D i v i s i o n O F I N T E R N A T I O N A L F I N A N C E BOARD O F e O V E R N O R S

H . 1 3

NO, 136

February 5, 1961; •

CAPITAL MARKET DEVELOPMENTS ABROAD

-- • I , Japan -II. Nine Charts on Financial Markets Abroad

I , Jaoan: Money and Capital Markets in December-January

\ ^ .Japan turned actively to European capi tal markets in December and January and raised a t o t a l of # 5 million; but the borrowings were mostly in U.S. dollars and. not in European currencies. Two issues of convertible deben-tures to ta l ing $5 and $15 million were successfully floated in December and a bond issue for $25 million was f loated in January. These e f fo r t s r e f l ec t the damper placed by the United States'1 proposed interes t equalization tax on Japanese secur i t ies issues in the U.S. No issues have been placed in the U.S0 since las t October. With an increase in imports, however, Japanese acceptance and other indebtedness to U.S. banks has risen sharply since August.

Table 1. Japan: Short- and Long-Term Borrowings in the U.So

Change during yr . I960 1961 1962 1962

Change during period 1963

Bank loans!/ Securi t ies^/

I 11 H I IV I I I I I I Sent. Oct. Nov.

U80 722 212 250 -20 -17 29 11 118 - 7 69 a / 10 a /111 30 J* 111 -22 .3L 27 J ! J & 60 0 • " J ~ 0

512 780 353 273 16 8 56 62 202 53 69 . 15 111

l 7 Short-term l i a b i l i t i e s to U.S. banks, 2/ New security f lo ta t ions . a / Preliminary.

There are also indications that^the volume of term loans extended p r i -marily by UcS. banks to Japan has been r i s ing . In recent months, Japan has released the following data on intemediate-term foreign loans approved by the Foreign Investment Council:

Date Approved Amount

Sept. 10, 1963 $67.0 million Oct, 1, 1963 6,9 million Oct. 22, 1963 18.5 million Nov. 12, 1963 Uh.5 million Dec. 17, 1963 62.1 million Jan. 21, 1961 2U.8 million

Range of Maturities .

3 to 10 years 3 to 5 years 2 yrs . 10 months to 5 years. 2 y rs . 10 months to 12 j e a r s . 2 yrs . 10 months to 21 years . 2 yrs . 10 months to 10 years.

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Japan continued to experience some balance of payments d i f f i c u l t i e s in December - January, and for the t h i rd month in a row, i n t e rna t iona l reserves declined. From the end of October — when reserves reached a peak for the year of $1,922 million — through the end of January, reserves declined $6? mi l l ion . The decline in December and January was $33 and .*.23 mi l l ion , - respect ively , •

Primarily because of t he worsening trend in the balance of payments, the Bank of Japan began t ightening money in December by doubling the commercial bank requirements for a l l deposits other than ti-^e deposi ts for the larger banks. This move reportedly ra ised the reserve deposits of the large c i t y banks in December from W> b i l l i o n to ¥110 b i l l i o n and contributed to an increase in on-e of the c a l l loan r a t e s by 2 percentage points t o 11,680 per cent . Ef fec t ive January 1, 196k, the Bank of Japan also r e i n s t i t u t e d "window guidance" operat ions . This means t ha t c r ed i t s extended to commercial banks by the Bank of Japan wi l l be ra t ioned.

Domestic monetary condit ions t ightened in December but eased in January with the usual seasonal reduction of currency in c i r cu l a t i on . Call loan r a t e s increased subs tan t i a l ly in December and the average i n t e r e s t r a t e on bank loans and discounts leveled off in October a f t e r a steady decl ine since November of 1962. Stock pr ices reached a low for the year on December 18, but moved up s t ead i ly in January,

Money market. The t ightening in the money market tha t began in mid-November continued through the end of December. Immediately a f t e r the f i r s t of the year , however, the marked eased subs t an t i a l l y . The t i g h t e r market in December was due mainly to the increase in commercial bank reserve requirements and a ¥lj.l2 b i l l i o n increase in bank notes in c i r c u l a t i o n . This was only p a r t l y o f f s e t by net Treasury disbursements of ¥2h5 b i l l i o n and Bank of Japan net pur-chases of s e c u r i t i e s of ¥206 b i l l i o n . During most of January, conditions in t he money market continued to remain r e l a t i v e l y easy.

I n t e r e s t r a t e s . Call loan r a t e s rose subs t an t i a l ly in the l a s t week of November and December, but f e l l sharply a f t e r the f i r s t of the year . The January decl ine r e f l ec t edc the usual re tu rn of funds to the banks following heavy consumer spending in December. The ra te for overnight money rose s tead i ly from 6.935 per cent on November 27 to 8.395 per cent on December 31, but f e l l back sharply to 6.935 oer cent on January L. The r a t e f o r overmonth-end money (repayable at a day 's no t ice in the following month) increased from 8.9h3 per cent on November 28 to 11,680 per cent on December 30, but dropped to 9.125 per cent on January 1|. Unlike the i n t e r e s t r a t e s f o r overnight and uncondit ional (repayable at a day's notice.) c a l l loan money, the r a t e f o r overmonth-end money i s not subject t o voluntary ce i l ings es tabl i shed by the bankers and c a l l loan brokers, hence i t i s general ly the highest c a l l loan r a t e .

The average i n t e r e s t r a t e for bank loans and discounts leveled off in - O c t o b e r , remaining at the same leve l as in September. (See Table 2), This

r e f l e c t s in par t the t i g h t e r monetary policy the Bank of Japan i n s t i t u t e d l a s t

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OFFICIAL USE ONLY - -3-

1959 I960 1961 1962

March 8.18 8.21 7.92 8.22 June : 8.28 8.22 7.88 8.23 September 8.06 8.1k 8.00 8.2k December 8.11 8.08 8.20 8.09

f a l l , which included net sales of secur i t ies in October and November in i t s open market operations, I t appears that the steady decline in the r a t e , which f i r s t - " began in November of 1962, has been hal ted, and with the increase in commercial bank reserve requirements in December, a gradual r i s e in the r a t e now seems l i ke ly .

Table 2. Japan: Average Monthly In teres t R&te on Bank Loans and Discounts

1963

7.92 7.75 7 . 6 8 , \ 7.681/

1 / October.

Bank loans and discounts. Bank credi t increased 2.3 per cent in November, somewhat less than the 2.6 per cent r i s e a year e a r l i e r . This rep-resents a reversa l of the previous trend in 1963 when bank credi t rose at a f a s t e r ra te than a year e a r l i e r . The ra ther high ra te of increase in 1962 r e f l e c t s the relaxation of the t i gh t money policy in October of tha t year . Although the November 1963 r i s e in c red i t was subs tant ia l , i t i s possible that i t might have been even higher, in the absence of Bank of Japan net bond sales during that month.

Bank deposits in November 1963 rose 3.3 per cent as against 3.5 per cent a year e a r l i e r . Increases in loans and secur i t i es holdings in November 1963 were less than a year e a r l i e r , but b i l l s discounted rose 2.0 per cent compared to 1.2 per cent a year e a r l i e r , .

The proportion of bank loans and discounts extended for purchases of equipment was i6 .8 per cent in November. The r a t i o has been gradually increasing since March when i t reached a low for the year at 16.3 per cent.

Early in Janu-iy the Bank of Japan announced that i t would resume "window guidance" operations, previously discontinued in May of 1963, whereby l imi ts are placed on the amount of credi t accommodation that commercial banks can obtain from the cent ra l bank. For the f i r s t quarter of 1961+, the bank intends to extend 10 per cent less in credi t to 13 large c i t y banks than i t d id . in the same period a year earl ier . , This wi l l amount to ¥233 b i l l i o n or 2.8 per cent of the outstanding-loan balance of these banks a t the end of 1963.

Bond market. New issues of domestic bonds remained a t r e l a t i ve ly high levels in October and November. Total issues in November were ¥138 b i l l i o n , only ¥3 b i l l i on below the high for the year in September. New issues of nublic corpora-t ion debentures at ¥27 b i l l i o n were the same as in October. New issues of indus-t r i a l debentures at ¥27 b i l l i on were up ¥2 b i l l i on from the October level, and bank debentures at ¥83 b i l l i on were down ¥3 b i l l i o n .

OFFICIAL USE (TvLY

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OFFICIAL USE ONLY -b-

Average y ie lds in November, on loca l government s e c u r i t i e s , public corporation bonds, and one-year bank debentures, remained unchanged from leve ls e a r l i e r in the year at 7.35U, 7.053, and 6.22L per cent , r espec t ive ly . Yields on f ive -yea r bank debentures were 7.283 per cent , down s l i g h t l y from October, and 7.499 per cent on i n d u s t r i a l bonds, up s l i g h t l y from the previous month.

Stock market. In December, stock pr ices continued t h e i r general down-trend from the peak reached l a s t Apr i l , and the stock average h i t a low f o r the year on December 18 of ¥1,201. This i s 26 per cent below the Apri l 5 high for the year . Stocks recovered s l i g h t l y during the t h i r d week of December but through January 7 were s t i l l near the 1963 low. During the res t of January stocks rose s t ead i ly and on February 3 the average was.¥l,30£, up 9 per cent from the December 18 low. (See Table 3 below).

On January 20, lb banks and Japan's four l a rges t s e c u r i t i e s companies formed a new en t i ty en t i t l ed -^ he Japan Jo in t Secur i t i e s Company with the aim of s t a b i l i z i n g stock pr ices through appropriate stock purchasing operat ions. The

^ new firm has an authorized c a p i t a l of $27.8 mi l l ion , of which $6.9 mill ion i s paid- in c a p i t a l . The company wi l l l imi t i t s possession.of stocks in any one company to 10 per cent of the t o t a l volume outstanding.

Table 3. Japan; Dow Jones Average of 225 Stocks, F i r s t Section of Tokyo Stock Exchange

January November 25 December 2

9 16 23 28

?i,2U5 1,257 1,259 1,216 1,216 , . 1,225 1 /

6 ¥1,205 1963 High ¥1,631 13 1,259 Low ¥1,201 20 1,317 27 1,321 1961 High

Low ¥l,33li ¥1,2014

February 3 1,305

1 / Last trading day of 1963.

Foreign t rade . The seasonally adjusted t rade d e f i c i t remained large in December, but was down subs tan t i a l ly from a peak in October. In December, season a l ly-adjus ted imports f e l l 1 per cent and exports rose U per cent . At a seasonally adjusted annual r a t e , the t r ade d e f i c i t in December was $1.5 b i l l i o n compared to $552 mi l l i on a year e a r l i e r . The t rade f igures (monthly, or monthly averages, on a customs bas is ) in Table U below are based on seasonal adjustment f ac to r s computed by the Board of Governors of the Federal Reserve System#

Table L. Japan: Seasonally Adjusted Foreign Trade ( in mil l ions of do l l a r s )

1962 1963 I I I H I IV I 11 I I I IV Oct. ' Nov. Dec.

Imports l\9h U68 1^2 L8W 545 582 6ii2 661 637 628 Exports 378 Uoe ii28 109 bh2 U62 188 188 178 h99

Trade Balance -116 - 60 -- 2h - 99 - 73 -103 -120 -I51i -173 -159 -129

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During calendar 1963, exports rose 11 per cent to $5.1+ b i l l i on (as measured on a customs bas i s ) , and imports increased 20 per cent to $6.7 b i l l i o n . The resu l t ing trade d e f i c i t of $1.3 b i l l i o n was subs tant ia l ly higher than the $720 b i l l i o n d e f i c i t in 1962.

Foreign reserves and cap i t a l flows. In ternat ional reserves f e l l $33 mil l ion in December and a fu r ther $23 million in January to $1,855 mil l ion. This marks the th i rd consecutive monthly declined from the 1963 high of $1,922 million in October, suggesting the beginning of a new general downtrend in reserves following the gradual increase since January 1962.

The balance of payments, as measured on an exchange t ransact ions bas i s , continued to r eg i s t e r a d e f i c i t on current amount in December, when i t was $56 mil l ion. Long-term cap i t a l receipts at $9U million were high, but with long-term payments of $38 million and net short-term payments of $U2 mil l ion, the surplus on cap i t a l account was only $lli mi l l ion. Since reserves f e l l only $33 mil l ion, While recorded net payments to ta led Slj.2 mil l ion, errors andomissions account for the $9 mill ion d i f ference , Results on an annual bas is are indicated in Table 5 below.

Table 5» Japan: Foreign Exchange Receipts and Payments V (in millions of U .S . dollars)

Current transactions ' 1963 1962 1961

. 1 . Receipts: 2 . Receipts:

commodity trade services

+5,356 + 883

+1,787 + 813

+3,993 + 78U

Total >6,239 +5,600 +1,777 3 . Payments: ii. Payments:

commodity trade services

H

O

3W -li,51i6

-1,017 -U,92U - 937

Total -6,813 -5,563 - - 5 , 8 6 1 5» Current account balance - 57k + 38 -1,085

Capital t ransact ions 6. Long-term cap i t a l receipts + 750 + L58 319 7. Long-term cap i ta l payments - 282 - 197 - ^ 1S6

Net balance . + L68 + # 2 + 163 80 Short-term capi tals net balance • + 177 + 172 + 610 9. Capital account balance + 6L5 . + h3h ;• T~ 773

10. Current and capi ta l a c c ' t . balance + 71 + 172 - 312 11. Errors and omissions - 3h - 116 - 26 12. Net overal l balance + 37 + 3 # - 338

1/ Data include only foreign exchange t ransact ions and thus omit t ransact ions taking place without an exchange settlement such as reparat ions , sales to UN forces , consignment sa les , yen credi t s and donations in kind. Numbers may not t o t a l due. to rounding.

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According to preliminary repor t s , Japanese short-term l i a b i l i t i e s t o U.S. banks increased §111 million in November to $1,983 mi l l ion . (See Table 6 below). The r i se r e f l e c t s largely an increase in the outstanding leve l of commercial acceptances.

Table 6. Short-term Claims by U.S. Banks on Japan ( in mil l ions of U.S. do l l a r s )

Jan. Feb. Mar. Apr. Jtejr

168 175 20U 22k 2!i2 362 372 L20 250 U88 875 952 1,069 1,159 1,196

1,601 1,685 1,778 1,775 1,762 1,697 1,691 1,751 1,876 1,896

1959 1960 1961 1962 J - L , | [ U -L, II J X) 1 1963 1,697 1,691 1,751 1,876 1,896 1,869- 1,872 793 1,862

NOTE: Data for 1962 and 1963 have been recent ly revised and include $52 mill ion reported by banks i n i t i a l l y as of December 31, 1961.

a / Preliminary.

^ With the i n t e r e s t equal iza t ion tax s t i l l pending before the U.S. Congress Japan continued to take steps to r a i s e fore ign c a p i t a l outside of the United States On December 10, the Takeda Chemical Co: any successfu l ly f loa ted $15 mil l ion in 6 per cent , 20-year convert ible debentures in the European market. Shortly l a t e r on December 16 the Canon Camera Company issued $5, mi l l ion in 6-l/lj. per cent , 15-year convert ible debentures in Europe. Last ly , the c i t y and pre fec ture of Osaka success f u l l y f loa ted t h e i r t h i r d bond issue of %25 mil l ion (DM 100 mil l ion) in Germany on January 7. The 15-year issue car r ied a 6-1/2 per cent r a t e of i n t e r e s t . Ear l i e r issues-of $25 mil l ion each were f loa ted in February of 1962 and March of 1963.

The Japanese Minister of Finance announced in December t h a t Japan s t i l l intends to issue $52.5 mill ion in government bonds in the U.S. market before Apri l of I96I4.. In addi t ion, he said t h a t there had been no change in the government's plans fo r i ssuing $125 mil l ion in s e c u r i t i e s overseas in Japan 's next f i s c a l year which begins Apri l 1, 1961+.

Foreign exchange. The yen remained r e l a t i v e l y weak in the spot market during the f i r s t t h r e e weeks of December, but strengthened subsequently through January 13. The r a t e in the three-month forward market remained f a i r l y s tab le during t h i s neriod„ The strengthening in the spot market caused the forward d i s -count t o r i s e from 0.20 per cent on December 23 to a peak of 1.03 per cent on January 9. For add i t iona l d e t a i l s , see Table 7 below.

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Table 7. Japan: Customer's T. T. Exchange Rates of Bank of Tokyo, in Tokyo

Yen-dollar spot middle

ra te

Three-month forward middle

ra te

Forward discount in per cent

C per annum

Nov. 29 362.30 362.53 .25

Dec. 6 362.30 362.53 .25 13 362.30 362.50 .22 20 362.30 362.18 .20 27 361.90 362.b5 .61 31 361.70 362.1+8 .86

Jan. h 361.90 362.18 .61). 10 361.70 362.18 .86 111 362.10 362.50 .hh

Asia, Africa and Latin America Section.

I I . Nine Ctiarts on Financial Markets Abroad

Chart 1 - In teres t Arbitrage, United States/Canada Chart 2 - In teres t Arbitrage, New York/London Chart 3 - In teres t Arbitrage fo r German Commercial Banks Chart L - In te res t Arbitrage, Frankfurt/London Chart 5 -Shor t - t e rm In teres t Rates Chart 6 - Long-term Bond Yields Chart 7 - Indus t r ia l Stock Indices Chart 8 - Spot Exchange Rates - Major Currencies

Against U.S. Dollar Chart 9 - 3-month Forward Exchange Rates

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