KEY POINTS:
The countless "Mrs Watanabes" who lent up large to fund much of New Zealand's foreign-debt-fuelled housing boom are saying "sayonara".
It's not an all-out retreat (at least not yet). And let's hope that doesn't eventuate until we've worked through the effects of the housing bubble.
But the speed with which Japanese household investors exit the New Zealand market will have a big effect on borrowing conditions here, particularly the length of time that Kiwi householders will continue to face higher effective margins on mortgage borrowings, and businesspeople on their credit facilities.
This is one of the underlying reasons why trading banks are warning customers not to expect interest rates to come down as fast as the Reserve Bank Governor lowers the official cash rate (OCR) during the current easing cycle.
Alan Bollard is widely expected to clip a further 25 basis points off the OCR tomorrow, lowering the base interest rate to the 7.75 per cent level that the market has already priced in.
Most traders expect an OCR of 6.5 per cent by the end of next year.
And even though the US federal Government's bailout of mortgage giants Fannie Mae and Freddie Mac has been a welcome confidence booster to global financial markets, it won't be enough to curtail the pain here.
The international credit crunch has already taken its toll and New Zealand no longer offers the highest rate of return to overseas investors.
The Japanese housewives and their European counterparts, the fabled Belgian dentists, are now investing their surplus cash into exotic destinations such as the South African rand or the Brazilian real.
The two economies offer higher on-paper rates of return than New Zealand (South Africa at 12 per cent and Brazil at 13 per cent).
Toss in the fact that the New Zealand dollar has slumped 13 per cent in the past three months, reaching a 20-month low at US65.94c last week, and it's easy to see why the overseas investors are falling for new sales pitches. Westpac warns that global credit markets have shown no signs of improvement.
It notes the Reserve Bank's data - as originally published in July - suggested that banks' average funding costs had risen an alarming 20 basis points in the space of two months independent of any official rate changes.
The data also indicated that lending margins had been squeezed to record lows, implying that lenders had yet to pass on the latest increase in funding costs.
The extent to which New Zealand banks are facing margin squeezes doesn't worry Mrs Watanabe. Westpac notes that uridashi issuances - and their European counterpart Eurokiwis - have been under-funded to the tune of half a billion dollars three months in a row.
This factor has been widely reported overseas with the International Herald Tribune noting that the Japanese investors have been induced to switch investments from "safe" currencies like New Zealand to the more risky South African rand on the promise that the World Cup will bring a long-lasting fillip to that economy.
It's not just marketing spin of, course.
The higher interest rate margins on offer in South Africa have persuaded Japanese investors that the potential for currency risk will be averted.
New Zealand shouldn't complain too much. We ran similar arguments.
The concerning issue is whether the current redemption rate will be sustained.
In the next 12 months more than $20 billion of New Zealand's $50 billion in uridashi bonds will mature.
At the current redemption rate there will be a $10 billion funding hole to plug.
This factor will be weighing hard with Bollard, who will not want to ease interests rates so quickly that he prompts a currency collapse.
It's a point that he has made in private briefings in Japan.
Ironically, the funding issues persist at a time when confidence is creeping back into the businesssector.
A net 27 per cent of businesses in the Bank of New Zealand's survey now expect the economy will improve in the coming year, up from a net 4 per cent expecting worse times ahead just last month.
The latest reading was the highest seen in the three-year-old survey.
Confidence will get another boost when the Government's tax cuts take effect next month.
But Mrs Watanabe won't be listening - she's fluttering her eyelashes elsewhere.
