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Cablegate: Japan's Response to Lehman and Aig Development

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RR RUEHFK RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #2558/01 2612158
ZNR UUUUU ZZH
R 172158Z SEP 08
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 7291
RULSDMK/USDOT WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHFK/AMCONSUL FUKUOKA 9895
RUEHNAG/AMCONSUL NAGOYA 8006
RUEHNH/AMCONSUL NAHA 2255
RUEHOK/AMCONSUL OSAKA KOBE 3636
RUEHKSO/AMCONSUL SAPPORO 0471
RUEHBY/AMEMBASSY CANBERRA 2772
RUEHLO/AMEMBASSY LONDON 2186
RUEHUL/AMEMBASSY SEOUL 1367
RUEHBS/USEU BRUSSELS
RUEHBJ/AMEMBASSY BEIJING 5368

UNCLAS SECTION 01 OF 02 TOKYO 002558

SENSITIVE
SIPDIS

STATE FOR EAP/J
TREASUREY FOR TREASURY IA: DOHNER, WINSHIP, AND FOSTER

E.O. 12958: N/A
TAGS: ECON ASEAN EFIN ETRD EINV FRB JP
SUBJECT: Japan's Response to Lehman and AIG Development

SENSITIVE BUT UNCLASSIFIED, PLEASE PROTECT ACCORDINGLY

1. (SBU) Tokyo markets fell sharply September 16 following news of
Lehman Brothers bankruptcy, only to rebound September 17 upon news
of the Federal Reserve Board's authorization of an $85 billion loan
to American International Group (AIG). After falling 5 percent
September 16, the Nikkei Stock Average was up 2.1 percent and the
broader Topix index was up 1.3 percent in September 17 trading. The
Tokyo Stock Exchange suspended AIG share trading prior to the
morning session, pending confirmation of reports that the Fed would
step in to support AIG.

2. (SBU) Insurance stocks, which were among the worst performers
Tuesday, were boosted by optimism over the AIG bailout. Among them,
Tokio Marine Holdings rose nearly 5 percent, and Sompo Japan
Insurance advanced 2.6 percent.
The AIG bailout also encouraged investors to snap up financial
issues including megabanks which fell sharply the previous day,
brokers said. Mizuho Financial Group climbed over 1 percent and
Mitsubishi UFJ Financial Group gained 1.5 percent.

3. (SBU) While Lehman Brother's September 15 bankruptcy court
documents indicated that major Japanese creditors, including Aozora
Bank, Mizuho, and Shinsei Bank, faced a total exposure of $1.67
billion, press reports indicated that due to credit-default swaps
the actual exposure was signifcantly more limited. Aozora Bank,
which was the largest Japanese creditor on the list, shed over 2
percent. Shinsei Bank, which was also on the list, lost nearly 7
percent.

Following a 2.5 trillion yen ($24 billion) injection of liquidity
into money markets September 16, the Bank of Japan again provided
3.0 trillion yen ($2.9 billion) through emergency market operations
to ameliorate financial market turmoil; the benchmark unsecured
overnight call money rate reached 0.57 percent, exceeding the
central bank's policy target of 0.5 percent.
Members of Prime Minister Fukuda's cabinet met September 15 to
discuss the implications of Lehman Brothers' bankruptcy, and the
following day State Minister for Economic and Fiscal Policy Yosano
remarked "[T]his has been expected since last year. It is unlikely
that the failure of Lehman Brothers will have an immediate impact."

Background on Lehman Brothers and AIG in Japan
--------------------------------------------- -

4. (U) Lehman Brothers Japan: Lehman Brothers Japan started its
operations in 1986. Its Japan offices are one of its three global
centers to conduct financial transactions in the Asia Pacific
region. The Japanese unit has conducted the full range of financial
advisory and fund raising services. In particular, it has been
active in underwriting stocks and corporate bonds in Japan. Lehman
Brothers Japan gained notoriety in Tokyo when it raised funds for
Livedoor's attempt to acquire Nippon Broadcasting System in 2006.
Also, it is the top non-Japanese underwriter of Japanese government
bonds (JGBs). Lehman Brothers Japan reportedly manages %1.2
trillion ($11.5 billion) in assets. The firm's clients are
corporations and institutional investors, while it has not provided
services for retail investors. It has about 1,300 employees in
Japan.

5. (U) On September 16, Lehman Brothers Japan filed for bankruptcy
protection with the Tokyo District Court. Its liabilities are
estimated to total roughly %3.4 trillion ($32.7 billion), the second
largest bankruptcy in post-war Japan, according to the Teikoku Data
Bank, a private credit information organization.

6. (U) American International Group (AIG): AIG started its
operations in Japan in 1946. The insurer provides the full range of
insurance and related services in Japan. At present, AIG has a
total of seven life, non-life, and reinsurance companies in Japan -
AIU Insurance, American Home Direct, JI Accident and Fire Insurance,
Alico Japan, AIG Star Life Insurance, AIG Edison Life Insurance,
Transatlantic Reinsurance Company. AIG also has three investment
management companies and one securities house. It has 13 related
companies, including consulting and worker dispatching firms. It
has about 26,000 employees in Japan.


TOKYO 00002558 002 OF 002


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