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Japan Hit Hard With Currency Woes
by Alex Schay (TMF Nexus6)

Alexandria, VA (Dec. 19, 1997) -- Over the last 24 hours, more turmoil in "distant lands" has hurt U.S. stocks and highlighted the increasing interdependence of world economies. Japan's benchmark Nikkei 225 index plunged 5.24% in overnight trading after the country saw its fourth-largest bankruptcy in the post-war period. The victim was Japan's third-largest foodstuffs trader, Toshoku Ltd. One of Japan's largest players in the international grain and dairy markets, Toshoku was crushed under long-term debt of 528.9 billion yen (or $4.16 billion) and further debt guarantees of 110.9 billion yen ($873 million). The bankruptcy follows the dissolution of two banks and two brokerages last month and heightens concerns that the East Asian economic turmoil could topple more Japanese companies.

Toshoku's story is not a foreign one, despite the fact that it is a foreign company. The Tokyo-based concern has long-suffered under the burden of bad loans and multiple restructuring attempts. The straw that broke the debtor's back was a credit crunch induced by recent tight money policies implemented by Japanese banks to prevent lending money to poor risks. With a concrete example of a company going under due to a short supply of credit, some observers felt Toshoku's failure might trigger some deflation in the Japanese economy. The bankruptcy, however, was not completely unanticipated. Toshoku announced in early August that it would forgive $389 million worth of loans to its subsidiary Toshoku Finance, which contributed to Toshoku's $400 million net loss for the year.

Japanese investors punished shares of Toshoku's creditor banks, including Sakura Bank Ltd., Yasuda Trust & Banking Co., and Long Term Credit Bank of Japan. The sell-off was extended to any companies perceived as financially weak -- which in Japan's current terrible economic climate describes many, many companies.

Japan's already suspect financial infrastructure has not been helped by recent economic turmoil in the rest of East Asia, particularly in Korea. As Korea's largest trading partner and creditor, the fact that Korean companies are scurrying around buying all of the dollars they can in a desperate bid to get enough money to pay off creditors certainly does not sit well with investors. The situation with Korea and Japan is equivalent to what would happen to businesses in the United States if Mexico and Canada both simultaneous started to go bankrupt.

The bleak outlook for Japan's economy boosted the dollar against the yen somewhat, despite the Bank of Japan's best attempts to support its currency. The dollar held firm at just over 129 yen, up from the previous New York close of 128.66. The dollar-won exchange rate in South Korea also escalated overnight.

These currency woes directly impact the profitability of all companies that export goods to Japan. While exports make up 11% of the U.S. gross national product, most of the premiere companies that are publicly traded do a lot more than 11% of their business overseas. While this turmoil does not mean that U.S. companies will be the next to go bankrupt, it could scrape a few percentage points off growth rates across the board -- not exactly what investors want to hear when stocks are at all-time valuation highs.

 

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