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Japan: Land of Rising Risk

Japan is looking less and less like its former self by the day. In fact, the country appears as if it is deliberately switching strategies for handling its economy, which is the world's second largest, in recent months.

While the domestic currency, the yen, has been on the climb vs. the dollar, Japanese Finance Minister Kaoru Yosano said today that his government would not intervene to prevent any further strengthening. While it's not uncommon for Japan to allow some strengthening in the yen for a bit, it's extremely rare for any officials to confirm their reluctance to do so when that process is well underway.

With exports the country's key source of revenue by far, Japanese financial policymakers are usually terrified of upsetting the precarious earnings balance its volatile national currency creates for companies such as Nintendo and Toshiba.

But there appears to be a renewed sense of optimism going on in the country right now. The Central Bank of Japan announced early in the day that it would accept foreign-currency denominated sovereign bonds as collateral for making loans, and it also hinted that the worst may be behind the land of the rising sun.

After "deteriorating significantly," economic conditions are beginning to "level out," the bank noted optimistically. Once again, that's a big statement when it comes in Japanese.

In other words, Japan is betting that more aggressive long-term lending at its ultra-low interest rates will offset any short-term earnings pain in its exporting sector.

That highly aggressive stance echoes the spree of bargain hunting for beaten-down U.S. financials that traditionally low-risk, deposit-taking Japanese institutions went on late last year. While their Chinese rivals stayed (shockingly) mute, in September Japan's megabanks Mitsubishi UFJ, Nomura and Sumitomo struck overnight deals to purchase multi-billion dollar stakes in America's big banks just when they most needed the cash.

It seems that just as everyone has grown tired of the volatility induced by adding risk, Japan can't get enough of it. Part of this is obviously due to the credit crisis.

Whereas Japan used to rely on the U.S. and European economies to export the lion's share of risk and return its way (mainly in exchange for futuristic technology in the form of consumer goods), now that those economies are cooling the pie a bit, Japan is merely upping the ante to get things going again.

The Japanese know that eventually, everyone will be in the mood to make some serious money again. Next time round they just want more of it happening on their own turf.

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