Japanese media misreported suspense of mark to market accounting

On October 17th, Japan's leading business newspaper Nihon Keizai Shinbun (so called "Nikkei") reported that the US, EU and Japan are going to suspend mark-to-market accounting. I read this news on Nikkei Net (online version newspaper) and was unpleasantly surprised . As far as I know, none of the countries has plan to "suspend" mark to market accounting so far.

Under this troubled market, accounting standard boards in the US, EU and Japan have announced interpretations regarding application of mark to market accounting on hard to value assets. The main purpose of the interpretations is to remind financial institutions that they don't need to use fire sale prices when evaluating their hard to price assets. It actually gave banks more leeway on mark to market. However, it did not mean to suspend mark to market accounting.

In fact, Accounting Standard Board of Japan (ASBJ) immediately announced that it was misinformation due to the misunderstanding of ASBJ's recent press release. Nikkei kept silent on it.

I was wondering why Nikkei made such a big mess. I could not believe that it was just a simple mistake... I've been carefully reading Japan and US news regarding subprime crisis and noticed that Japanese media is more aggressive in blaming mark to market accounting than US media.

Interestingly, subprime crisis did not affect much on Japanese financial industries as they did not bet too much on mortgage backed securities and other exotic financial instruments. However, some Japanese financial firms are facing trouble in maintaining capital adequacy ratios and Japanese media is insisting mark to market rule is making troubles. Why?

The real issue to Japanese firms is mark to market accounting on publicly traded stocks, not on hard to value assets. Unlikely the US or other countries, Japan has business practices mutual share holding between enterprises ("Kabushiki Mochiai"). It's been considered as a heritage of the past. During Japanese financial crisis era around 2000, many companies sold shares to mitigate the effect from troubled stock market. As a result, the ratio of mutual share holding dropped to 8.6% in 2003, compared to 32.9% in 1990.

However, the ratio of mutual share holding has been increased since 2004 as Japanese company started protecting from hostile take over. The idea was to hold shares among friendly companies and avoid unknown parties to take majority of shares. The ratio of mutual share holding was 12% in 2006, and appears to be higher in 2007/2008.

In response, recent sharp drop in stock market hit Japanese companies significantly. Of course, publicly traded stocks are to be valued at the price as of balance sheet date, and then, Japanese banks started warring about impairment of their assets.

US and EU rules ease mark to market accounting on hard to value assets but publicly traded stocks. And there is no good reason to stop valuing the assets which have certain market value. This is not saving anything...is resulting "cheating" investors.

Think hard about real problem...is real problem that mark-to-market accounting is dragging down financial institutions and world economy? Nope. Shouldn't get away from real problm that many banks made poor decisions and lost credibility with investors.

You've got a meltdown and should deal with it, without cheating investors anymore.