“Zaitech” (財テク)
“Zaitech” (財テク)
Japanese Style Financial Engineering of the 1980's
On Sept. 2nd, 1987, the announcement of a medium sized Japanese company called Tateho Chemical sent shock waves into an already jittery stock market. The company incurred a loss of $141 million, wiping out its entire net worth. Not only was the dimension of the loss staggering, but also the origin. It was the result of huge bets on the Japanese bond market that went awfully wrong.
Most market operators in the west seemed surprised. But a handful of pundits in Japan had been well aware about a peculiar phenomenon taking place within Japan’s corporate sector: “Zaitech” (Japanese 財テク), or “Zaiteku”, which means money management. The Japanese term is a blend of 財務 (zaimu, “financial dealings”) and テクノロジー (tekunorojii, “technology”).
It describes a corporate strategy where earnings are generated through non- operating financial activities and speculation. Today “Zaitech” is known under the label of “financial engineering”, and mainly conducted in the western hemisphere.
In its extremes, “Zaitech” was as simple and safe as investing retained earnings in short-term bank certificates. At the other end of the spectrum, it meant borrowing money from Japanese banks or in the Eurobond market to enter highly speculative positions in a variety of financial instruments.
The heyday of “Zaitech” was in the late 1980’s, right after the Plaza Accord to devalue the dollar against its major peers. Within one year after the agreement in 1985 by the G5 countries (Japan, United States, West Germany, Britain, and France) the Yen doubled in value vs. the US Dollar.
Japanese exporters were hit hard. They had to lower unit prices in Yen to maintain market share. Profit margins plummeted. To shore up profits, an increasing number of companies engaged in “Zaitech”. The Bank of Japan (BOJ) facilitated the trend by deciding to soften the blow of rapid Yen appreciation through unprecedented monetary easing.
The actual extent of “Zaitech” was unknown. According to Nomura, financial assets of Japan Inc. totaled $909.7 billion in March 1983. Three years later they had grown to $1.4 trillion. In 1986 it was rumored that one third of Toyota Motor’s pre-tax profits was based on “Zaitech”. And, at least within Japan, it was an open secret that other prominent Japanese companies, like Sony Corp. and Sanyo Electric Co engaged in it.
With the amount also complexity of “Zaitech” operations increased. Corporate Japan had long gone beyond merely speculating out of retained earnings or bank loans. Instead, it raised money via sales of dollar-denominated Eurobonds with stock warrants attached to it. Those warrants became extremely popular over time. Roughly half of them were sold within Japan. The rest easily placed, and eagerly purchased, internationally with very low interest rates attached to them. Basically, when converting the dollar proceeds into Yen, Japanese borrowers often had an effective interest cost of nil, or less.
The funds would then be put into securities that had been in a sustained uptrend, such as Japanese real estates, stocks, bonds, or even warrants and/ or options. “Tokkin” funds were also popular vehicles used by corporate Japan. Trust accounts with special tax advantages, often handled by young and highly aggressive “portfolio managers”, and eagerly marketed by leading Japanese investment banks like Nomura or Daiwa.
Generally, Japanese banks were keen supporters of “Zaitech financing”, as it:
• Generated fees through underwriting corporate bonds
• Possibility to buy the warrants attached and to replace stock in customer holdings. Thus, generating fees through portfolio reshuffling
• Once the warrants were detached, bonds could be purchased at a discount. Banks repackaged them with an interest rate swap and converted them into a floating rate asset
The only trouble with “Zaitech”, which would materialize at a later stage, Japanese companies were not legally required to disclose their liquid assets composition and did not have to consolidate their balance sheets.
Actually, nobody could figure out the exact degree of “Zaitech” on an individual company level. The danger was compounded by a unique character of Japanese banking regulation. Unlike western counterparts, Japanese banks were allowed to count stock market holdings as "core capital" (reserves to determine the legal lending exposure). With the sharp contraction in collateral value after the Japan bubble burst in 1990 the market would slowly figure out how messy “Zaitech” really was.
In Japan “Zaitech” is history and business practice and accounting has turned highly conservative since the burst of the bubble economy.
But over time it became clear that also with “Zaitech”, and its fall out, again Japan was merely leading the way. The Great Financial Crisis of 2008 unearthed the western equivalent of “Zaitech”. Making clear to everyone that “Zaitech”, and the convoy system, was the rule, rather than an exception, in the western hemisphere, too.
Source:
Will Japan’s ‘{Zaitech}’ Bring a Market Crash? (larouchepub.com)
Kunst des Zaitech - DER SPIEGEL
Market Place - The New York Times (nytimes.com)
Zaitech and the Bubble Economy - Modern Banking - Andrew Jacobson (ajjacobson.us)