The EconomistSeptember 14th 2019 Finance & economics 732 nental European ones probably will not.
Mr Li is no patsy for China. Last summer
he tussled with Beijing when the Shenzhen
and Shanghai exchanges blocked main-
land investors from buying shares in Hong
Kong-listed firms with dual-class struc-
tures. Nevertheless, six members of hkex’s
13-strong board are appointed by Hong
Kong’s government, notes an investment
banker close to the lse. hkex could try to
increase its independence by asking the
territory’s financial secretary to refrain
from exercising his right to choose its
board members, but changing the rule it-
self is not on the agenda. For their part, lse
shareholders are unlikely to see hkex’s of-
fered price, at a relatively low premium of
23%, as sufficient temptation to abandon
the Refinitiv deal for one that has a serious
risk of being blocked.
Backers of the agreement with Refinitiv,
the owner of Eikon data terminals, are
therefore confident. They note the mar-
ket’s welcome for the lse’s further expan-
sion into data and analytics. The ex-
change’s shares had risen 20% from the
date of that offer to just before hkex’s bid.
The Refinitiv deal also faces regulatoryhurdles, however. Like hkex, the lse
swims in politically treacherous waters.
China’s desire to exert control will have
been one of the motives for the Hong Kong
exchange’s London gambit. As for the lse,
the eu’s fears that post-Brexit London will
be a freewheeling offshore centre could
prompt its regulators to seek to limit the
British exchange’s growth. The Refinitiv
deal faces a gruelling competition review
in Brussels over concentration of finan-
cial-data ownership. Mr Li’s bid to escape
trouble at home may not succeed. But the
Refinitiv deal is not home and dry either. 7Buttonwood The Japan bid
Rising sumsSource: Haver AnalyticsJapan, international investment position
% of GDP0501001502001996 2000 05 10 15 18AssetsLiabilitiesI
t would behard to think of a business
that is on the face of it quite as dull as
Norinchukin Bank. A co-operative, it was
founded almost a century ago to take
deposits from and lend to Japanese
farmers. Yet Norinchukin came blinking
into the spotlight earlier this year when it
emerged that it had been a voracious
buyer of collateralised loan obligations
(clos)—pools of risky business loans
used to finance buy-outs by private-
equity firms. At the last count, in June,
Norinchukin owned $75bn-worth.
The escapades of Norinchukin offer a
parable. One part of its lesson is that
when interest rates are stuck near zero
for a long time, as they have been in
Japan, banks’ normal source of profits
comes under pressure. The other part is
the lengths to which they must go to
boost those profits, in this case by buying
exotic foreign securities with attractive
yields. Norinchukin is not alone. Japan-
ese banks and insurance companies have
been big buyers of the triple-A-rated
tranches of clos, as well as other sorts of
investment-grade corporate debt.
For this, blame negative bond yields.
When the Bank of Japan’s board meets on
September 19th, it is not expected to
reduce its main interest rate, currently
-0.1%. But any increase in interest rates
seems a long way off. And as long as rates
are at rock-bottom in Japan, it is hard for
them to rise in other places. Bond-buying
by desperate Japanese banks and insur-
ance companies is a big part of what
keeps a lid on yields elsewhere.
Japan’s sway on global asset markets
has been felt ever since it liberalised its
capital account in 1980. Later that decade
Japanese investors snapped up trophy
properties in America, such as the Rocke-
feller Centre in New York and Pebble
Beach golf course in California. In the1990s they piled into American tech firms.
Both forays ended badly, but Japan’s stock
of foreign securities has kept growing as
its surplus savings have piled up.
Japan is already the world’s biggest
creditor. Its net foreign assets—what its
residents (government, householders and
firms) own minus what they owe to for-
eigners—are worth around $3trn, or 60%
of its annual gdp. And that understates
Japan’s influence on global asset markets.
Since 2012 both sides of its national bal-
ance-sheet have grown rapidly (see chart),
as Japanese investors borrowed abroad to
buy yet more assets.
Japan’s impact is felt most keenly in
corporate-credit markets in America and
Europe. Its pension and insurance firms,
which need to make regular payments to
retirees, are at least as hungry for bonds
with a decent yield as are their peers else-
where. But the grasping for yield is made
all the more desperate by the struggles of
Japan’s banks. It is hard to make money
from lending to the government when
bond yields are negative. In ageing, high-
saving Japan, private-sector borrowers arescarce. So bank profits have suffered. A
report last year by a financial regulator
found that half of Japan’s regional banks
lost money on their lending businesses.
Though yields in Europe are lower
than in America, they are nevertheless
attractive to Japanese buyers who hedge
their currency risk. Most currency
hedges are for less than a year and many
are for three months. The cost of such
hedges is linked to the cost of short-term
borrowing in the foreign currency. A
rising yield curve thus gives the best
currency-hedged returns: the yield is
high at the long end but short rates are
low. For that reason, currency-hedged
Japanese investors have preferred to buy
corporate bonds or other credit securi-
ties in Europe rather than in America,
where short-term interest rates are rela-
tively high.
Locals lament that high-quality Euro-
pean and American corporate bonds are
treated as safe assets, akin to sovereign
bonds. Analysts’ efforts to work out
which companies are more or less likely
to default, and so which bonds are more
or less valuable, seem almost quaint.
“The Japan bid is not driven by credit
risk,” complains one analyst. “It is all
about headline yield.”
Some see Japan as a template: its path
of ever-lower interest rates one that
other rich, debt-ridden economies have
been destined to follow and will now
struggle to escape. But Japan’s troubles
also have a direct influence on other
countries. This makes itself felt through
the country’s considerable sway over
global capital markets. The outworkings
are strange and unpredictable. Who
would have thought that the rainy-day
deposits of Japan’s farmers and fisher-
men would be used to fuel leveraged
buy-outs in America and Europe?How rock-bottom bond yields spread from Japan to the rest of the world