Investors to BOJ and LDP: It’s Not Enough   

• Last week, both the BOJ and the Aso Administration lurched toward the next level of government intervention, and the BOJ appears to finally have shifted into “emergency countermeasures” mode.
• Yet investors remain skeptical. It is likely that currency traders will continue to test the BOJ’s and government’s mettle in dealing with the crisis, which could eventually force the BOJ (on instructions from the MOF) to intervene in the currency markets, which Japan has not done unilaterally since 2003, when they intervened massively to keep the yen from surging through JPY100/USD. Until, or perhaps even if this happens, the JPY/USD could still challenge its 1995 high of JPY79.5/USD.
• In terms of Japan’s fiscal response, the revised and expanded package of countermeasures includes an allocation of up to JPY20 trillion to buy stocks from Japan’s banks to prevent further valuation losses from slam-dunking their regulatory capital ratios (Japanese banks can count a portion of the current market value of securities in Tier 2 capital).
• This could help ensure that the currently delicately positive supply-demand balance for equities through the end of FY2009 which ends next March. Following a wholesale dumping of Japanese stocks by foreign investors and brokers trading on proprietary in-house accounts in October, individual as well as domestic pension funds have stepped up their net buying, effectively absorbing the selling pressure from foreign investors.
• As a result, the Nikkei 225 has managed to stay nearly 1,600 points above its October 29 low of 6,994.90, and could limp along without renewing new lows for the foreseeable future. However, the probability of new lows in 2009 is largely dependent on whether the government and BOJ countermeasures (as well as the countermeasures of other countries like China) can turn the recession tide within 2009. Here, even the BOJ is now less sure Japan’s economy will bottom in 2009.
• Moreover, a major re-alignment of Japan’s political parties looms on the horizon in 2009 that could cause further short-term uncertainty but ultimately be an improvement to the current grid-lock. 

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