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DIVISI'j.N O F I N T E R N A T I O N A L F I N A N C E BOARD OF GOVERNOR* September U, 1963. No. 120 ^ C A P I T A L MARKET DEVELOPMENTS ABROAD jtSHAHY r, i"63 • I I*—Japan: Money and Capital Markets in August o; The proposed U.S. interest equalization tax has already had an influence „.-^on_J^panese.-foreign borrowing activity. Several firms have either postponed or are reconsidering their foreign borrowing plans. In addition, in late July the Japanese Vice Minister of Finance left for a three-week European tour to investigate opportunities for increased Japanese borrowing in certain European countries and the United Kingdom. The Japanese authorities expect the proposed tax to reduce drastically foreign purchases of Japanese stocks, which are largely made by Americans. In the fiscal year ending March 31, 1963, foreign purchases of Japanese stocks totalled approximately $165 million. The Japanese Government has'also been concerned about the impact of the tax on Japan's balance of payments and the domestic development program. According to Ministry of Finance estimates, the tax will have the effect • of chenging the originally estimated balance of payments surplus for the current fiscal yeai* from $88 million to a deficit ranging from $100 to $200 million. Following representations by the Japanese Government, including a special c-rip to Washington by Foreign Minister Ohira, a joint communique was released on August 2. The key points stated that: (1) a provision would be contained in the proposed tax measure allowing the President to grant certain exemptions if the tax threatens to imperil the stability of the international monetary system; (2) consideration will be given to some form of exemption for new issues of securities if serious difficulties, presumably in domestic output or the balance of payments, should arise in Japan; and (3) su-joint Japanese-American..economic consultative task force will be created to maintain close relations on these problems. New Japanese security issues in the United States remained at relatively high levels in July and August, totalling $33 and $27 million, respectively*. An increased volume of import acceptance financing is also reflected in increased liabilities to U.S. banks during the second quarter, as indicated in Table 1 below. Table 1. Japan: Short- and Long-term Borrowings in the U.S. (in millions of U.S. dollars J Change during quarter Bank loans V Securities i] 180 30 _30 512 722 _58 __58 780 212 ^ lUi 353 m i l IV I II Apr • May June 2 # -20 -U7 29 11 llf^/ 12$ 2\\V -111' 250 ^ 23 _36 51 • J3U _22 28 36 J>5 27 .•51 8 56 61 202 273 16 1U7 52 3 1/ Short-term liabilities to the U.S. banks. ?/ New security flotation;-. 3/ Preliminary. OFFICIAL USE ONLY (Decontrolled after 6 months) OFFICIAL USE ONLY - -2- Money market conditions and call loan rates remained relatively stable during July and August. Bank credit in June advanced less rapidly than a year earlier. In July the seasonally adjusted-trade deficit widened sharply as imports increased and exports remained unchanged from the previous month. International reserves fell $19 million in July but rose $26 million in August to $1,909 million. During July and the first half of August, the yen fluctuated only moderately in both the spot and forward foreign exchange markets. Money market. Despite a net contractionary impact from monetary developments in July, call loan rates remained unchanged during the month and the first half of August. Expansionary developments in July, as Bank of Japan loans increased ¥115 billion and bank notes in circulation fell ¥8 billion, were more than offset by the contractionary impact of a ¥110 billion decrease in Bank of Japan bond holdings and net Treasury receipts of ¥lUl billion. Interest rates. The unconditional call loan rate (for loans repayable at a day's notice) remained unchanged at 7«3 per cent in July and through August 2k* In general call loan rates have remained relatively stable since early March at lower levels than in 1962. The average interest rate on bank loans and discounts continued to decline through May, reflecting earlier reductions in the Bank of Japan's basic discount rate in March and April. (See Table 2)e Table 2. ' Japan: Average Monthly Interest Rates on Bank Loans and Discounts March June September December 1/ 1959 1960 1961 1962 1963 8.18 8.28 8.06 8.11 8.21 8.22 8.14 8.08 . 7.92 7.88 8.00 8.20 8.22 8.23 8.24 8.09 7.92 7,8oV May. Bank loans and discounts. Bank credit rose 1.3 per cent in June, compared to a rise of l.b per cent a year earlier. This represents a reversal of the general tendency for bank credit to rise at a somewhat faster rate this year than in 1962, although April was also an exception. In June, loans and bills discounted rose 1.9 and 3.2 per cent, respectively, while security holdings fell 3.8 per cent. In June of last year, all three groups registered increases ranging from 1.0 to 1.7 per cent. Deposits increased 1.8 per cent in June in contrast to no change a year earlier. As a result of the slower rate of increase in credit in the April and June period, total bank credit in the second quarter rose 4.0 per cent against 4*6 per cent a year earlier. Deposits, however, increased 3.1 per cent in contrast to a rise of only 0.6 per cent in the corresponding months last year# OFFICIAL USE ONLY OFFICIAL USE ONLY -3- The proportion of bank loans and discounts extended for purchases of equipment was 16,$ per cent in June, slightly lower than in May, but still above the probable cyclical low of 16.3 per cent in March. Bond market. New issues of domestic bonds totaled ¥119 billion in June, down ¥U billion from May, but considerably higher than a year ago and early in 1963. New issues of bank debentures totaled ¥77 billion, down ¥5 billion from the May level. In June, new issues of industrial debentures totaled ¥23 billion and public corporate debentures were ¥20 billion, marking a rise of ¥3 billion and a decline of ¥1 billion over the May level, respectively. Bond yields in June were unchanged from earlier levels except for a slight rise in yields on industrial bonds. Stock market. The announcement by the United States on July 18 of a proposed interest equalization tax on American transactions in foreign securities led to a precipitous 8 per cent decline in stock prices on July 19-20. About onehalf of the loss was recovered by July 2hs but during the rest of July and August the market generally declined. A new low for the year was reached on August 26 when the stock average hit ¥1,31L, or 13 per cent below the July 18 level. By August 3Q the stock average had moved up moderately to ¥1,35>1, Table 3• Japan: June 2k July 1 8 15 22 29 Dow Jbnes Average of 225 Stocks, First Section of Tokyo Stock Exchange %1,533 1,597 1,588 1,5H 1,129 1,353 August 5 12 19 26 30 ¥1,392 1,W3 1,372 1,31k 1,351 1962 High Low ¥1,590 1,216 1963 High Low ¥l,63k 1,31k In order to help bolster the market, the Government has encouraged city banks to expand their credits to security companies and life insurance companies. Encouraged by the success of a similar pool in 19h9, the Tokyo Securities Dealers Association and the Tokyo Stock Exchange have announced that a stock purchasing pool will be formed as a further step to sustain the market. Foreign trade. The seasonally adjusted deficit on trade account widened sharply in July as imports increased 9 per cent and exports remained unchanged. (See Table H)« The seasonally adjusted deficit at an annual rate in July was $1,7 billion. During the second quarter the trade deficit at an annual rate was $1.2 billion,compared to $876 million in the first quarter and $£1*0 million in the fourth quarter of last year. The trade figures (monthly, or monthly averages, on a customs basis) in Table It are based on seasonal adjustment factors computed by the Board of Governors of the Federal Reserve System* OFFICIAL USE ONLY OFFICIAL USE ONLY Table Japans Imports Exports Trade Balance l9l 378 -116 Seasonally Adjusted Foreign Trade C~in millions of dollars -) 1962 II III I 168 I1O8 - 60 -a- IV I " II 188 L6L L28 lil9 US - 2h - 99 - 73 452 51*5 LL2 -103 1963 May Aor. 56L L69 - 95 537 U21 -116 June July 581 535 U36 136 - 99 -115 Exchange reserves and capital flows. International reserves rose $26 million in August to a level of $1,909 million. This follows a decline of $19 million in July. The current account of the Japanese balance of payments as measured on an exchange transactions basis registered a deficit of $55 million in July compared to $3h million in June. Since the first of the year, Japan has had a deficit on current account each montfy in contrast to monthly surpluses during the last half of 1962„ Net long-term capital receipts were $Ul million, down from the $63 million level in June, and there was a net outflow of $8 million in short-term capital in July, compared to a net outflow of $27 million in June. With net receipts of $3 million under the errors and omissions item in Julys the over-all balance of payments deficit was $19 million,, According to preliminary reports, Japanese short-term liabilities to U.S. banks fell $31 million in June. (See Table 5)# This represents a reversal of the trend during February-May when liabilities rose $209 million, probably reflecting in part a rise in trade acceptances to finance the recent rise in Japanese imports. Table 5. Feb. (in millions of U.S., dollars) Mar. June July A m i M i 1959 168 20l* 22L 2h2 #0 2# 175 269 i960 362 U20 250 L88 . 372 U67 586 628 1961 1,069 1,196 875 9# 1,159 1,272 1,3L1 1.335 1 9 6 2 1,601--1,685 1,778 1,775 1,762 ; 1,758 ,1,765 1,"'6? 1 9 6 3 1,697 1 , 6 9 1 1,751 1,876 1,900±/ 1,869V Sept. Oct, 26^ otO 1,200 1,711 262 1,281 1«710 ii Jan, Deep 2?5 32h 806 7-1 1,292 1,528 1,662 1,71,0 NOTE? Data for 1962 and 1 9 6 3 have been recently revised and include $52 million reported by banks initially as of December 31, 1961» a/ Preliminary, During August, Japan issued $27.3 million in securities, as indicated below. This compares with $32,9 million in July, as detailed in the previous money and capital markets report. Borrower Tokio Marine and Fire Insurance Co., Ltd, Nippon Telegraph and Telephone Public Corp. Amount Comment $ 7o3 million lt0G50G0 A„DoRo shares at $18,25 per share 15-year, 5-3/4 per cent bonds priced to yield 6.08 per cent and placed pncli zly. $20:0 million OFFICIAL USE ONLY OFFIC] f-L Ur. Several - developments have occurrvd in resoonse to the United States' proposed interest equalization tax. Mist;an.:lotor has announced that it will defer until 196U its planned vl5 million private bo^d flotation in the U.f, " Other companies reported to be reconsidering or postponing.borrowing in the U.S..include Toyota Motor, Ishikawajima - Harima Heaver Industries Co,, Hino Motor and Daihatsu Kogyo K.K. . On July 27, Vice Minister of Finance Shinichi Ishino began a three-week trip through Britain, Switzerland, France and West Germany to investigate the no£sibilities of raising additional canital in Europe. Earlier in March the Japanese were successful in raising 025 million in the German market. While in London Ishino signed an agreement concerning the conversion of the £>5 million ($lh million) 3.899 bond issue due to expire at the end of this year, On August 15, . . when a new million, 6 per cent issue was offered, primarily for the purpose of retiring the old issue, it received an overwhelming reception, being oversubscribed 28 times. Foreign exchange. The yen weakened in the spot market during the first half of July but strengthened somewhat in mid-August, (See Table 6). In the threemonth forward market, the yen remained unchanged from July 2 through August- 5, but weakened thereafter through mid-Aumist. because the spot rate depreciated proportionately r.ov-. than the forward rate, the forward discount narrowed in the first two weeks of July but widened s j ~ ; on Aurust 11;-15 as the yen strengthened in the soot market. Table 6, Jaoan: Customer's T. T, Exchange Rates of Bank of Tokyo in Tokyo Ten-dollar riot -.ij/'die rate June 2% 36?.15 July 5 12 19 26 362.30 362.35 362.35 362.35 Aug. 362.35 362,35 362.25 2 9 15 Three-month forward Middle ' rate . 362.LO ~ 362.53 362.53 362.53 362.53 Forward' discount in nor. cent per annum .28 . 362,53 362,'.':. 362,58 OFFICIAL USZ ONLY .25 ,20 .20 .20 ,20 ,?5 ,36 lie India; Money and Capital Markets During July 1963 During July, there was no marked change from the pattern of previous months in India's money and capital marketso As bank deposits increased and credit declined, the market for short-term money continued to ease. Banks increased their holdings of government securities* and reduced their borrowings from the Reserve Banke The gold market continued unsettled,, as trading in gold of more than lU carats was made illegal» Prices in the stock market remained depressed. The most notable feature in July was a spirited debate between the financial community and the Reserve Bank of India over the latterrs tight money policy,. The Bombay Bankers Association urged the Reserve Bank to modify the two-tier structure of discount rates, to remove ceilings on commercial bank borrowings from the Reserve Bank, and"to postpone the proposed liquidity requirement. It was argued that these changes would aid economic growth in the private sector, On July 255 Mrc -P. C. Bhattacharyya^ Governor- of -the Reserve Bank, defended the bank's policye He argued that the economic situation was not as bad as some of his critics claimed- Also, he believed that current monetary policy was keeping a reasonable balance between prices, productivity and the expansion of credit, and that an easy money policy might lead to a severs inflation0 Money market. The rate on day-to-day money continued its decline in July, in response to seasonal factors (See Table 1) c In mid-July, the rate fell below 1 per cent, its lowest level of the current slack season, and the first time in 1963 that it was below that of the corresponding month of the previous year: The marked strengthening of the call money rate at the end of the month was only temporary and by August 2, it had fallen back to 1 per cent. Table 1-. India: Inter-bank Call Money Rate in Bombay Monthly Average: 1962 May June July 3.70 2.88 1963 1.80 May •June July U.oti 3-59 a/ 1=55 a/ Selected dates - 1963: June 7 1U 21 28 ho 79 k,U9 3.10 1.99 a/ Average of Fridays0 OFFICIAL USE ONLY July 5 12 19 26 1.L9 0,80 0.80 3.10 - 7^ OFFICIAL USE ONLY Gold market. There are no official figures for July on the market price of gold of more than 1U carats since such trading was made illegal under the June 25 amendment to the gold control rules. However, newspaper reports indicate that the unofficial price of gold bullion fluctuated between $68-73 per fine ounce during the month. This is lower than the average price of $7L.19 in June or the average price of $82.35 in July 1962, Stock market. Stock prices continued to remain at depressed levels during July (See Table 2). Throughout the month there was a slight upward trend in prices, but this was wiped out, for the most part, in early August. Buyers of new security issues continued to be scarce. The depressed state of the stock market reflects the imposition of heavy taxes, especially on profits, under the current budget. Table 2. India; Price Index of Variable Dividend Industrial Securities (1952-53 = 100) Monthly average: 1962 May June July 195.3 189.9 18U.0 1963 16U.8 May June July 162.2 July 6Z 13 20 27 158,8 162.2 I63.5 161.2 Aug. 160.0 161.5 Selected dates - 1963: ! 1 8 15 22 29 163.0 162.7 162.2 161, U 158.1 3 Banking developments. JCn July, the trend of the previous two months continued: bank deposits expanded further, bank credit declined, holdings of government securities rose, and borrowings from the Reserve Bank fell. (See Table 3 ) ° Total deposits were 6.7 per cent higher than in July 1962. Holdings of government securities increased as the central Governmentopened subscription lists on.July 22 for a.6-year, h per cent loan at Rs. 99.50, and a 10-year, U J per cent bond at par - The two loans totalled Rs. 2,250 million ($U70 million) and were fully subscribed by July 26. This July issue was the second installment of the Government's borrowing program for fiscal 1963-6U, and both installments have raised Rs. 3,650 million, as compared to the target borrowing of Rs. 3,930 million„ July is traditionally the month of minimum borrowings from the Reserve Bank. This year, such borrowings outstanding at the end of the month totalled only Rs. Iu7 million. OFFICIAL USE ONLY = 8 - OFFICIAL USE ONLY Table 3« Deposits India; Scheduled Banks - Monthly Changes in Deposits, Boriowings from Reserve Bank and Principal Assets (in millions of rupees) Per cent Bank, Per cent Holdings of Change Credit Change Gov't Securities Per cent Change Borrowings from Reserve Bank 1962 July +2L6 +1.2 -309 -2.2 +L79 +7.9 - +10L +387 +398 +0.^ +1.8 +1.9 -367 -238 -L35 -2.3 -1.* -2 0 8 + 3l2 + 2.2 + 3.9 +5.2 -150 -1U9 - 12 9 1963 May June July Exchange reserves= During July, India's international reserves remained very stationary around $lj.60 million. The sharp decline at the end of June reflects India's repurchase of S2£ million previously drawn from the International Monetary Fund. Table India: International Monetary Reserves of Reserve Bank (.in millions of dollars - last Friday of month"} " " Months 1962 May June July U63 h$2 __ L6L 1963 May June July h9h U^9 Selected dates - 1963: June 7 1U 21 28 U88 U91 U8U L71 July ' 5 12 19 26 U60 hfO 161 ^9 Asia, Africa and Latin America Section. III. Nine Charts on Financial Markets Abroad Chart 1 - Interest Arbitrage, United States/Canada Chart 2 - Interest Arbitrage."'New York/London ~ Chart 3 - Interest Arbitrage for German Commercial Banks Chart - Interest Arbitrage, Frankfurt /London Chart 5 - Short-term Interest Rates Chart 6 - Long-term Bend Yields Chart 7 - Industrial Stock Indices Chart 8 - Spot Exchange Rates Major Currencies Against U«S0 Dollar Chart 9 - 3-month Forward Exchange Rates OFFICIAL USE ONLY - VNTiRIEST ARBITRAGE, UNITED ST A T E S / C A N AD A Thursday figures , 3-MONTH , Percent | [ TREASURY r BILL 11. RATE DIFFERENTIAL AND per 1 ; RATES FORWARD 1.1 J T ' CANADIAN I DOLLAR l ^ FORWARD RATE \ 11 RATE DIFFERENTIAL I960 WITH FORWARD 1961 EXCHANGE COVER 19 62 1963 annum INTEREST ARBITRAGE, 3-MONTH RATE RATE TREASURY DIFFERENTIAL DIFFERENTIAL NEW BILL AND WITH Y O R K / L O N D O N RATES 3-MONTH FORWARD FORWARD EXCHANGE STERLING COVER INTEREST ARBITRAGE FOR GERMAN COMMERCIAL BANKS Per c e n t p e r a n n u m 3-MONTH TREASURY EURO-DOLLAR BILLS, DEPOSIT LENDING RATE RATES GERMAN INTERBANK LOAN RATE EURO DOLLAR LONDON N I ! Xfv-i INTERBANK - GERMAN T R E A S U R Y BILLS RATE I I DIFFERENTIAL I AND I I FORWARD I DEUTSCHE I MARK S P R E A D IN F A V O R OF F R A N K F U R T F O R W A R D RATE DISCOUNT ( — ) INTERBANK LOAN RATE " T R E A S U R Y BILLS •" " | RATE | -- 1 • DIFFERENTIAL WITH NET I N C E N T I V E : 1 ! FORWARD I I IN F A V O R OF F R A N K F U R T ( + ) i \ INTERBANK LOAN RATE i (i ( R E A S U R Y BILLS Spue id I I or w u r | EXCHANGE I * O11 CJ B I E IO Oer ! 1 COVER AND INTEREST ARBITRAGE, FRANKFURT / L O N D O N Friday figures 3 —MONTH RATE TREASURY DIFFERENTIAL BILLS AND AND 3 —MONTH / "T' INTERBANK V RATE DIFFERENTIAL FORWARD \ \ G I R M A N WITH FORWARD — h V | ' ^ V / ^ * EXCHANGE RATES STERLING T R E A S U R Y BILLS v_ i G E R M A N INTERBANK LOAN RATE LENDING COVER —-V- Per ten. p e r SHORT-TERM INTEREST RATES * — —I d"EUR0-D0UAR - 10ND0N-V L N y> .1 J_L±JJ_ I— CANADA f V" L-V* 'I . I 1 1.1 und Switzerland ( J m o r« I h ilepoul r u l v ) ~j~ S month rule I or U S dollar d e p o v I •. tit I uiulon 1 J 1.1 J I L LLUJ I LONG-TERM BOND YIELDS 1_UJJ.J_1JL.LL1J. INDUSTRIAL STOCK Digitized I " for FRASER INDICES' ,958 = 100 Ratio scale GERMANY \ SPOT EXCHANGE RATES - MAJOR CURRENCIES AGAINST U.S. DOLLAR SWISS FRANC J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O - N D 3 - M O N T H Friday F O R W A R D EXCHANGE RATE Iiguiei AGAINST U. S. DOLLARS AGAINST POUND STERLING - LONDON k u . s . DOllAR X x , ^ / ' I I, I I I I \ h I I AGAINST POUND STERLING - LONDON r^V vx/^r 1961 1962 1963
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