Why are you so fascinated by the municipal finance market in Japan?
Japan represents an astonishing 42% of the global public finance market and the Japanese government is on a drive to pare its role in the direct financing of the municipals. In the future it might even downsize its existing holdings of municipal sector debt, which stands at roughly Eu600bn, either through selling it or not refinancing.
Back in 1994 about 65% of local government debt was funded by the central government, while today it has already fallen to 40% and that figure is falling year on year.
Also in 1994 the average life of municipal debt was roughly 20 years, while today it has fallen dramatically to about eight years, creating a major asset and liability problem for these borrowers, which need to fund their very long term public works assets, which have an average life of about 23 years.
This represents a massive opportunity for an institution such as Dexia, which is one of the worlds leading lenders to the public finance sector. Private long term money is needed urgently and we have few, if any, competitors in Japan or overseas.
There are more than 3,300 municipal entities in Japan. Where do you stop?
We currently have about 800 municipalities in our proprietary model and our immediate focus is on about 350 of them with a population of more than 80,000 each. We began lending only last December and we already have a book of roughly Eu3.5bn in local assets, either loans or bonds, while Dexia at large has total Japanese assets equivalent to about Eu7bn.
In late February we closed the first joint lending exercise with one of the many regional, or Chikin, banks that operate in all of our target municipalities. This was a 20 year loan direct to a municipal and jointly with a Chikin bank.
At first we had thought of these numerous Chikin banks as potential competitors, but now we embrace them as partners that can bring opportunities to us to match our funds with their clients needs. We also work with the mega-banks, which do not like to lend long term, so again we are a potential partner not competitor.
We began a tour of Japan last September with the aim to visit all the 350 municipalities in our targets, as well as the associated Chikin banks. We will finish that massive exercise by the end of April this year.
You must be remarkably positive about Japans future, as you are focused on even relatively small towns across the length and breadth of the country.
Yes, this is indeed a remarkable country. My personal view is that the state has performed a miracle of what I might call island Keynesianism. What do I mean by this? I mean that the state has, I believe, saved this country in the past 15 or so years since the bubble burst by taking on massive public debts to keep the economy moving, to maintain financial stability, to ensure that most Japanese people kept their jobs and that the nations social infrastructure and values did not erode.
I refer to the island, because this is a country from which, on the whole, little money flows out most of the massive savings stay at home. The result of the borrowing binge is debt to GDP of 160%, and municipal debt to GDP of 40%, compared to 6% in France, 4.7% in the UK and an average of 5.8% in the EU.
Is this a major problem for the nation, especially if per capita debt will rise with a falling population? Perhaps, but probably not; as the government, and the municipal sector, is now on a path towards downsizing debt and reducing its collective balance sheet through asset disposition.
Even worries about the demographics are, I would argue, overblown. By 2050 the population will be around 90 million, down from 128 million today, but at the end of the Second World War it was 70 million and look what was achieved in the five decades after the war ended.
Amidst all this, as a foreign lender we need to be aware of the big picture trends and extremely sophisticated in how we position our loan book to appropriately deliver rewards for our shareholders compared with the risks we take here. That is both a challenge and a great opportunity.