FINANCE-PUBLIC & PRIVATE.
[BY OUR CITY EDITOR.]
JAPAN AS A BORROWER.
[To the Editor of the SPECTATOR.] SIR,—There are one or two reasons why it would be unwise to over-emphasize the dullness of the investment markets during-the past few days. It would-be an easy matter to assert that as th date for the reassembling of Parliament approached, a recurrence of uneasiness occasioned selling of securities, and especially of British Funds and kindred stocks. Up to a point, the statement would be perfectly true, but not only would it leave out of consideration certain other factors which have con- tributed to stock movements during the week, but it would ignore the possibility of some of the weakness of British Funds being traceable to fresh " bear " opera- tions. It will not be forgotten that, soon after the meeting of Parliament in January, extreme weakness in stocks was followed by a sharp rally, due to the fact that the public did not sell heavily immediately following the establishment of the Labour Government,. while the hurried closing of " bear " positions disclosed a com- parative shortage of stocks. I am not suggesting that these experiences will necessarily be repeated during the next few days, but simply that it is difficult to tell for the moment how far the dullness of stocks, occasioned by political anxieties and the threat of the dockers' strike, may have been solely due to nervous selling by real holders, or how far it may have been accentuated by a renewal of speculative operations for the fall.
Moreover, as I have already indicated,. other factors of a less sinister character have contributed to the special dullness of high-class investment stocks. Chief among these have been dearer money, indications of better trade and signs of large fresh capital issues. These first two factors have been operating for the past month or two, and if they have not actually prompted selling of investment stocks by real holders, they have at least checked fresh purchases by large financial interests. Moreover, even if the acute apprehensions concerning Labour Government legislation have partially subsided, the feeling rightly or wrongly grows that the atmosphere has become one more favourable to foreign loans or to industrial issues giving a fairly high yield of interest, than to gilt-edged descriptions where the income yield when the tax is deducted still appears to be rather low. In other words, the trend has been for market activity to shift a little to the second rank of investment stocks, and, similarly, it is thought that this same tendency may be noticeable in the character of capital flotations in the near future.
Finally, it has, of course, been an open secret for some months past that sooner or later the earthquake disaster of last autumn in Japan must entail a large foreign loan by that country. At the time of the disaster, however, I stated in your columns that the balances of Japan abroad were such as to enable that country to refrain from any kind of hurried panicky borrowing. Not only has this proved to be the case, but Japan has manifestly waited until there was abundant evidence of a return to something approaching the normaL Even immedi- ately following the disaster, it is probable that Japan would have got a good response to a loan, for not only was sympathy evoked by her misfortunes, but there was complete confidence in Japan's recuperative power. Very wisely, however, the Japanese Government quietly set to work on reconstruction, utilizing for the time being her large balances in New York and London, and, indeed, there is little doubt that so far as this country is concerned, the first stirrings of trade activity in the autumn of last year can be directly traced to Japanese orders for materials to carry out the work of reconstruction and rebuilding.
Nowhere, however, more than in this country is there a keener realization of the fact that to place large orders abroad means the requirement of ample credits at those centres, and though the Japanese loan offered this week appears to be large, those who have followed (Continued on next page.) the matter most closely are impressed with the economy which Japan must have practised to make the present operation Sufficient for the work of reconstruction. The amount of the loan offered in this country is £25,000,000, and I believe that the amountto be offered simultaneously in the -United States is £30,000,000, making £55,000,000 in all: This -does not mean, however, that the external debt of Japan is increased by that amount, because, in addition to .reconstruction requirements, the present loan offered on both Sides of the Atlantic deals with the conversion of 41 per cent. Japanese bonds for about £35,000,000, which will mature next year.
' As regards the English portion of the loan for £25,000,000, I am writing without the formal prospectus in my hands, which, however, will be issued to-night, and I have very little doubt that by or before the time that this article appears in print, the loan will have been fully subscribed. It is in 6 per cent, form at the price of 871, redeemable at latest in 1959 with a fixed Sinking Fund commencing five years hence, sufficient to redeem the whole of the loan within thirty-five years from the present date. The holders of expiring 41 per cents. have the option of converting into the new 6 per cents, on the basis of £125 for each existing £100 of old , bonds plus a small cash payment for each 1100 con- verted. The loan gives a flat yield of just under 7 per cent., or, allowing for redemption, practically over 7 per cent. That is a good yield even in these days, and, moreover, I think that the success of the loan will be ensured by at least three main influences. The first is, undoubtedly, the good credit enjoyed by Japan. It is a credit obtained, perhaps, in the first place, many years ago by her valour and skill in war. That credit, however, became more firmly established when Japan showed in the days of peace a skill with regard to the conduct of her finances fully equal to that displayed in war, and, finally, on the occasion when the test came of Japan's loyalty and good faith in the matter of Alliance obligations, she was certainly not found wanting either in promptness or in efficiency. As. with the individual, so with nations, these things are reflected in credit power, and if, as I anticipate, the Japanese loan is a great success in spite of her recent economic disaster, it will undoubtedly be primarily due to a recognition on the part of both America and this country of the qualities I have mentioned. In addition, however, there has probably never been a loan issued Under such -extraordinarily powerful auspices. Moreover, the trend of investment business to which I have referred at the beginning of this letter must also be reckoned among the helpful influences.—I am, Sir, yours faithfully,
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