Host 1: Amanda Drury
Host 2: Martin Soong
Host 3: Sri Jegarajah

About CNBC's "Squawk Box" Asia

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Squawk Box is CNBC Asia’s morning show which focuses on updates after the US market closes.

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Japanese banks have very minimal subprime exposure, notes Patrick Mohr, strategist & head of quantitative research at Nikko Citigroup. He gives his outlook for the Japanese market with Todd Everts of Wall Street Global, CNBC's Martin Soong, Amanda Drury & Sri Jegarajah.

Host 2: Let’s get to Patrick Mohr, strategist head of quantitative research at Nikko Citigroup Limited…joins us live up at our Studio in Tokyo and staying with us in Hong Kong is Todd Everts, president and CEO at Wall Street Global…gentlemen good morning to the both of you…nice to have you with us…Pat, let me start with you up in Tokyo…you know, anybody who has been pinning hopes on the Tokyo market coming back is of course focusing on the financials very heavily weighted to lead this market out but as we probably know banks out here in Asia are the ones with the most exposure to, if nothing else, just Lehman debt are Japanese banks. So what are prospects now?

Patrick Mohr: : Well I think you that in the short term certainly the market’s going to be weak… I mean we’re seeing a barely market today but I don’t think that the market’s going to stabilize in the short term. Certainly Japanese banks do have exposure but in the grand scheme of things, if you look at the percentage of credit ride offs and the percent of total, it’s about 2% as opposed to the US banks which are about 50%. So you know in the short term certainly nerves are being rattled but when you think a much bigger perspective on this Japanese banks really don’t have that much exposure so I think that in the short term I mean there is a gap between perception and reality and we are encouraging our clients to exploit that gap but of course you’ve got to have a stomach for volatility.

Host 1: Yeah you got to have a very strong stomach. So if you just want to seed it out I mean maybe it’s not such a bad place to put your money into Japanese Yen considering the very volatile risk environment that’s going on at the moment, I mean the yen does tend to gain.

Patrick Mohr:Absolutely, I mean because the carry trade we’ve seen, the yen strengthened time and time again in times of crises over the last few years and you know I don’t think this is going to be any different so if you’re really looking for safety, yeah, I would tend to agree with that…just hold your money in yen.

Host 2: Okay, so the good news is Japanese banks don’t have that much just very minimum marginal subprime exposure there. The bad news is at home you’ve got an economy…exports are slowing as well weakening external demand but these guys have strong balance sheets. Are you surprised that they are going outbound using some of their capital to gobble up hugely distressed assets in the West, the US or even Europe?

Patrick Mohr: I think you have a very important point which is a major positive for Japan which is that, you know, in the aftermath of a credit bubble, cash is king…and that’s one thing that Japanese corporations, Japanese households have – is cash…so the corporate and household balance sheets are much better than the West at this time. I think that they will go out and buy growth and this is the perfect time for them to do it. We are seeing signs already..some of the insurance companies for example and even some of the banks going out to buy growth so I think we’re going to see more of that and I think that’s a positive development.

Host 1: : Yeah. What about you, Todd…come in on this conversation…what’s your outlook for the Japanese market?

Todd G. Everts: Well clearly, having a strong balance sheet is going to help the Japanese institutions and the Japanese market take advantage of opportunities. The Japanese has certainly learned at many different periods over the last few decades to come into the market at the right time versus at the top. It’s interesting that they’ve stayed on the side lines for so long. My quick question for Patrick is, do you see the carry trade continuing and you see having that quite an uplift on the yen because over the last couple of days we saw a flight to the US dollar but probably over the next quarters we’re going to see a flight away from the dollar because the Fed is taking on so many more liabilities.

Patrick Mohr: Sure, well it’s a good question… its certainly in the discussions of my clients that comes up a lot and I think one of the things that you have to…I think that it will weaken going forward because if you look at just a simple comparison of real rates, certainly the yen carry trade is not the only carry trade in town anymore…even..I mean the dollar carry trade even looks from a real rare perspective even more attractive. So I think it could weaken but only time will tell. So in the short term we’re still looking for some yen strength.

Host 3: Patrick, how concerned are you about the political insurgency in Japan. We’ve got the possibility of snap elections, they’re coming up. Yes we’ve got all these global macro-economic headwinds coming out of-emanating from the US but what sort of domestic pressures could be brought to market...

Patrick Mohr: You know to be honest I don’t think that market players are focusing on Japanese domestic politics at all at the moment. We’re still an environment where foreign investors pretty much control the tempo of this market and I don’t see that changing anytime soon. All eyes are on the financial crisis…the systemic risk, what the central banks are doing, how quickly can Pulson react?, can the US come up with a comprehensive package?. You know while we are in the state of administrative transition these are the questions that the markets are focusing on. I’ve been speaking to a lot of clients the last few days, none of them are interested in talking about Japanese politics.

Host 3: Patrick, we’ll see your best cents about how the Japanese export sector the…big names like Canon, Mitsubishi, the car makers are holding up the mirth the downturn in the US and the broader very grim macro-economic environment.

Patrick Mohr: Sure…it’s going to be tough. On the one hand, these are great companies that have been beaten down…some of Japan’s best companies…some of the best companies in the world…that have been beaten down. I mean if you can take a long term view, I think it’s a great buying opportunity. Having said that, one of the things that’s not coming out in a lot of dialogue because we’re all so focused on what’s going to happen tomorrow, we’re giving all the volatility, is that financial conditions lead the economic conditions in the United States by about 9 months so given how tight lending is at the moment, you know CAPEX and jobs are going to be tight going over the next 9 months. That’s not good for Japanese exports I’m afraid.

Host 2: What is the foreign money doing? Is it pulling out because we know there’s a heck of a lot of redemptions, repatriation… pulling out money from EM and back home, does that hold for Japan too?

Patrick Mohr: Yes, absolutely. You know the quantitative work that we’re doing points to a few things: one, flight to safety. You know balance sheet quality. The other thing is that stocks that are widely held by foreigners are being beaten down the most and that’s just simply because you can’t sell what you don’t own and the foreigners are pulling out and the stocks that they own are being beaten down the most.

Host 1: Patrick thank you very much for joining us...