Rising yen sees small Japanese importers fail on derivatives losses+

TOKYO, Dec. 29 Kyodo - The yen's sharp appreciation against the U.S. dollar and euro has forced a growing number of small and mid-sized Japanese importers to fail due to swelling losses on foreign exchange derivatives.

Of 71 firms that went bankrupt with at least 10 million yen in debts due to the
yen's appreciation this year, 26 failed on foreign exchange derivatives losses,
increasing nearly four-fold from seven in the previous year, said Tokyo Shoko
Research Ltd., a credit research agency.
The 26 firms, including 11 fishery products importers and nine sundry goods
importers, mostly concluded long-term foreign exchange derivatives contracts to
avoid exchange rate fluctuation risks between 2004 and 2007, when it was
difficult to predict that the dollar would fall below 100 yen.
A Tokyo-based importer, which filed for bankruptcy protection under the civil
rehabilitation law in late November, signed a contract with a major bank to buy
$50,000 per month at a fixed rate of about 99 yen to the dollar over five years
from June 2004 when the dollar traded around 110 yen.
The firm, which had to raise dollars to settle imports, also concluded a
similar contract at a rate just above 110 yen in 2005 when the dollar rose
above 120 yen.
The firm initially earned foreign exchange profits on the dollar's rise against
the yen. But the September 2008 bankruptcy of U.S. investment bank Lehman
Brothers Holdings Inc. triggered the dollar's fast decline, compelling the firm
to buy dollars at far higher rates than actual rates now below 85 yen and incur
heavy losses.
''We doubt the advisability of instruments that allow banks to benefit from
their customers' losses,'' said lawyer Haruyasu Ishigami, who now represents
the failed firm.
''A rising number of complaints about derivatives have reached the Japanese
Bankers Association,'' JBA Chairman Masayuki Oku told a recent press
conference. ''It is important for each bank to give counsel to customers.''
As some complaints have pointed to banks' insufficient explanations about
derivatives, the Financial Services Agency has launched investigations into the
issue.
In early December, the financial industry watchdog asked banks to report small
corporate customers' derivatives holdings and their unrealized relevant losses.
But the FSA believes it would be difficult to tighten regulations on foreign
exchange derivatives. ''As there is a demand for instruments to avoid foreign
exchange risks, we cannot impose any complete ban on their sales,'' a senior
FSA official said.
==Kyodo