Japan is the next sub-prime flashpoint

Subject: Japan is the next sub-prime flashpoint Mon Feb 11, 2008 8:15 pm

There is still $300bn of bad debt out there, and Japan could be hiding most of it. Ambrose Evans-Pritchard reports

Just as battered investors had begun to glimpse signs of recovery in America, the next shoe has dropped with an almighty thud in Japan. Echoes are rumbling across the Far East.

The Tokyo bourse has crumbled, suffering the worst start to the year since the Second World War. The Nikkei index is down 17 per cent since Christmas, and the shares of Japanese banks are leading the slide. Mizuho Financial, Mitsubishi UFJ and Sumitomo Mitsui have all been punished as hard or even harder than those US banks at the epicentre of the sub-prime debacle.

The nagging fear is that Japan's lenders - the conduit for the world's greatest stash of savings - have taken on a far bigger chunk of mortgage securities, collateralised loans obligations and other exotica from America's structured credit boom than they have yet revealed.

Americans and Europeans have so far confessed to $130bn of the estimated $400bn to $500bn of wealth that has vanished into the sub-prime hole. Somebody, somewhere, must be sitting on a vast nexus of undisclosed losses. We may find out soon enough whether the hold-outs are in Japan. The banks have to come clean under the country's strict new audit codes by the end of the tax year in March.

"We think this is where the next big problem is going to pop up," said Hans Redeker, currency chief at BNP Paribas.

"We know from Bank of Japan's lending survey that the banks are already tightening hard, so something is brewing. Right now, we are in the lull before the second storm in global markets, and Asia is going to be the source of the nasty surprises," he said.

The iTraxx Japan index measuring default risk of 50 Japanese companies saw its biggest one-day jump ever on Thursday to 77.5. Rightly or wrongly, it is flashing a serious distress signal.

What we know is that Japan's economy - still the second biggest in the world by far - has fallen over a cliff since October. It remains joined to America's hip after all. The decoupling theory has failed its first test.

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Japan is the next sub-prime flashpoint

Japan is the next sub-prime flashpoint

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