January 5, 2007; Volume 03, Number 01
of the
Japan Considered Podcast
[Listen to the audio file by clicking here]
Clink Links Below for Today's Topics
Good Morning from Beautiful Spring Valley, in the warm, but rainy, Midlands of South Carolina. Today is Friday, January 5th, 2007. And you are listening to Volume 03, Number 01, of the Japan Considered Podcast.
Thanks for tuning in again, this second week into the New Year. Still hard to believe it’s 2007 already. But it is, and Japan’s political world is experiencing the usual New Year’s Holiday quiet time. However, that hasn’t reduced the volume of political news from Tokyo. Though it certainly does affect its quality. This week we’ll consider the continuing revelations of political funding scandals. And then we have an interview with Mr. Francis A. Moyer, Director of the North Carolina Japan Center, located in Raleigh, at North Carolina State University. Tony worked during the 1980s as a stock analyst in Japan. Experience very few of us have had. And he agreed to talk to us about that. A topic several of you have mentioned in your suggestions for upcoming programs.
As we discussed around this time last year, holiday periods are a political reporter’s nightmare, and a political public relations operative’s dream. Editors still require copy to fill their pages. If only to provide justification for the advertisements. But, one suspects, reading their publications, that the more demanding of editors have gone away on vacation.
Political journalists, then, unfortunate enough to have been left behind on duty, are required to file something, even if nearly all of their best sources have turned off their cell phones, and won’t return messages. There’s only so much that can be done with “year-end wrap-up” articles and speculation on the upcoming year that doesn’t include eye-catching quotes from those “reliable sources.”
In this environment, political public relations operatives can expect quicker-than-normal calls-back from journalists working for even the most respectable of publications. They also are likely to find those journalists more receptive, and less suspicious than normal. Willing to overlook for the moment the fact that their “source” is being paid somehow to bring them whatever information they offer.
As a result, the noise-to-signal ratio of Japan’s communications media offerings during the long year-end and new year holiday tends to be quite high. Lots more content that’s obviously intended more to persuade politically than to inform. I go through it all, however, looking for clues to what’s going on in Japan’s domestic politics and international relations. There’s something to be learned even from these sorts of articles. If only about the intentions of their sources.
LDP Political Funding Scandals Continue too Surface
Last week we considered Kantei efforts to cope with the resignation of Tax Commission chairman, Professor Masaaki Homma. And the resignation of Cabinet Minister Genichiro Sata. Sata’s resignation, you’ll recall, was prompted by what he described as “sloppy bookkeeping” by one of his political support groups. I speculated that we’d see more of these reports of political funding irregularities, and suspicions of violations of Japan’s strict political funding laws.
Well, we have. Since the beginning of the year there have been three more high-profile reports of a similar nature. All involving members of the Liberal Democratic Party. On January 1st, Kyodo and other Japanese sources reported that the political funds reports of LDP Upper House Member Shinsuke Suematsu, of Hyogo Prefecture, came up 50 million yen short. This amount, a loan from one of his supporters that should have been reported.
The following day, Asahi Shimbun and other sources took up the case of LDP Upper House Member, Hirohide Uozumi, of Kumamoto Prefecture. Uozumi was reported to have received 20 million yen from a consulting firm under investigation for violations of the Investment Deposit and Interest Rate Law. With the suspicion the 20 million yen was given to Uozumi in return for his efforts to influence the government investigation. This case included the eye-catching detail of a Go board and stones sold at a grossly inflated price.
And just today, the 5th, Asahi reported problems with suspicious contributions from construction companies to a former Land Ministry bureaucrat, Nobuaki Sato. He intends run for the Upper House in July with LDP support.
As I mentioned last week, a cynical observer might be excused for seeing a pattern here of concerted efforts to discredit LDP candidates for the upcoming Upper House election. Especially during this period of very limited solid political news. As described a moment ago. And that may well explain it.
But there’s more for us to consider here than manipulation of political reporting in Japan for electoral purposes. That’s sort of a given. Something all experienced observers watch out for. In addition, this pattern of “revelations,” I think, provides further evidence of change in Japan’s political system. Yes, we’ve seen such revelations in the past. But I don’t recall a time when there were so many of them in such a short period. In the past, we were treated to the details of one or two cases, followed in short order by resignations, then proposals for more restrictive regulation of political campaign financing, and sometimes even prosecutions. After which things returned pretty much to normal.
This latest spate of revelations suggests to me that Japan’s public environment has changed. That Japan’s voters are less willing to overlook the “sloppy bookkeeping” and ‘creative financing” that has been so common for decades in Japanese electoral politics. In other words, this is more than just a concerted effort to disadvantage the LDP in the next Upper House election.
Confirmation of this interpretation would require, first of all, such revelations to continue beyond this political news drought year-end vacation period. Second, it would require inclusion of non-LDP members in the investigations.
One might conclude that only LDP candidates and incumbents have engaged in dubious political campaign financing practices. And therefore, that it’s only natural for attention to focus on LDP candidates. But that’s highly unlikely. There may be differences of degree when it comes to party affiliation. But I suspect that only Japan Communist Party members would be immune from such investigations, given the close attention the authorities have paid to their activities in the past.
Also, some of the most prominent members of the leading opposition party, the Democratic Party of Japan, are former LDP members. Some of them, like Party President, Ichiro Ozawa, were even very important LDP officials. It’s unlikely that those former LDP members were unacquainted with creative political campaign financing during their LDP memberships. Even if they abandoned such practices upon resignation from the LDP. Will we see efforts to investigate their relationships with organizations representing private business interests that depended on government contracts? If we do, we can be sure there’s more to all this than garden-variety partisan politics. It’s well worth watching. And I’ll keep you posted.
Interview with Francis A. Moyer on Japan’s Stock Market
RCA: As promised earlier in the program, we’re joined via SkypePhone by Tony Moyer. Tony’s the Director of the North Carolina Japan Center at North Carolina State University, in Raleigh, North Carolina. The Other Carolina. Thanks for joining us Tony.
TM: Happy to be here, Bob.
RCA: Let’s begin with how you became involved in Japan’s stock market.
TM: Well, I was actually looking around for employment while writing a doctoral dissertation at Columbia, on how to tax sixteenth century Japanese peasants more efficiently. While working on the project, I had a call from a friend who had gotten involved in finance in Japan. A fellow history major from the Columbia graduate school, named Bob Burghart. Asking if I wanted a job. Given the tone of the times in terms of academic employment, I was quite happy to take him up on this.
I went to work for a British-owned company called W. I. Carr Sons and Company (Overseas) Ltd., that made most of its living in the Japanese market. They wanted a group of international analysts who knew Japanese to work in the market over there, and then write reports for their institutional investor client base. Primarily based in London, parts of Europe, and Hong Kong. I was invited in to work as an analyst covering some of the traditional, sort of rust belt, manufacturing sectors. Autos, steel, shipbuilding, machine tools. Things of that sort.
This was back in the summer of 1982. I worked there, both for W. I. Carr and then later moved over to a subsidiary of Swiss Bank Corporation, a company that’s been merged since them with UBS. To continue basically doing the same work as an analyst, covering roughly the same sectors. Right down to the summer of 1989, when I left to come back here. To take this job at the Japan Center.
Changes in Japan’s Stock Market Since the Early 1980s
RCA: That’s quite an interesting experience, and must give you a lot of perspective. On that point, I wonder if you could comment briefly on how you think Japan’s stock market has changed since you were involved.
TM: Well, my involvement took place at an interesting stage. I got in during kind of a dull patch, in the early 1980s, and happened to be there working through the bubble economy, with the huge run-up in share prices, which was paralleled by the increase in land prices. That in itself was a very interesting experience. Almost like participating in the seventeenth century Dutch tulip bulb mania from the inside. A very unusual experience. But I got back to the U.S. just before that bubble began to collapse.
In the period since then there have been quite substantial changes. Some of which actually were beginning to show first signs while I was over there. A lot of things have changed. The Japanese have put through a series of deregulation changes in the market. Kind of a Japanese Big Bang equivalent to what had happened in London earlier on in the 1980’s, that put some administrative reforms and deregulation policies into the market.
In the process, one of the major things that happened was that it became more open to international involvement and participation. Again, there were signs of that already. From 1986, I believe it was, international brokerage firms actually could have seats on the Tokyo stock exchange. That itself was a major change. So there were some things happening even before the bubble economy came to an end. But it has blossomed since then.
I think it was helped to some degree by disappointment, or dissatisfaction, with the way the system had operated during the run-up to the collapse of the bubble, and the consequences that came afterward. I think that was an incentive for some of the change. And also made some of the foreign brokerage houses and securities companies appealing as possible business participants in the community over there.
To innumerate a couple of the changes, there’s been a shift, for example, in emphasis on reporting. When I was working there, no one really looked seriously – none of the Japanese, at least – looked seriously at the consolidated figures for companies. They tended to look strictly at the parent company’s performance. Outsiders tended to demand information about consolidated figures. But that’s something that was not emphasized.
Now, if you look at the Kaisha Shikiho, the little quarterly handbook that everybody in the industry lives by, they list the consolidated figures first. That in itself is an attempt to take a broader view of how these companies operate, how their business is structured, where they get their profits, and where they run risks of loss, and things of the sort. Something like that is a great improvement in the sophistication of the approach to company performances.
On the internationalization side, a lot of questions are raised about whether Japan is really an open environment for international businesses. Part of the issue, I think, is that a lot of people looking at it lack a longer-term perspective. Because change in Japan that they think of as raging social change, we tend to view as relatively glacial. As a result of the slower process, unless you do have a depth of experience, and a number of years of exposure, you don’t really recognize the changes that have taken place, against an earlier base of comparison.
So I have a touchstone for change in the areas that I covered--not specifically the financial sector, but in general. It’s the fact that Renault and Carlos Ghosn came in, took over Nissan – sort of a jewel in the crown of the Japanese industrial sector –restructured and reorganized the company, and brought it back to a level of comparative health and high profitability as a result of radically different management practices. That is something that during the 1980’s would have been unthinkable.
So, use that as kind of a reference point, and look at the financial sector. When I was there, there were four big securities companies in Japan that made the market. Collectively called the Big Four: Daiwa, Yamaichi, Nikko, and Nomura. Yamaichi is gone. Its securities operations after it went bankrupt were bought out by Merrill Lynch. Western firms now have small, but significant, holdings in the other three. And the dominance those companies had on the volume of the stock market in general has greatly eroded, so that foreign brokerage houses now make up between one third and one half of the trading volume on any day on the Tokyo Stock Exchange. And stock holdings by foreign investors in the Japanese market also have become quite significant. The total average for foreign investors’ holdings was something like five percent of the shares outstanding while I was there. By now the figure is up closer to about twenty percent. Which is a significant increase in the holdings and the presence of American, Western, and some other Asian investors’ holdings in Japanese shares.
These are significant changes in the world’s second-largest economy and the financial sector that supports it. So there’ve been quite a number of different things that have happened. They’ve often involved opportunities for Western firms or American companies to participate. Both as financial service providers, like the brokerage houses. Or as investors in the market over there. So, there have been radical changes. That doesn’t mean it’s the same as America now. And I don’t think Japan ever will be the same.
Comparing Japan’s Stock Market with the U.S. Market
RCA: I wanted to ask you about that. Is Tokyo’s stock market the same as the U.S. market now? In general?
TM: No. In some ways it’s gotten a bit closer to what we have as a model. But I think historically, perhaps, the differences were even more exaggerated. I’d say the market in Japan is, in some ways, a simpler market in the sense that the range of options and alternatives historically have been more restricted. It’s become more diverse and more complex in recent years. But I think the creativity of the American financial sector has run ahead of most of the rest of the world. Perhaps London sometimes might have provided a comparison to the U.S. But our market is more complex, offers more alternatives, and routes for investment, and management, and the raising of money, than the Japanese market has done historically.
There’s also greater transparency in the U.S. market. There have been improvements in accounting practices, and reporting practices. But the level of transparency is not the same as in America. Now, remember, that I’m not working now in this field any more personally. But my impression is that while there have been improvements, it’s still not up to the U.S. level of transparency.
One of the big issues that tends to separate the American market from the Japanese market has been the U.S. emphasis on shareholders rights, and influence on corporate management, which always has been downplayed in Japan, relative to the importance of other interested parties, for example, Japanese management, Japanese employees, the other corporations to which they have links, whether banks or keiretsu partners, and even their role in the broader community.
You can argue that each side has its positive and negative aspects. You can say the Japanese approach fosters a longer-term view for management and planning. That it also tends to take a more responsible social view of the role and importance of a company in the society in which it operates. An American perspective on this would tend to emphasize that this leads to inefficiencies. It leads to misuse of capital that could be turned to greater effect. It keeps weak, uncompetitive firms in the market. And it under-represents the interests of the shareholders, who are the ones who put the money up to build and run the company. The owners! So you can make arguments for both cases.
But I think that Japan has drawn closer to the American model in recent years, and the participation of Western investors and Western securities companies in the market has contributed to this. But I think there are quite marked differences between the two markets and the investment opportunities and consequences.
Stock Market Scandals in Japan and the “Horie Phenomenon”
RCA: On another topic you may be reluctant to talk about. In the American press especially, or overall in the English language press, we read a lot about scandals in the Tokyo Stock Market. Recently what’s been called the ‘Horie Phenomenon.’ Can you make any comments about that?
TM: Well, not only the Western press. The Japanese press too spends a lot of time on it. In the course of the last calendar year, 2006, a number of those scandals even had a major impact on market indices. You had LiveDoor and Horie, that you mentioned, breaking out as a scandal in January. The company actually was de-listed. Horie himself was arrested. He’s now on trial. I think the prosecution now is asking for four years in prison for him for putting out false information about stocks and activities in order to manipulate the market. You had Murakami of the Murakami Fund accused of insider trading in June. There’ve been a couple of these scandals that have broken out.
It’s a complex subject. Every society has people who step outside, or play outside the lines. It’s not that we’re innocent of scandals here in the United States! Heaven knows. I’ve heard of a company called Enron. And other markets too, obviously, as well. One of the interesting things, though, is that a number of the people who have been caught up in these high-visibility scandals, like Horie, like Murakami, have been rather antagonistic presences on the Japanese scene. They’ve sort of stepped outside the rules of how the game is played socially and in business terms.
Horie, for example, got in to Tokyo University, and dropped out. That’s an indication right there that you’re dealing with a very unusual character! This is a man trying to trash the system from the inside out. He’s flamboyant, he’s dramatic, he’s confrontational, he’s very outspoken. All of these things are big black check marks against him in the Japanese social order. And then to be successful economically on top of that! What more of a threat to the system do you want? So, people like this sort of set themselves up as ideal targets. Obviously, creative financiers in any market tend sometimes to sail close to the wind in terms of rules and regulations. It’s very easy to step outside the line. My impression is that Horie has done this. Of course, he’s not convicted yet. But he did so in a very flamboyant way.
Being these kinds of antagonistic challengers of the system in Japanese society is sort of like walking around in a lightning storm with an iron pole in your hand. They attract the attention that logically follows from that. They get zapped! I think that setting themselves up as such challenging figures does two things. One is that it excites people who have a desire to see change. “Horie Effect Number One” is that this stirs up the rebellious, radical, reformer, change-oriented types who want to see the system changed in some fundamental way. They become heroes. The press certainly plays into this as well, by making these guys media figures. Then they get zapped and they become sources of intimidation for these types of people. And the press plays up that as well.
Someone said years ago – I think, one of our teachers back at Columbia. I don’t know if you had classes with Ivan Morris. He wrote a book about “The Nobility of Failure”– rapid rises and rapid falls are dear to the Japanese heart. And I guess in that sense, Takafumi Horie is a sort of a modern-day Yoshitsune. You could interpret it that way, if you like.
But the thing is that their fall becomes sort of an admonitory warning to people who are inclined to step outside the system. So “Horie Effect Number Two” is to frighten everybody off so they will behave again.
We too get upset. Look at all of the people who have a problem with Bill Gates, make movies about his assassination, and things like that. We have our own problems with the brash success stories in our society. And we’re supposed to be tolerant, even encouraging, of things like this. In Japanese society it’s supposed to be the other way around. So it’s natural that these people come in for some rather unpleasant attention.
But there are also a lot of people who have been working for change. Young people who have stepped outside the standard business practices, started new companies, using different approaches--on-line trading, challenging some of the big traditional Japanese brokerage houses; different forms of retail distribution--but have done so without the flamboyant desire to make themselves into popular figures, media heroes. Again, they have not made themselves magnets for lightening, that those like Horie or Murakami did.
So, I think it’s the style in many ways, the excessiveness with which they delivered this to into a society that’s not happy about that.
Now, one reason why this got a lot of particular attention during this last year is that the market has had a phenomenal run-up to the early part of 2006 in Japan. Over a three-year period to early 2006, the Nikkei Index more than doubled in value.
The momentum is going out of that, for a couple of reasons. If, for nothing else, the market was due for some kind of pause and consolidation. In a situation like that, bad news scares people. If you look at the index movements during 2006, when these stories would break, stock indices would plummet. Because people got scared off, thinking this was an indication of change, decline, instability, unreliability in the market. And people would be scared into selling in response to that. So a lot of the more dramatic market movements this year in the Tokyo Stock Exchange reflected these stories breaking in the news.
Is Japan’s Stock Market Safe for Americans?
RCA: This you probably will refuse to answer, but I’ll ask anyway. What do you think? Should Americans participate in Japan’s stock market? Or is it just too touchy to deal with?
TM: I’ll answer that. But first let me put the necessary professional caution here. I’m not in the market. And if anybody should make an individual stock purchase on the basis of anything they think I’m recommending, they’re more foolish than I am for making the recommendation!
Having said that, and make sure that gets bold face in the transcription, the answer is “yes.” Americans should be involved. And Americans are already very heavily involved in the Tokyo Stock Market.
There’s been a lot of fascination with the performance of the Chinese economy. In this last year, for example, we went into the calendar year with a lot of people predicting that 2006 would be a very good year for the Japanese market. And the market has disappointed. Whereas Chinese markets, and the funds involved there, have tended to perform much better. That’s a case where calling things on a short-to medium-term view is very, very difficult. And we have to be very cautious about that sort of thing.
But aside from the disappointment of the 2006 indices performance, this is the second-largest economy in the world. It’s relatively accessible to American investors. You can go in through Japanese or through Western brokerage houses who can provide the services you need. If you’re investing internationally at all, you have to have Japan on your radar screen. The weighting, from one year to another, obviously has to change, depending on what you think is going to happen. But the idea that you should drop out of Japan or omit it completely is to overlook a great opportunity. You’re dealing in a market with an easily convertible currency. Laws in place are helpful and protective. They’re getting better over time. I think it is market you have to participate in, or at least be watching for opportunities.
And if you’re in the industry, the finance industry, obviously the Japanese economy is one you should be looking at as well. Second largest economy in the world. Many top-class companies. And many new start-ups that are getting access to the market through the Mother Market and the JASDAQ market, that developed within the last decade to give small start-up companies more public exposure and access to capital. So there are a lot of very good opportunities there.
The one thing that I would very strongly suggest is that not only should Americans look at the market, they also need to do their homework. They need to develop an understanding of what goes on over there. Use a multitude of sources for their information. And put what’s going on now in some kind of historical perspective. The worst thing you could do is to walk into Japan with stars in your eyes and a hand-full of cash, and expect that everything’s going to go right. You need to know what you’re doing there, just like in any other market. So, definitely watch what’s going on in Japan.
RCA: You’ve given us historical perspective here that’s very valuable. I certainly appreciate your time. I know you’re busy. You have an organization to run. All of this has been very helpful.
TM: Happy to do it. Thanks for calling. I’ve enjoyed talking about it.
So there you have it. Interesting comments about a subject of great importance, and great interest. That you hear little about on this program. Tony Moyer is a remarkable person, whose career has spanned academe, business, and non-profit organization management. And, if memory serves, he even worked for a while during his earlier years as a short-order cook in Mississippi! How many of us can boast that breadth of experience!
To go out today, I have something for you a little different. A short clip from Virginia’s Lakeside Junction. A traditional bluegrass band that, unfortunately, no longer exists. They had a great sound, though, as demonstrated in this short selection from “Not Afraid.” Thanks to banjo player, Bill Krumpter, for the clip. Enjoy.
[bluegrass clip]
Goodbye all. Until next week.
