TOKYO -- It is shortly before midnight Wednesday, and in the trading room of Yamaichi Securities Co. Ltd., five weary men are sitting at their desks eyeing computer screens filled with numbers. The boss, whose stocking feet are propped up on his desk, takes long, slow drags from a cigarette. Occasionally, the men exchange a few words or answer the phone; mostly, they just gaze at the computer screens.
"Pretty boring," one of them comments.
Indeed it is, and that is precisely what makes the situation noteworthy. The lack of action in Yamaichi's trading room is symptomatic of a trend that is shaping up as a potentially serious problem for the United States -- the growing reluctance of Japanese investors to continue pouring money into U.S. financial markets.
The trend is likely to continue at least until mid-1991, economists say, and that is not good news for an already hard-pressed U.S. economy. The new Japanese aversion to U.S. securities likely will prop up interest rates at a time when the slumping American economy badly needs a boost from lower rates.
As one of Japan's four major securities firms, Yamaichi has played a key role in helping to funnel tens of billions of dollars into U.S. markets over the past decade. The firm's main customers, Japan's huge life insurance companies, pension funds and banks, have been particularly important purchasers of U.S. Treasury bonds.
So tonight ought to be busy, because in New York, where it is mid-morning Wednesday, the Treasury is in the midst of one of its quarterly auctions of medium- and long-term bonds. But at Yamaichi, the auction is stirring little interest.
As recently as two years ago, Treasury auctions were an occasion for great excitement at Yamaichi, recalls Mototoshi Ogawa, a scholarly looking 30-year-old bond trader.
In those days, Japanese financial institutions eagerly snapped up U.S. securities. At auction time, "it was like a festival here," Ogawa says. Twenty or so Yamaichi bond traders and salesmen would stay all night in the trading room, and "when a salesman would get a $100 million order from a customer, he would shout, and everyone would clap."
Yamaichi would also send a top executive to New York to coordinate the firm's Japanese and U.S. trading operations.
But tonight, only a trickle of small orders has come in and Yamaichi hasn't bothered to send anybody to its New York office. The salesmen, knowing their customers' indifference, are barely making an effort to drum up business. One of them, Masayuki Enomoto, visited a top investment officer of a big life insurance company this afternoon. According to Enomoto, the man said in mock surprise: "Oh, is there a Treasury auction today?"
The scene is just one manifestation of a phenomenon that has been building for months. After five years in which Japanese purchases of U.S. bonds and stocks ranged as high as $50 billion a year, Japan's financial institutions actually sold about $9 billion more in U.S. securities than they bought during the first half of 1990, according to the Ministry of Finance. In the six months from March to September, Japanese purchases of foreign bonds and stocks in general were down 60 percent from a year earlier.
The slowdown in Japanese bond purchases "means that interest rates are going to be higher than they would be otherwise," said Richard Woodworth, a bond specialist at Merrill Lynch Japan. Long-term rates are likely to stay relatively high, he said, making a recovery in housing and business capital spending more difficult.
The development provides something of a morality lesson. For years, the inflow of funds from Tokyo helped sustain the long U.S. expansion, making it easier for Washington to borrow the hundreds of billions of dollars needed to cover its annual budget deficits. Many economists warned that the country was becoming dangerously addicted to Japanese capital and would suffer if the flow dried up.
Fortunately for the United States, the shrinkage hasn't taken the form of a sudden, panicky dumping of U.S. bonds and stocks. But the statistics leave no doubt that the shrinkage is occurring. Although Japanese direct purchases of companies, properties and factories continue, the total outflow from Tokyo is smaller, especially for bonds and stocks.
Nippon Life Insurance, the world's biggest, exemplifies the trend. It recently disclosed that it is scaling back the proportion of new funds invested abroad to less than 10 percent, compared with at least 15 percent in recent years. Moreover, from that smaller pie of overseas investments, a reduced share is going to the U.S. market and more to Europe.
For the Yamaichi foreign-bond traders, this is bad news, but the reasons for it are compelling, they say.
In the first place, one of the most attractive features of U.S. securities -- the higher interest rate yields in comparison with Japanese bonds -- has all but vanished. This is because Japan's central bank has driven interest rates sharply upward in an effort to cool the economy and prevent an outbreak of inflation.
Second, there's the problem of the sinking dollar. Any Japanese buying a U.S. investment has to consider the risk that the dollar will continue to slide, eroding the investment's value in yen terms.
All these problems are compounded by a third one: the drubbing that the Tokyo stock market has taken this year. The 41 percent decline in Japanese stocks since last December has wiped out a big chunk of the value of the holdings of life insurance companies and other institutional investors, rendering money managers much more cautious about taking risks overseas.
"When the Japanese stock market was performing, the life insurance companies could cover their foreign exchange losses with their gains from the stock market," Ogawa explained. "Now they can't do that, and everyone is trying to avoid foreign exchange risks."
A Deadline Approaches
At 1:50 a.m., after calling a few friends at other Japanese firms, Ogawa punches a button on the console at his desk. He is connected with Mel Swanborn, the head of Yamaichi's bond trading operation in New York, where it is now 10 minutes before noon.
Both men are aware of a looming deadline: In a little over an hour -- at precisely 1 p.m. Eastern Standard Time -- all bids for the Treasury's auction of $11 billion worth of 10-year bonds must be submitted. The Treasury hopes that securities firms will bid aggressively, offering to buy bonds yielding a few hundredths of a percentage point less than the current market rate yield of about 8.51 percent. If, for example, the department can sell the bonds at an 8.47 percent yield instead, U.S. taxpayers will save a total of $44 million in interest payments.
"Our book hasn't changed at all," Ogawa tells Swanborn, referring to the orders for Treasury bonds from Yamaichi's customers. "The Japanese don't have an exciting book today. How's the U.S. domestic side right now?"
Ogawa is told that the U.S. bond market, which has enjoyed a good week so far, is continuing to look healthy. He also learns that one big institutional investor is rumored to be planning a huge bid. He reports this tidbit to his boss, Hideo Takemura, who is sitting next to him. Takemura, who is staring at a computer screen, nods impassively.
A spate of bad economic news has made Treasury bonds attractive to American investors. This is for two reasons: First, the bonds offer a chance to lock in relatively high yields before interest rates drift lower as a result of the sluggish demand for credit. Second, the government-guaranteed bonds look a lot more secure at a time of recession than do "junk" or other risky investments.
The U.S. investors' appetite for the bonds means that for this auction, at least, nobody cares much about the fact that the Japanese are probably going to sit on the sidelines. In previous auctions, however, the level of Japanese participation has mattered a great deal -- and it is likely to matter in the future.
As the auction deadline grows closer, the tempo picks up a bit in the Yamaichi trading room.
Working through the firm's New York office, Takemura orders two $100 million bond trades in a gamble that interest rates will rise a couple of basis points before the auction. The firm stands to make a quick profit of more than $125,000 for each basis point. Takemura smokes almost nonstop and jiggles his right leg, presumably reflecting the fact that the firm also stands to suffer a $125,000 loss for each basis point that rates move in the wrong direction.
At 2:55 a.m., with the auction deadline just five minutes away, Takemura punches a button on his console and places Yamaichi's bid, which is relayed to a messenger in the Federal Reserve Bank of New York.
About an hour later, when the auction results are announced, the Yamaichi traders learn that the firm has successfully bid for about $480 million worth of bonds, some yielding 8.51 percent and some 8.52 percent. A little less than half of the bonds will go to Yamaichi customers. The rest are for Yamaichi's own trading account; Takemura later orders the bonds sold and the firm ends up breaking just about even on its trades for the day.
From the Treasury's point of view, the auction has been fairly successful, but Japanese firms have reportedly bought only about 20 percent of the $11 billion in bonds that were auctioned off, a substantially lower figure than the 30 percent to 40 percent that has been typical in recent auctions.
After the auction, Ogawa, who has been at work nearly 21 hours, reflects on whether the current trend should be worrisome to the United States.
"I think so," he said quietly. "Japanese investors are just the same as American investors. They are profit-oriented. They are not going to volunteer to go into the U.S. market."
Special correspondent Yasuharu Ishizawa contributed to this report.