Certification of Accredited Investors
In accordance with the Financial Products Trade Law, the Financial Services Agency will certify qualified entities as "accredited investors" beginning in the summer of 2007. Besides more than 10,000 listed companies, the group is expected to include local governments, hospitals, and schools. Compared with ordinary investors, entities deemed accredited investors will be able to receive favorable treatment in areas like interest rates and fees. Individuals with substantial assets will also be eligible for designation. The actual certification examination will be carried out by financial institutions.

Hostile Takeover Bid for Hokuetsu Paper
The Australian has a good account of Oji Paper's $1.2 billion bid to buy 50% of Hokuetsu Paper Mills. The offer appears to be the first hostile takeover bid in Japan by a large, old-line firm and would make Oji the world's fifth-largest papermaker.

Hokuetsu responded to the offer, which would reward shareholders with a 35% premium over the Y635 share price, by refusing to put the offer to a shareholder vote. Instead, it agreed to a tie-up with Mitsubishi that would give the trading company a 24% stake in Oji. Mitsubishi's white-knight status was purchased at a 4% discount to the stock price. Hokuetsu also adopted a poison pill defense whereby new shares would be issued to dilute a hostile bidder's stake if it acquired a holding of more than 20%.

Hokuetsu shares, of which 24% are foreign held, have recently traded above 750. Stephen Codrington, an independent corporate governance adviser, says of Hokuetsu:

"It's just another board of directors who want to safeguard their own jobs rather than enhance the value of the company for their shareholders. The lack of a clear takeover code in Japan is what is allowing this to happen."

UPDATE: The future path of M&A in Japan compared with other nations is discussed in this Japan Times article.

Restrictions on Derivatives to Be Lifted
The Financial Services Agency is set to liberalize the trading of derivatives. Currently, trading is limited to specific categories like stocks, bonds, and currencies. By next summer, the FSA aims to do away with the current system that requires prior approval for new derivative products and permit trading in vehicles like REIT index futures. The move was taken to speed the development of new investment products that meet investor needs, and thus enhance the competitiveness of Japanese financial markets vis-a-vis its European and U.S. counterparts.

The Economist on Japan
The current issue of the Economist has one of its periodic surveys on the Japanese economy. The overview of the past 30 years of economic performance is expertly accomplished. The author also has useful points to make about current conditions, including the high level of consolidation in some sectors and surprising economic inequality in a country that had prided itself on being singularly middle-class. The piece can be faulted for not spending more ink on how the growth of the Asian economy, especially China, has affected Japan, and whether the country's regulatory system has been sufficiently reformed to meet foreign competition. But it's well worth reading.

New Takeover Defenses Questioned
M&A specialist Nicholas Benes has offered a revealing analysis of new strategies being adopted by Japanese firms to avoid acquisition. Titled Japan's New Takeover Defences Are Indefensible, Benes describes how measures that apparently seek to protect shareholder rights are actually designed to allow managements to "prevent deals, but avoid getting blamed for it." Benes outlines the most popular of these arrangements, the so-called advance warning plan, in this example:

Unwanted bidders intending to acquire more than 15% would be required to comply with a detailed list of seemingly reasonable information requests, and if based on that information the board could not devise a legal argument to label the bidder as an abusive acquiror, then the decision to deploy a poison pill would be put to shareholders. Only if shareholders rejected the poison pill could the takeover go ahead unhindered. If shareholders voted to deploy the pill based on the information provided by management, the directors could not be sued, since they could claim it was shareholders who had so decided.

Benes follows-up with a detailed scenario that demonstrates how this seemingly sensible proposal allows management to engage in various machinations that will ultimately kill any hope of a deal. Shareholders are the big losers, since the advance warning plan eliminates the chances of advantageous takeover bids and may well leave the company poorly positioned to succeed.

CHAKO Adds: When I advised Japanese companies' about their overseas M&A, some of the large Japanese corporations had a no-layoff policy after the merger, even when consolidation and streamlining would have been in the best interest of shareholders. Even though Japanese corporate and employment practices have changed dramatically since then, many Japanese corporate managers feel that U.S.-type merger practices that come with many layoffs doesn't quite fit them. It seems that currently there is a backlash in Japan against shareholder activism, as reflected by the Murakami incident and some of the new corporate laws. On the other hand, there certainly are cases where excessive poison pills and missed merger opportunities result in a loss of value creation. If investors react to these practices by refraining from owning such stock, at the end of the day the market will judge (by price) whether the company's defence tactics are acceptable or not.

Yagi Corporation Announces Management Buyout
On July 19, Yagi Corporation, a textile manufacturf office uniforms, announced a management buyout (MBO) to take the company private. All outstanding Yagi shares will be acquired for about Y5.2 billion. The buyback period will extend from July 20 to August 22 at a purchase price of Y659 per share, representing a 54% premium to the average quote of the past month. If the buyout is completed as expected, the shares will cease trading at the end of September.

The news follows the completion of Skylark last week. About a month ago, MergerMarket.com noted that MBOs and private equity deals now account for about 15% of all Japanese M&A activity. Japanese managers increasingly view MBOs as a way to radically transform their companies without worrying about shareholder approval. Stopping hostile takeovers is another motive.

Asked to describe the qualities of the ideal MBO candidate, Kenji Kimura, co-COO of Nomura International and former global head of Nomura's M&A team, said:

A company must have a stable cash-flow base. A decisive executive with leadership quality at the top is another requirement. A target company should also be the one with huge value-up potential that could be turned around with some kind of a short-term push.

Interestingly, the June 16 article cites three potential candidates for MBOs. Two were Ezaki Glico, a confectionery manufacturer, and Sonton Food Industry. The third was Yagi.

A Vanishing Japan?
In the July 17 FT there's an opinion piece by Hitoshi Tanaka, a former deputy minister for foreign affairs, titled Reports of 'Vanishing Japan’ Are Exaggerated. Tanaka argues that Japan has been edged out by China as the focal point of American attention in Asia and has generally fallen off people's radar screens. For Tanaka, rather than a vanishing Japan, there exists a Japan in transition, a country that has made substantial strides in its domestic and foreign policy, and has the potential to be "…a considerate leader working to structure a regional order."

As one would expect from a former diplomat, the piece is temperate and balanced, and, it must be said, unremarkable. But what struck me was the absence of any mention of South Korea, except in a slight aside. One hopes that's an oversight, and that South Kores is prominent on Tanaka's radar screen. It is Sony that now learns from Samsung, and Toyota is more scared of Hyundai than it is of GM.

If Japan has lost some of its luster, it's not only because big brother China is reviving, but also because its best firms seem less outstanding when compared with its Korean competition. If you're a Chinese manager faced with a buy decision between Japanese and Korean firms, with a workforce angry at reading page-one articles about visits to Yasukini Shrine, a Seoul supplier may be the preferred choice.

Tertiary Index Up in April
Today the Minstry of Economy, Trade and Industry announced that the May index of tertiary industry activity (i.e., most of the economy, excluding agriculture, construction, and manufacturing) rose 0.5% from April's level to 109.1 (Year 2000=100). It was the second-highest level on record, and up 3.3% year over year. It was the thirty-thrid straight month of improvement.

New Financing for Hokkaido Hospitals
Caress Group, which manages seven Hokkaido hospitals, is joining forces with several firms to create a fund that will buy the hospitals' real estate assets for 100 billion yen. For hospitals that have traiditonally relied on borrowing from financial institutions, the fund represents an innovative way for procuring funds that facilitates the financing of facilities and the introduction of new equipment. The fund will be established this autumn. Funds will be solicited from big trading and real estate companies, energy companies, and other firms. The fund's composition and management will be the responsibility of a German brokerage, which aims to have it trading as a REIT in 2007. Hospital managements are under pressure because of declining payments for medical services and other factors.

BOJ Ups Interest Rates for the First Time in Six Years
As widely anticipated, on July 14 the Bank of Japan raised the overnight call rate to 0.25%. This was the first increase in this key rate in six years, and it marked an historic milestone in Japan's efforts to boost the economy and end deflation. The overall impact of the rate hike on the economy was expected to be minimal, however; the BOJ has indicated that interest rates would continue to remain very low. The discount rate, the rate at which the government lends directly to banks, was boosted only 30 points to 0.4%, less than analysts had expected.

Skylark MBO Successful
On July 11, Nomura Holdings and private equity firm CVC completed a tender offer for shares of Skylark, a major family restaurant chain with more than 40,000 employees and locations in Taiwan, Thailand, Korea and the U.S. Some 18,800 shareholders tendered 102.6 million shares, or 94% of the outstanding stock, far exceeding the required 67%. The Y278 billion deal represents the largest MBO thus far in Japan. Skylark shares are expected to be delisted at the end of September.

Skylark intends to institute major structural reforms, including the closing of some 150 units. The MBO will increase the company's flexibility and streamline the restructuring effort. Management buyouts were almost nonexistent in Japan during the 1990s, but the number and size of MBOs has been increasing steadily in the new millenium. MBOs represent an important change in the strategy of Japanese firms, which traditionally have prided themselves on their ability to go public. 日経, 東洋経済 (subscription required), Reuters

New Online Trading Accounts Slack Off
The number of accounts at the five big online brokers rose by only a net 70,000 in June, the lowest advance in a year. The drop in the Nikkei to below 15,000 and the generally poorer market tone contributed to the slower expansion. Competition has also become more severe with the entry of Nomura Holdings's Joinvest Securities.

Despite Success, Toyota Unloved by U.S. Investors
Interesting piece in Business Week (subscription required) on how American investors remain largely indifferent about Toyota stock, despite the company's enormous business success, not least in the U.S. The lack of interest is especially surprising in contrast to the attention lavished on GM and Ford, despite their poor results and uncertain futures. Toyota's average daily volume of 370,000 shares is just a small fraction of GM's 13 million and Ford's 26 million.

Auto analyst John Novak at Morningstar says Toyota has a "mind share" problem: "There's a perception that you can't invest in it [because] it's a Japanese company -- that you would require a special account." That's wrong, of course -- there are dollar-denominated Toyota ADRs. Another reason cited is Toyota's exclusion from U.S. market indexes, which should continue to penalize the stock in terms of volume.

Equity Financing Doubles in First Half
Japanese companies made extensive use of the capital markets in the first half of 2006. Equity financing (funds procurement that included new stock issues) totaled Y2.52 trillion yen compared with Y1.3 trillion a year earlier. It was the highest level of equity financing since 1996. The strong activity reflects the many companies looking to boost medium-term growth through purchase of new equipment, M&A, and other activities.

Stiffer Penalties for Securities Violations
In the wake of the Livedoor and Murakami scandals, Japan is toughening its securities law. Under revisions of the Financial Products Trading Law, the maximum term for insider trading has been hiked from three to five years. Surveillance of market activity for illegal transactions will also be strengthened. The top term for falsifying accounts and other schemes that dissemble to boost stock prices will be upped from five years to ten years. Regulators hope the longer sentences will stem securities crimes. In addition, laws governing takeover bids will be reviewed at the end of the year, and new rules for solicitations and buy-outs should go into effect next summer.

"Flat 35" Housing Loan Rate Moves Up
The average rate for the so-called Flat 35 moved up 0.032% in July to 3.226%, its first increase in two months. The Flat 35 is a joint offering of the Government Housing Loan Corporation and private financial institutions, and it is the longest fixed-term housing loan. The hike reflects higher cost of funds for the 308 participating institutions. Flat 35 loans, introduced in 2003, have taken off after a slow beginning, as this somewhat dated article from the IHT describes.