese exports fall, prices start falling again, and the central bank does what? cut rates 25 or at most obviously 50bps. that would probably happen some insignificantly small % of the time (rates falling by >25bps). and when it does, you have a moderate (though still painful) loss.

if i'm right, the impact will be significant (i don't know the equivalent bp comparison here).

so the loss isn't that big in most cases and isn't even tremendous inthe worst case, while the gain is steady and medium sized in most cases and decently big (40% flow in a year) in the best case (very unlikely though as that would be about 1.8billion/day selling of JGBs)

it isn't the trade of the year or anything, and it's information ratio isn't big (since JGBs are so freaking volatile), but i think it would be worth it.

Barron
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