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Monday, Aug. 27, 2007

JAPANESE PERSPECTIVES

'Lucky bag' binge turns into Pandora's box


Japanese retailers like to offer "fukubukuro" (lucky bags) to customers as an added attraction. The bags, sold at a fixed price, are filled with an assortment of goods that are supposed to be worth more than what you paid for the bag.

But you cannot tell what is actually inside until you have made your purchase and broken the seal.

The "lucky" in the name implies a nice surprise is in store. But there is always the possibility of disappointment. The risk is yours to take or leave.

Lucky bags have been in plentiful supply of late in the global financial market. The financial market's own term for lucky bags is "debt securitization."

Debt securitization refers to the way that banks slice and dice their loans and repackage them into securities, which they then sell on to other investors, such as hedge funds, for example.

Such asset-backed securities are lucky bags of financial tools that have the potential to deliver wealth to the purchaser many times more than the price paid for the bag itself.

Or not, as many financial lucky bag buyers have discovered in recent weeks.

The contents of a financial lucky bag tend to move with the times. Most recently, lots of them contained bits and pieces of subprime loans, which are mortgages taken out by mostly low-income American households. Banks have been increasingly removing these mortgages from their own books and off-loading them onto securitized financial products.

This was all very well so long as the original mortgage liabilities were being paid back on time. But things gradually started to unravel as defaults began to rise among the original subprime debtors. Purchasers of what were thought to be lucky bags suddenly found themselves holding onto a lot of bags of woe.

Still, one may argue that surprise is, after all, part of the fun of buying a lucky bag. Very true. But there is a slight difference when the lucky bags in question are financial ones.

The woe does not necessarily stop with the purchaser. He may have borrowed money from somebody else to buy the bag, in the hope that the contents would yield ample rewards out of which he could easily pay back the lender. In the event this strategy goes awry because of the bag's disappointing contents, however, the borrower may have to sell off other assets, such as stocks, to repay his debts.

If he cannot raise enough cash to meet his obligations, then it will be the lender who may get into difficulties. He may have his own debts to repay. And so the contagion spreads, drawing more and more people into the financial maelstrom along the way.

All this begs the question: Why are so many people going in for the lucky bag gamble these days? There are two answers.

One, it has been so easy to borrow to gamble because interest rates are low everywhere. Two, it has been so difficult to make your assets earn profitable yields because interest rates are low everywhere. The two answers are clearly two sides of the same coin.

And for the low interest rates that lie at the root of the problem, it is Japan that has a lot to answer for. With all that cheap and abundant yen swishing around the globe, it is no wonder people have taken to running after financial lucky bags only to find they have opened up a Pandora's box of financial woe.

More than ever, Japan owes it to the rest of the world to normalize its interest rates.

Noriko Hama is an economist and a professor at Doshisha University Graduate School of Business.


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