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Sunday, Feb. 16, 2003

MEDIA MIX

Don't be too quick to jump on the bondwagon


Two weeks ago, post offices and financial institutions began taking orders for new Japanese government bonds targeted exclusively at individuals and set to go on sale March 10. Post offices immediately booked sales for all 50 billion yen worth of bonds they were entrusted with, and the remaining 280 billion yen was quickly scooped up as well.

The government, which is saddled with enough debt to stop an asteroid in its tracks, is understandably grateful for the response -- and perhaps a little surprised. Individual Japanese investors might as well belong to a secret members-only club, considering how few and quiet they are. Several years ago the government launched an advertising campaign to get more individuals interested in buying regular bonds, but it wasn't successful.

That campaign featured Keiko Takeshita, a former idol who has since become a successful actress and talent with a down-to-earth, housewifely image. The campaign for the new 10-year government bonds, which began in December, features young actress Koyuki and veteran kabuki star Matsumoto Koshiro.

The faces on the PR posters in this case are less important than the message, which simply informs people who might be interested that the bonds are available. The media and financial advisers are supposed to do the explaining. But the choice of Koshiro, at least, seems inadvertently inauspicious. The actor's most famous role outside of kabuki is that of the title character in the Japanese production of "Man of La Mancha."

Shall we call the government's new bond scheme "quixotic?" That would be imparting too much idealism to the Finance Ministry, but just like Cervantes' dilapidated knight, there's definitely something deluded about the whole plan.

It's no secret that the government is salivating over the country's last untapped source of capital: personal savings. By reducing the minimum purchase amount for the new bonds and offering floating interest and "floor rates" that guarantee a better return than banks, the government believes it can wrest some of this cash from the tight little fists of the citizenry, and so far their plan seems to be working. With interest rates for savings accounts as close to zero as you can get without having to measure them with an electron microscope, who wouldn't jump at a chance to make even a little more money?

But as financial planner Yoshiko Nakamura pointed out in an analysis in last week's Shukan Asahi, the new bonds don't offer any real advantages. Explaining that potential investors should first determine the purpose of their investments, she found little reason to recommend the new bonds.

If the purpose is to have a reserve of money that the investor can dip into whenever necessary, the bonds are clearly useless, since they cannot be touched for a year after purchase. If the purpose is to make a short-term investment, say, of 3 years, the bonds are ineffective. Though the investor can cash them in after a year, the handling fee will likely equal the amount made in interest.

The most obvious purpose for buying the bonds is as a long-term investment, but in that case other instruments are better. The appeal of the floating interest rate is that if the economy improves, the bondholder can get a higher return; but if the economy does, in fact, improve, one would get a much better return from trading in stocks or foreign currencies. If the economy actually worsens and the rate goes down, then at the end of 10 years the return will be much lower than that from a regular fixed-rate 10-year bond.

According to Nakamura, the only purpose for buying the new bonds is to make a "no risk" investment, meaning one in which the investor is guaranteed to get back at least the principal. That's why Nakamura calls the new bonds "silver merchandise," because they appeal directly to retired or soon-to-be-retired people who are paranoid about investing and would sooner stuff their cash under the futon than invest it or put it in a bank.

This idea may, in fact, be the main pillar of the government's strategy. Seventy percent of the nation's 1.4 quadrillion yen in savings is held by people over 50, people who, for the most part, aren't certain their pensions will support them and who, following the "payoff" fiasco last spring, refuse to trust the banks.

It would be much better if this money were circulated throughout the economy in the form of purchases, be they refrigerators or stocks. But most people over 50 already have very nice refrigerators, and no one, including the media, has been able to sell them on stocks, which they equate with gambling.

Stock investing is gambling, but as Nakamura points out it's generally the case that when people sit down with financial planners and learn about the investment options open to them they feel more relief, not more anxiety. She may be tooting her own horn here, but there's certainly a paucity of usable (not to mention interesting) investment information in the Japanese media. Gloom is sexier, at least when it comes to economic reporting.

What isn't sexy is reporting where the money that's spent on these new bonds will actually go. It, of course, goes back to the government, where it's used to fill the pension pool, maintain life support for companies that would be better off dead, and keep fat bureaucrats swimming in cash to pay for white elephants that justify their positions.

None of these purposes substantially aid the economy, though they presumably prevent the government from going bankrupt. In that regard, the bonds are self-justifying, and the government continues to delude itself. Where's Don Quixote when you need him?



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