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BOARD O r 0 O V I R N O M H. 13 No. 223 ; \ I ; i V November 24, 1965. yCAPlTAL MARKET DEVELOPMENTS ABROAD I. II. III. I. Japan Nine Charts on Financial Markets Abroad Latest Figures Plotted in H. 13 Chart Series Japan: Money and Capital Markets in September-October Since early September the Japanese authorities have taken several important decisions in the financial field. On the international side, the Ministry of Finance has decided to float a third bond issue in the United States this year. Domestically, the authorities have decided to turn to an expansionary fiscal policy. The third Japanese bond issue in the United States this year is to be floated in November. This will be a $20.0 million, 6.5 per cent, 15-year issue by the Japan Development Bank. Earlier, in April and June, Japan placed in the American market issues totaling $22.5 million and $20.0 million, respectively, All of these issues are exempt from the Interest Equalization Tax. Since the November issue is likely to be.the last Japanese issue this year, this means that Japan will not have been able to float the full $100 million in bonds in 1965 allowed under the exemption from the Interest Equalization Tax. The Japanese were reportedly reluctant to place new issues during the July-October period because they would have had to pay about 7 per cent for funds, a rate which Japanese borrowers consider excessive. It is estimated that the latest issue will be placed at a price providing an initial yield to investors of about 6.7 per cent. The major changes in domestic fiscal policy include the decision: (1) to finance the current deficit in the general account budget by the issue of bonds rather than by reducing expenditures; and (2) to present a deficit budget to parliament next year instead of the legally-required balanced budget. In late October, the Minister of Finance announced that the original ¥300 billion estimate of total bond flotations by the Government during the 1965 financial year (ending March 31, 1966) to stimulate economic recovery, had been revised downward to ¥250 billion ($694 million). The bond issues will now be limited to financing a shortage in tax revenues. New budget requests in November totalling ¥150 billion will be met, he said, by cutting expenditures and transferring various Government funds to the general account. The Government is expected to introduce in November a special one-year law to allow it to float bonds to finance a deficit in the general account next year. This practice is expressly forbidden in the 1947 Public Finance Law which prohibits the floating of long-term government bonds for any purpose except public works and government investments. The Finance Minister also plans to cut taxes by ¥200 billion ($556 million) during the next fiscal year. According to preliminary data, Japanese borrowing in the U. S. fell $6 million in August as long-term claims declined by $7 million. OFFICIAL USE ONLY (Decontrolled after 6 months) OFFICIAL USE ONLY Table 1. Japan: Change during yr. 1962 1963 1964 Short-term claims^/ Long-term claims V TOTAL Securities 2/ TOTAL JL/ 2/ &/ _b/ £/ 2 - - Short- and Long-term Borrowing in the U.S. (in millions of U.S. dollars) Change during period I 1964 II III IV I II 1965 May June July Aug. 212 _50 431 175 632f/ 181b/ 229 69 14 24 26 3101/ 79W -47 42 15 _7 29 15 _4 --_4 •-492/ __32/ j ^ / 262 606 813 291 83 50 389 - 5 22 33 11 •-462/ -62/ 141 200 0 0 _0 _0 0 0 23 _0 20 403 806 813 291 83 50 389 - 5 45 33 31 0 Bank-reported liabilities to the U.S. New security flotations. Includes $150 million newly reported in December. Includes $45 million newly reported in December. Preliminary. NOTE: Data on short- and long-term claims since early 1962 have recently been revised substantially by the U.S. Treasury. The maximum authorized rates that Japanese foreign exchange banks may pay on Euro-dollars continued to decline in September, but then increased during the first half of October. The increase in Japanese authorized rates in October reportedly reflected a general tightening in the Euro-dollar market and the desire by the Japanese to avoid any substantial loss of Euro-dollars. (See Table 2). Table 2. Effective: Less than 30 days 1 - 3 months 3 - 6 months 6 - 1 2 months 1 year and over Japan: 7/14/65 4.375 4.875 5.125 5.5 5.875 Maximum Authorized Rates on Euro-dollar Deposits 8/2/65 9/3/65 9/9/65 4.375 4.75 5.0 5.375 5.875 4.375 4.75 4.875 5.25 5.625 4.25 4.5 4.625 5.125 5.5 10/5/65 4.25 4.625 5.0625 5.25 5.5 10/11/65 4.25 4.75 5.25 5.375 5.625 International reserves continued to rise, increasing $5 million in September and $29 million in October to $1,998 million. The gain in September was aided substantially by a large trade account surplus. In the foreign exchange market, the rate for spot yen.weakened in September, creating the highest premium in the forward market in years. On the domestic side, interest rates continued to ease, both in the call market and for commercial bank loans and advances. Bank credit expanded at a slightly faster pace in July and August than a year earlier after remaining rather dull earlier this year. The stock market continued to recover from its five-year low in July, and OFFICIAL USE ONLY 0 -• 462/ -62/ OFFICIAL USE ONLY by November 12 had reached a new high for the year. Money market. Conditions in the money market remained e a s y i n S e p t e m b e r . The impact of a cdetraction in Bank of Japan credit of ¥105 billion was more t h a n offset by the expansionary impact of ¥111 billion in net Treasury payments and a ¥5 billion decline in bank notes in circulation. Japan's money m a r k e t i s likely t o remain easy for some time in the future because of slack capital investment and an expansionary government budget. The supply of funds to the call market fell during the June-September period. From a level of ¥1,341 billion at the end of May, the average monthly balance declined to ¥1,226 billion in September. This represents a reversal of the general expansion of the call money market up to May. The chief reason for the turnaround is the improving fund position of city banks, major borrowers of call loans, partly as a result of the Bank of Japan's expansion of credit. Also, business and industry have reduced their demand for new funds, and the lower cost of call market funds has improved bank liquidity. Interest rates. For the fourth time since May, call l o a n r a t e s w e r e reduced again in early October. Already at their lowest levels since 1956, r a t e s w e r e reduced by 0.365 percentage points on October 1. (See Table 3). Table 3. Japan: Average Call Loan Money Rates in Tokyo (per cent) Overnight 1/ Unconditional —^ Over-month-end —/ August 28 6.205 6.570 7.300 September 4 11 18 25 5.840 5.840 5.840 5.840 6.205 6.205 6.205 6.205 6.935 6.935 6.935 6.935 October 2 9 16 23 30 5.475 5.475 5.475 5.475 5.475 5.840 5.840 5.840 5.840 5.840 6.570 6.570 6.570 6.570 6.570 6 5.475 5.840 6.570 "November , V For settlement on the following day. 2/ Repayable at a day's notice. 31 Repayable at a day's notice in the following month. The average rate of interest on commercial bank loans and discounts declined again in August and September. From last December's high of 7.99 per cent, the rate fell to 7.73 in August and 7.68 per cent in September. OFFICIAL JSE ONLY OFFICIAL USE ONLY - 4 - Bank loans and discounts. Bank credit in August continued to expand at a slightly faster rate than a year earlier. During the April-June period, bank credit expansion lagged behind the-pace a year earlier. In August, bank credit rose 1.1 per cent in contrast to a rise of 0.9 per cent a year earlier. The increase in securities holdings in August was 2.1 per cent against a decline of 0.4 per cent a year earlier. Loans increased at about the same rate as in August of last year, biit bills discounted increased by only 0.5 per cent in contrast to a rise of 3.2 per cent the year before. Deposits were up by 0.8 per cent in August compared to 0.6 per cent a year earlier. Since the end of last year a rising proportion of bank credit has b^ep. extended for purchases of capital equipment. The proportion of bank loans discounts extended for purchases of equipment in August rose to 17.5 per cent, as against 17.4 per cent in July and 17.0 per cent last December. In September, Bank of Japan operations were contractionary. (See Table 4). According to preliminary data, loans and discounts were reduced ¥24 billion and there were net sales of securities totaling ¥81 billion. For the third quarter, Bank of Japan credit registered a net increase of ¥90 billion, lower than the ¥106 billion figure for the same period a year earlier. Table 4. Changes in Bank of Japan Loans and Holdings of Securities (in billions of yen) Japan: (1) Period (2) + (3) Net increase (+) or decrease (-) (2) Loans: Increase (+) or decrease ill (3) Net purchases (+) or sales (-) of securities 1963 I Quarter II Quarter III Quarter IV Quarter + 158.2 - 109.2 + 202.4 + 18.0 + 59 .1 - 198 .7 + 91 .3 + 81 .2 + 99.1 + 89.2 + 129.1 + 99.2 1964 I Quarter II Quarter III Quarter IV Quarter + 203.3 + 75.7 + 106.1 - 329.6 + 36 .7 + 121 .0 + 97,.5 - 300..5 + 166,6 - 196.7 + 8.6 - 29.1 1965 I Quarter II Quarter III Quarter July August September + + + + - + 216. 5 14. 4 + 133. 1 + 62.8 + 94.4 - 24. 1 1.0 109.6 43.3 39.0 1.8 80.5 217.5 124.0 89.8 101.8 92.6 104.6 Bond market. The monthly volume of new bond since April. New issues of bonds rose in July to ¥180 billion from the June level of ¥178 billion. The increase resulted chiefly from a rise in new issues of bank debentures from ¥110 to ¥116 billion. OFFICIAL USE ONLY OFFICIAL USE ONLY Complete data for August are not yet available, but it is known that new issues of industrial debentures were ¥4 billion higher than in July. New issues of bank debentures were also higher by ¥2 billion. , Bond yields in August were mostly unchanged. Average yields on local government securities, public corporation bonds and one-year bank debentures remained at the 1964 rates of 7.354, 7.053 and 6.224 per cent, respectively. The yield on long-term bank debentures was up very slightly to 7.279 per cent, while the yield on industrial bonds fell from the July rate of 7.466 per cent to 7.464 per cent. Stock market. Rallying from its five-year low in July, the Dow-Jones stock average rose by 25 per cent to ¥1,277 on September 9. Thereafter it fell erratically to ¥1,192 on October 5. By November 12 the index had more than regained the lost ground reaching ¥1,323. (See Table 5). Table 5. Japan: Dow-Jones Average of 225 Stocks, Firs>t Section of Tokyo Exchange August 30 ¥1,245 September 6 13 20 27 1,236 1,250 1,272 1,233 r 4 .11 18 25 ¥1,204 1,219 1,249 1,233 November. 1 8 15 1,268 1,284 1,304 October 1964 High Low ¥1,369 ¥1,203 1965 High Low V ¥1,323 • ¥1,020 v : The July-September rally has been attributed to increased confidence by the securities companies and other institutions in the Japanese Government's readiness to increase spending to halt the recession. The temporary decline from, the early September peak was. reportedly due. to prof it-taking and an increase on September 14 in the margin required on stocks purchased with securities as collateral. Most issues reportedly increased only slightly in October and early November, but sharp gains for the issues of color TV, real estate, and beer companies helped boost the total stock average. Foreign trade. The tradition-defying chain of trade surpluses which Japan had forged since the beginning of this year was broken in September when the seasonally-ad justed trade balance registered a negative balance of $5 million. Between August and September imports increased by $34 million and exports declined by $66 million. Despite the poorer performance in September, the third quarter surplus was probably the highest in Japanese history. * Table 6. Japan; Seasonally-Ad justed Foreign Trade, Monthly %or Monthly Averages (in millions of dollars) 1965 1964 I II III IV I II 690 664 697 659 655 632 Imports 618 711 534 Exports 485 571 m + 20 + 23 Balance -179 -121 - 61 • - 79 a/ All figures on a customs basis5 . 5/ Preliminary, OFFICIAL USE ONLY July III 2-1 725 727 + 2 652 750 + 98 Aug. Sept. 670 765 + 95 - 699^ 5 - 6 «• OFFICIAL USE ONLY Foreign reserves and capital flows. International reserves rose $5 million in September and a further $29 million in October bringing total reserves to $1,998 million. The reserve gain reflects the continued good performance on trade account. The ratio of international reserves to the note issue of the Bank of Japan continued the rise from the July low of 33,7 per cent and reached 35 per cent at the end of October. This reflects a rise in reserves and a decline in note issue. Table 7. Ratio of Reserves to Bank Notes International Reserves (billions of yen) End of Period Bank Notes Issued (billions of yen) June September December ¥520.9 701.6 599.8 727.9 740.9 697.3 698.0 719.6 ¥1,029.4 1,234.1 1,480.1 1,745.9 2,057.4 1,860,6 1,836.1 2,298.8 March April May June July August September October 739.1 726.8 724.7 712.8 702.0 707.0 708.8 719.3 2,022.3 2,032.8 1,975.4 2,078.3 2,083.1 2,038.2 2,033.2 2,053.2 1959 1960 1961 1962 1963 1965 Japan: Reserves/ Bank Notes • 50.6 56.9 40.5 41.7 36.0 37.5 38.0 31.3 36.5 35.8 36.7 34.3 33.7 34.7 34.8 35.0 The current account surplus in September increased to $135 million,, but an accompanying rise in capital outflow reduced the over-all balance of payments surplus to $8 million. Because of changes in Japan's gold tranche position with the IMF in "September, the official reserve gain was only $5 million. (See Table 8). Table 8. Japan: Trade account balance Services balance Current account Net long-term capital receipts Net short-term capital receipts Net balance on capital account Balance of Payments on an Exchange Transactions Basis (in millions of dollars) II 1964 III IV - 37 Z_37 - 74 71 139 33 94 - 42 51 42 28 33 _4& -54 155 84 26 -22 I 1965 June July Aug. Sept II III 51 -44 7 85 -58 27 173 ^56 117 5 -10 -24 -22 -15 ^19 -44 -80 -104 -90 l61 -54 -103 -126 -105 -80 16 OFFICIAL USE ONLY 123 zJzl 68 152 -51 101 175 Z59 116 192 257 135 -37 -125 - 7 - OFFICIAL USE ONLY Table 8. (Cont.) 1964 III II Errors and omissions Over-all balance of payments NOTE: IV - 30 - 5 -16 - 20 1 13 I II III - 6 -11 - 8 17-37 Quarterly data are monthly averages. rounding. 1965 June July 20 -19 Aug. Sept. - 2 - 2 34 8 6 - 3 8 - 2 3 Data may not add exactly because of According to preliminary data, Japanese short-term liabilities to the U.S., as reported by U.S. banks, rose by $1 million in August to $2,823 million. This contrasts with the peak level reached so far this year in June of $2,871. Table 9. Jan. 1959 1960 1961 1962 1963 1964 1965 168 326 875 1,601 1,697 2,247 2,738 Feb. 175 372 952 1,685 1,691 2,340 2,741 Short-term Claims on Japan Reported by U.S. Banks (in millions of U.S. dollars) Mar . 204 420 1,069 1,778 1,751 2,400 2,856 Apr. 224 456 1,159 1,775 1,876 2,394 2,827 Max 242 488 1,196 1,762 1,898 2,421 2,856 June 260 497 1,272 1,758 1,872 2,469 2,871 July Oct. Nov. Dec. 262 693 1,281 1,710 1,904 2,488 275 711 1,292 1,662 2,017 2,496 324 806 1,528 1,740 2,171 2,803 Sept. 262 269 256 660 628 586 1,341 1,335 1,288 1,765 1,767 1,711 1,877 1,798 1,890 2,416 2,472 2,493 2,822—/2,823£/ NOTE: Data for 1962, 1963, and 1964 have been revised and include $52 million reported by banks initially as of December-31, 1961. The December 1964 figure includes $150 million in newly reported data. a/ Preliminary. Long-term Japanese liabilities to the United States, as reported by U.S. banks, declined $7 million between the end of July and the end of August, according to preliminary reports. (See Table 10). This decline brought long-terms claims® close to the level prevailing at the end of the first quarter. Table 10. 1959 1960 1961 1962 1963 1964 1965 Jan. 13 16 19 24 74 280 455 Feb. 14 16 19 25 74 295 454 Long-term Claims on Japan Reported by U.S. Banks (in millions of U.S. dollars) Mar. 15 14 18 31 76 311 472 NOTE: Apr. 15 14 19 28 83 319 479 May.., June 17 17 14 14 18 19 29 49 111 104 323 325 479 483 July 16 18 20 50 119 329 482±/ Aug. 15 18 19 54 136 332 475i/ Sept. 16 21 25 54 143 351 Oct. 15 21 23 62 146 352 Nov. 16 19 25 69 170 269 Dec. 16 19 24 74 249 430 Data for recent years have been revised and the December 1964 figure includes $45 million in newly reported data. a/ Preliminary. OFFICIAL USE ONLY OFFICIAL USE ONLY " ° " Early in November the Japanese Minister of Finance revealed that the World Bank would extend credits of only up to $50 million during Japan's next fiscal year which begins in April. Japan had requested $100 million and for the current fiscal year was earlier allocated $150 million. Foreign exchange. The spot middle rate for the yen in terms of dollars strengthened briefly in the second week of September, but weakened again by the end of the month. During the first half of October the rate strengthened slightly. In the forward market, where the yen has been at a premium since June, the yen appreciated moderately after the first week of September, but then weakened later in the second week of October. Because of the weakening of the yen in the spot market, the premium reached its highest level in recent years at the end of September when it was at 1.38 per cent annum. Table 11. Japan: Customer's T.T. Exchange Rate of Bank of Tokyo in Tokyo Yen-dollar spot middle rate Three-month forward middle rate Forward premium in per cent per annum August 30 362 .30 361 .70 September 6 13 20 27 362 .05 362 .15 362 .25 362 .35 361 .45 361 .20 361,.20 361 .20 .66 1 .05 1 .16 1 .27 October 4 11 15 ^ 3 6 2 .10 362 .30 362 .25 361.,20 361. 20 361. 40 ,99 l . ,21 94 . 66 Asia, Africa and Latin America Section. OFFICIAL, USE ONLY / Chan 1 INTERNATIONAL MONEY MARKET YIELDS FOR U.S. DOLLAR INVESTORS 3 - M O N T H E U R O D O L L A R D E P O S I T VS. CERTIFICATE O F D E P O S I T Wednesday figures * I SIT m.s. ciiTinciTi or I beposit EURO-DOLLAR OVER | SELECTED I N T E R N A T I O N A L MONEY RATES Friday figures E U R O - D O L L A R D E P O S I T RATES ( L O N D O N ) 4= U . I . H i l l MIICHASI *er. feet. JM. 1111 I'M '*$* INTEREST ARBITRAGE, Fridoy figures* UNITED STATES / C A N A D A f 1 3 - MONTH TREASURY BILL RATES BIL RATE DIFFERENTIAL AND FORWARD CANADIAN DOLLAR S M E A D IN F A V O I O F C A N A D A — 3 - M O N T H C O V E R E D RATE DIFFERENTIALS (NET INCENTIVES) 1962 1963 1964 196$ INTEREST Friday Al GE, NEW Y O R K / L O N D O N figures 3 - M O N T H TREASURY BILL RATES RATE DIFFERENTIAL A N D 3 - M O N T H FORWARD STERLING RAT DIFFERENTIAL WITH F O R W A R D E X C H A N G E C O V E R (NET I N C E N T I V E ) CHART 4 was not published in this issue. Chart 5 SHORT-TERM INTEREST R A T E S * •VI • (UIO-DOllAI u. i . - LONDON r^/ yw 11*5 4^ 3 month ireoiury bill t o l d lor all countries encepl Japan on d Switzerland (3 month deposit role) "f" 3 month rate for U S dollar deposits in London (Average role on bank loons and discounts) LONG-TERM BOND YIELDS J — v r INDUSTRIAL STOCK INDICES 5wi$i Bonk Corporolion indvstri SPOT EXCHANGE RATES - M A J O R i 1 1 1 CURRENCIES AGAINST i i FRENCH UANC 1 U.S. DOLLAR i ! | * • ' «•«» Above par i 1 i i ~y i n 6 I A N fftANC A / v L c - p v \A W V| eu TCH 6UIIDEI 1 1 1 1 1 1 1 1 1 1 1 M i l l ! 1 1 1 1 1 1 1 1 1 1 Below p a r - a 1 1 « 1 1 J i i S 1143 i , 1 i i 6 M v—"i i i 1 11*4 1 1 $ Q 1 1 e r£ is i, 1 1 * 1 1 J !•*$ I I $ 1 1 D n 3 - M O N T H FORWARD Friday figures EXCHANGE RATES A G A I N S T U . S . DOLLARS A G A I N S T P O U N D STERLING - L O N D O N mark A G A I N S T POUND STERLING - L O N D O N a It. November 24, 1965 H, 13 No. 223 III. Latest Figures Plotted In H. 13 Chart Series, 1965 Per cent per annum Chart 1 Upper panel (Wednesday > Nnv. 1 7 Chart 5 (Friday, Nov. 19 , except as noted) ) Euro-$ deposit s. 00 U.S. certif. of deposit 4.49 Treasury bills: U.S. Nov. ) 1Q Euro-dollar deposits: Finance Co. paper: Call 7-day 30-day 90-day 180-day 4.25 4.38 4.50 5.00 5.06 U.S. 4. 38 Canada 5.05 Hire-purchase paper, U.K. 4.08 Euro-$ deposit (London) 5.00 Japan: composite rate (Date: sPp1-, in ) 7.680 Chart 6 U.S. govt. (Wed. , Nov. 17 ) Canada 4.Q8 U.S. 4.07 Spread favor ^Canada +q, q i Forward Canadian dollar -Q.81 Net incentive (Canada +) -p.80 U.K. war loan (Thurs. , Nov. 18 6.43 German Fed. Railway (Fri. » Mrw 1 Q 7.49 Swiss Confederation ( F r i * » Nov. 12 JuU Canadian govt. (Wed. , Nr>v. 1 7 Chart 3 (Friday, Nov. 19 Treasury bills: 3.88 Canada Bonds: Nov. 19 Treasury bills: Germany Swiss 3-month deposits (Date: net. 15 ) 4. 75 Chart 2 (Friday» 4.07 U.K. Lower panels (Friday, Per cent per annum ) U.K. 5.33 U.S. 4.07 Spread favor U.K. +1,26 Forward pound -1.26 Net incentive (U.K. +) For description and sources http://fraser.stlouisfed.org/ September 23, 1964. Federal Reserve Bank of St. Louis Netherlands government perpetual ) (Fri., Nov. 12 5.44 0.0 of data see special annex to H. 13 Number 164,
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