KEY POINTS:
What does it take to induce the Japanese retail investors who have piled into New Zealand dollars by buying up uridashi bonds to end their all-time spending spree?
Just over a year ago Finance Minister Michael Cullen packed a bunch of senior Treasury and Reserve Bank officials off to Tokyo to try to talk down the value of the kiwi by alerting Japanese banks and officials to some major misalignments in the New Zealand economy.
It was serious stuff.
The officials' talking points went somewhat like this:
* New Zealand was living beyond its means.
* Householders were running up too much debt.
* The country now had a crippling current account deficit.
* Japanese investors who had invested in uridashi bonds attracted by some of the highest real interest rate returns in the Western World might find themselves at risk if the international financial world "goes dog" on New Zealand.
* A major currency depreciation could wipe the value of the Japanese investments.
* All that money pouring into New Zealand was bumping up the kiwi to unrealistic heights and cutting the ground out from under the tradables sector.
* It was also pumping up liquidity and fuelling a boom in property prices that looked unsustainable in the long-term based on New Zealand pay rates which are relatively low by international standards.
Could the Bank of Japan please issue a quiet warning to big players like Daiwa Securities that New Zealand dollar-denominated bonds should carry an "at risk" warning?
Cullen was hoping that by sending Treasury Secretary John Whitehead off to Tokyo the top government official could effect a change of sentiment towards New Zealand at the highest levels of the Japanese financial community.
It was risky stuff.
If Whitehead's Cassandra-like spin came on too strong, Cullen ran the risk that capital flight could result. Japanese investors, scared they might lose their shirts, would quickly pull out and send the New Zealand dollar into freefall.
Nothing happened, of course.
New Zealand sending its officials offshore to try to persuade another nation's savers to take on board some home truths about its economic situation - that its own nationals ignored - had a perverse effect.
New Zealanders were clearly still prepared to keep on borrowing at high real interest rates. The Japanese' investments were in fact relatively safe: it was all go at the casino.
Market estimates suggest that at the end of 2005 there were $19.012 billion of uridashi bonds on issue - 41.6 per cent of the combined total for eurokiwi and uridashi bonds of $51.693 billion.
There was still $21.721 billion of uridashis out there at the end of last year - 42 per cent of the combined eurokiwi/uridashi total.
The overall total has now reached $53.093 billion.
Judging by market estimates, all that jaw-boning has not deterred Japanese retail investors one iota.
Although $10.2 billion of the uridashis are up for renewal this year, little is expected to change unless the Bank of Japan significantly increases its own official rate, thus reducing the available yields for investors. Japanese investors who currently borrow yen at infinitesimally low rates of about 0.3 per cent are buying kiwis giving a high real rate of return approaching 7 per cent.
There was a flurry of activity early this month when speculation suggested the Bank of Japan would significantly increase its official rate. But nothing happened.
Tomorrow, Reserve Bank Governor Alan Bollard will begin the first of this year's warnings to New Zealanders trying (yet again) to persuade domestic consumers to pull their heads in.
His warnings will be largely futile.
While the central bank's November financial stability report talks about the global savings imbalance and its potential impact on New Zealand, this does not filter down to the "man in the street".
New Zealanders have no difficulty persuading their banks to lend money to buy property, or to bump up credit card lending limits.
All Bollard's warnings that other people's savings are being used to fund consumption and the accompanying strong rise in asset prices (especially house prices) will again fall on deaf ears.
The Reserve Bank Governor is not crying wolf.
New Zealand is a net recipient of global savings and sports a current account deficit at record levels which is being driven up by household borrowing demands.
This carries a risk.
If there is a sudden decline in investor confidence worldwide it would impact negatively on liquidity in key markets. With the New Zealand foreign exchange market currently experiencing a high level of cyclical liquidity any international hiccup could turn into a rather large belch here.
Then there are farm values which are at a very high level relative to underlying earnings.
As the November report says, New Zealand's overall foreign indebtedness makes the cost of capital susceptible to sudden changes in investor sentiment.
The current account deficit is 9.5 per cent of GDP. A vicious circle has now emerged where the amount required to service NZ's international indebtedness exacerbates the deficit.
The critical factor, however, is that about half of all NZ's debt liabilities have maturities of less than one year. This does not leave much room to move if there are any external shocks to the economy.
If foreign investor sentiment shifts, New Zealand's risk premium will increase, putting upwards pressure on interest rates. We can also expect liquidity will tighten and it will be more difficult to borrow money.
The Reserve Bank's take is that Japanese investors with their focus in income-producing investments are not likely to suddenly and simultaneously withdraw their investments.
The conundrum for this year is which country's nationals get the message first about this country's growing indebtedness: Japanese investors or New Zealand borrowers?
