Nihon Equity Research

2008-03-20T09:41:00.000-07:00

Japanese Stocks Look Cheap Compared with U.S. Land

In the past few weeks we've seen more and more articles predicting the continued downturn of the US economy and housing market. A particularly useful set of graphs was published in Business Week, the second of which illustrates the sharp jump in housing prices in the past few years.

It’s helpful to compare these prices to those for Tokyo residential real estate. From 1985 to 1991, Tokyo real estate prices went up almost 150%. By 2005, prices had retreated to 1985 levels, with the biggest losses posted in the three-year 1991-94 period.

It is often argued that a similar collapse is impossible in the US, especially in places like California. But it’s wise to remember that much the same thing was said about real estate in Tokyo in 1990, namely, that the city is the center of Japan’s economy, and land supply cannot be expanded. In short, real estate prices could never go down.

Prices of California homes went up 167% in the past 10 years, and in the past year have only dropped less than 10%:

While many people won't (or don't want to) believe the 20%-30% drop predicted by BusinessWeek is possible, if the Tokyo example is at all similar, there is certainly the possibility that those declines will be realized.

The Japanese stock market was one of the world’ worst-performing markets last year. The economy is not any better this year, but stock prices may have been already battered enough. Some bottom-fishing is now possible.

2008-02-14T10:06:00.000-08:00

Analysts Debate Sharp Rise in 4Q GDP
Japan's GDP in the fourth quarter of 2007 rose at an annual rate of 3.7%, more than twice the level of consensus estimates. Greater outlays for factories and facilities and strong exports of cars and software helped spur the expansion. The solid performance boosted growth for the full year to 2.1%. Investors responded positively to the news, sending the Nikkei 225 up 558 points, or more than 4%.

But many analysts were skeptical. Glen Maguire, the chief Asia economist for Société Générale, said "Every now and then Japan produces an economic number that prints diametrically opposite to what common sense would suggest.” Some observers noted that consumer spending was buoyed only by high oil prices and cold weather. Government ministers were equally cautious, warning of downside risks for the economy. Other analysts expected the estimates to eventually be cut.

Still, some observers were heartened by the news. "Japan's economy may not be great, but it's never as bad as investors think,'' said Masayuki Kubota, who helps oversee $2.2 billion in assets at Daiwa SB Investments Ltd. in Tokyo. "Japan's GDP figure and the U.S. retail data are evidence for a more positive view on the market outlook today.''

One overarching -- and disconcerting -- phenomenon is the skepticism with which Japan's real GDP numbers are viewed. Some suggest that nominal GDP -- which grew more slowly in the quarter -- is less riddled by distortions and presents a more accurate picture of the economy. Takehiro Sato of Morgan Stanley notes that, while the economic cycle in the US can be traced by GDP, in Japan it's the industrial production numbers that count. All in all, although the strong 4Q GDP growth for Japan should not be ignored, it will take stronger evidence to convince analysts that the Japanese economy is doing as well as the recent news would indicate.

2008-01-16T07:00:00.000-08:00

Opportunity in Japanese Car Navigation?
Thanks to more advanced and user-friendly graphical interfaces (among other developments), personal navigation devices (PND) -- portable and economic versions of car navigation systems -- are seeing high demand. PND sales doubled in 2007, and according to Amazon, it was one of the hottest product categories during the past holiday season. Garmin (GRMN), the leading U.S. maker, saw its sales increase nearly 70% in the first nine months of 2007 (see photo of Garmin nuvi2000 below). Canaccord Adams recently raised its rating on the company from "hold" to "buy". Another leading maker is TomTom of Netherlands, and Taiwan's Mio is also doing well and growing sales in the U.S.

Japanese makers are notably absent from this race in the U.S. While many companies, including Fujitsu, Pioneer, Sony, and Panasonic, offer PNDs in Japan, we don't see any of these names in the U.S. market. What happened? Japanese makers are usually good at marketing these clever small devices. And the car navigation market in Japan was at least several years ahead of that in the U.S.

A likely reason is the advance of originally equipped car navigation systems. Japan has a relatively mature car navigation market, dominated by expensive systems embedded in the car (at additional costs of $500 or more). When much cheaper PNDs (some around $100) started showing more advanced functions and usability, Japanese makers had difficulty competing in this market for fear of cannibalizing their own more expensive systems.

So are there no Japanese companies that will benefit from the expanding U.S. PND market? An interesting name to watch might be Zenrin (TSE: 9474), an old map company that started providing digital map databases to car navigation makers in the early 1990s and recently was in the process of shifting more of its energies into its mapping database business. It has about a 70% market share of the maps used by original equipment car navigation systems in Japan, and many PND makers also buy map data from the company. More recently, one of NTT Docomo's newest mobile handsets, "905i", was equipped with Zenrin's map software, opening potential content revenues for the company.

In the U.S. and European markets, upward integration (M&A) was evident in the last quarter of 2007. The leading US PND maker Garmin fought to acquire Tele Atlas (TLATF), bidding $3.4 billion for this a Dutch digital map company; but it gave up this expensive bid to rival TomTom, also a Dutch company. At the same time, Nokia offered $8.1 billion, or 50 times earnings, to buy Navteq (NVT), a Chicago-based digital mapping company. While these M&A deals sound very expensive, if consolidation proceeds in the navigation sector, mapping data companies may become rare and expensive assets. Map content is very time-consuming to build, so it's something all navigation system providers have to pay to license. In December, Microsoft bought U.K mapping company Multimap in a bid to compete with Google in online mapping tools.

At this point, it is speculative to think Zenrin will be an M&A target. For one thing, its large share in Japan would make it difficult for one of the device makers to own it. And currently selling at 40 times forward earnings, the stock is expensive. Still, if we were to see any major developments -- fierce PND competition from foreign makers like Garmin and Mio (which are already selling in Japan), development of Zenrin's next generation content "guidable city mobile (GCM), etc. -- this might be an interesting company to follow in this sector.

Zenrin stock chart

2008-01-07T16:37:00.000-08:00

Is Higher Oil Fully Reflected in Japanese Utility Stock Prices?
In recent weeks the yen has rebounded nicely against the dollar, moving from a high of ¥124 this past summer to the recent low of ¥107. Some observers say the yen carry trade has almost unwound and the yen has peaked. Others predict that, with continuing mortgage woes in the US, the yen is slated to move under ¥100.

The strong yen is bad news for the many Japanese companies that rely heavily on exports (Sony, Toyota, Honda, and Nintendo, to name just a few). But Japan is also a net importer in certain sectors, most notably energy, food, and wood. In particular, Japan imports most of its oil from abroad, thus margins at electric utilities are strongly affected both by the crude oil price and currency exchange rate. Electric utility company stocks had rebounded late in 2007, before the sharp decline at the beginning of 2008 with the rest of the Japanese market.

Currently the average forward PER of Japan's utility companies is 23.4. Do their stock prices reflect both the effect of rising energy costs and a stronger yen? We think that recent surge in oil prices to around $100 has not been incorporated in many of the March 2008 earnings estimates that were announced a few months ago. Thus when third- quarter results are released in late January they should include some "surprises" -- which really shouldn't be surprises at all if you do some rough calculations to adjust the previously announced estimates.

For example, Chubu Electric's (9502) most recent forecasts for the March 2008 year is ¥145 million for ordinary income and ¥89 million for net income. These estimates assume a crude oil price of $68.10 per barrel for the fiscal first half and $70 for the second half (October 2007 to March 2008).

However, the actual average oil price for the second half is more likely to be around $85 or even $90. Chubu's disclosures tell us that every $1 rise in crude oil prices adds ¥7.6 million to its costs. So if the average oil price for the year is $85 instead of $70, the gross impact on costs would be ¥121.6 million. That amount would be somewhat offset by the benefits of a rising yen: if the average exchange rate is ¥115/$ instead of ¥120/$ that their current estimates incorporate, the gross positive impact on the margin would be ¥26 million. However, considering that ordinary income is pegged at only ¥145 million, the overall impact from higher oil prices would still be substantial.

Of course, utility companies use various hedging contracts for commodities and exchange rates (for which we could not find detailed disclosures). There are other factors as well -- such as the percentage of electricity generated from nuclear -- so the back-of-the-envelope calculation offered above is not the whole picture. But it's helpful to remember that Chubu's forward PER of 24 is based on estimates released two months ago – whose assumptions are now very different from current reality.

2007-12-31T10:14:00.000-08:00

The Self-Inflicted Wounds of the Japanese Economy
The AFP has a good story about how three over-reactions to consumer worries by Japan's bureaucrats hurt the economy during the past year.

The first instance was the introduction of stricter construction standards for earthquake resistance following the falsification of data by a Japanese architect. It sounds fine on paper, but the new rules lengthened the permit approval process from three weeks to more than two months.

The second was new regulations that severely limited the interest rates charged by consumer finance companies. Again, the aim was laudable, in this case to protect poorer Japanese from high debt. But less-well-off consumers depended on the high-priced loans from the finance companies, and they now have to turn more often to the black market.

Finally, life insurers have been forced to go back over 30 years' worth of records to find policyholders who were entitled to benefits but didn't receive them. The action shifted the burden for notification from policyholder (where it resides in the US) to the company. Again, noble goal, but it cost the industry in excess of $2 billion and reduced the level of trust between consumer and the insurers.

2007-11-07T10:44:00.000-08:00

New Stock Exchange for Japanese Start-Ups
Last week the London Stock Exchange and the Tokyo Stock Exchange announced that they would set up a new stock market for Japanese start-up companies. The market, which has yet to be named, will seek to eliminate numerous requirements for listing and will only be available to professional investors. The LSE already operates a similar market in London called AIM. The two exchanges hope to have the new market up and running by the end of 2008.

The move comes as Japanese financial authorities work to re-establish Tokyo as an international financial center. In recent years, the TSE has seen the number of foreign listings fall, and overall Japan has been losing its luster as a financial center compared with other East Asian markets, most notably Shanghai.

Whether the new market will be successful is open to to question. Some suggest that AIM itself poses significant competition. The London market has been extremely successful in capturing foreign listings. In 2006 the market held 462 IPOs compared with 138 launched on NASDAQ and 136 at JASDAQ, Mothers, and Hercules combined. Japanese start-ups may figure that AIM serves its needs nicely and decide to list on AIM instead. In July of last year, Secure Design, a provider of biometric verification systems, became the first Japanese company to list on AIM.

On the other hand, there's reason to doubt whether AIM will act as a drag on the new exchange. Unlike U.S. or many European companies that need to prepare all of their financial documents in English anyway, it will be a significant burden for small Japanese companies to prepare all their disclosures in English and do the IPO "tour" for an English-speaking audience. That's a major reason why Japanese ADR listings are so few and limited to mostly very large companies.

Notably, this latest venture follows JASDAQ's move in August to establish a small company exchange called NEO to compete with TSE Mothers and OSE Hercules. Thus far the response to that entity has been underwhelming. It's interesting timing that there are so many efforts to establish exchanges for smaller cap companies when existing exchanges are not succeeding.

2007-10-31T19:10:00.000-07:00

Japanese Firms to Benefit from Strong Airbag Sales

One area of the auto industry that may grow faster than actual vehicles is airbags. Two recent developments brighten the outlook for this industry segment. First, Toyota announced in July that all of its models sold in Japan will be equipped with side and curtain airbags. Second, the US NHTSA will gradually mandate side/curtain airbags beginning September 2009. This will triple the cost of airbags for each car compared with current levels with just the requirement of front seat bags.

There are essentially three airbag providers for the Japanese auto industry: Takata (7312), Toyota Gosei (7282), and Nihon Plast (7291). Among them, Takata may benefit most since 47% of its sales come from outside Japan. Because vehicles of the U.S. Big Three are less likely to be equipped with side/curtain airbags compared with Japanese cars, the NHTSA mandate should have a relatively strong impact on Takata.

2007-10-10T17:54:00.000-07:00

The Problems of Japanese M&A
FinanceAsia has published a long, excellent aritcle on Japanese M&A. Among its many salient points:

(1) Equity capital markets in Japan are contracting while debt markets stay steady. The reason is that companies don't want to increase their freefloat and thereby allow potential acquirers get their hands on any ownership.

(2) At the same time, M&A in Japan is not doing badly, up about 10% year over year in the April-September period to about $400 billion.

(3) Still, the numbers for calendar year to date are flat, and any recent increase is from a relatively small base. Japan doesn't like the mass firings that often accompany M&A, and managements don't think mergers are good for company or staff. Japanese managements feel less obliged to reward shareholders with high stock prices.

(4) Partly because of the lack of emphasis on share price, Japanese firms see themselves as targets rather than equal players. They point out that their market caps are relatively low, which makes them vulnerable to takeover; correspondingly, they also lack the muscle to be acquirers.

(5) The somewhat-heralded new triangular mergers law has for now turned out to be mostly a bust. Although the big takeover of Nikko Cordial by Citi was indeed such a merger, the code regulating domestic M&A is actually far more convenient.

(6) The article's conclusion is that, while Japanese M&A will continue, there won't be a big spike of large, international deals. "...It will be successful Japanese companies offloading their subsidiaries or buying profitable new ones (“Domestic, friendly, inter-and-intra group” as the EIU puts it)."

The big problem I see in Japanese M&A is that, as the article states, M&A has traditionally meant lopping off a whole bunch of people to produce efficiencies and cost savings. In the US we accept that, more or less, for a variety of reasons -- we believe no job lasts forever, our unions aren't strong, job markets are fluid, etc. In Japan, people who get laid off don't believe they are soon going to get comparable work, and they are right.

Add to that the sense of Japanese managers (and apparently domestic shareholders) that stock price isn't the be-all and end-all; that foreign firms like Steel are predators taking advantage of the mispricing of Japanese companies; and that acquirers should add something more to the mix than just boosting shareholder value, and it's little wonder that M&A sits uncomfortably with many Japanese.

Overseas acquirers will need to devise new strategies if they want to allay these misgivings. These methods could include promises to keep staff on or finding them new jobs, investing cost savings in communities and environmental enhancement, or putting new money into the business. One way or the other, overseas acquirers will need to recast their current image of invading capitalists if they are to enjoy success in Japan.

2007-10-04T10:39:00.000-07:00

Privatization of Japan's Post Office Begins
On October 1, the privatization of Japan's postal services was officially inaugurated. Under the umbrella of the new Japan Postal Holdings there will be four separate companies for mail delivery, banking, life insurance, and over-the-counter services. Japan Post Holdings is currently 100%-owned by the Government, but its interest in the bank and insurance companies will decline, with the aim of stock listings by 2009 at the earliest.

The Japanese post office is a colossus with 250,000 employees, 24,000 post offices, 400 million accounts, and $3 trillion in savings and insurance policies, more than half of that in deposits. Its 26,000 ATMs is three times the number of Mitsubishi UFJ, Japan's biggest bank.
During the four months ending July, the post office sold Y1.1-trillion worth of Japanese stock, apparently in an effort to show a profit in its last reporting period before privatization began.

The sales are considered one reason why Japanese equity markets stayed low this summer. However, under privatization, investments in equities are likely to increase to achieve higher returns. Even if the vast majority of assets under management remain invested in low-risk government bonds, the small portion allotted to equity investments may help to move the market higher.

Questions remain, however, about the ultimate path and effect of privatization, including:

Will the Japanese government actually relinquish control of the postal system? If the government keeps a one-third ownership in Japan Holdings, as it is likely to do, and if Japan Holdings maintains its investments in the banking and insurance divisions, Tokyo will continue to exert de facto control over how the country's savings and insurance contracts are invested.

Will the new entity entice more Japanese to invest in equities? Although buying mutual funds may be made easier and more convenient, middle-aged Japanese remember well the collapse of the stock market in the early 1990s and remain reluctant to put their money in stocks. Privatization may not do much to alter their conservative investment stance. On the other hand, if the new entities decide to invest more of their assets under management in stock, that will be a bull factor for the equity markets, just because of the huge amounts of money involved.

What will be the impact on other financial institutions? Japan Post has already announced plans to team up with Suruga Bank to offer mortgages in the Tokyo area. The banking and insurance companies will gradually enter other financial businesses, increasing pressure on Japanese banks. Private companies are worried that Japan Post entities will be able to offer de facto assurances on which they can't compete and will enjoy unfair tax and regulatory treatment.

On the other hand, commercial banks are improving their services and extending their hours, exactly the kind of steps that proponents of privatization anticipated. As the Economist notes, "a little competition goes a long way."

2007-09-24T13:20:00.000-07:00

Shimano: Evolution Trumps Innovation
In his new book "The Shock of the Old," David Edgerton continues to question the emphasis most technology historians place on innovation and invention. Instead, he insists that at any particular time it is older technologies that do most of the work. A prime example is the bicycle, whose annual unit production still exceeds that of the automobile and continues to show steady gains.

Edgerton's thesis is controversial, but the ability of Shimano (JP:7309, SHMDF.PK) to capitalize on enduring strong demand for bicycles is not. Founded in 1921, this premium, high-end, Japanese bike parts maker provides an integrated line of products, including shifting gears and driving and braking components. The Company also makes fishing gear and snowboards, but bike components represent more than 70% of sales, the majority of which are in the US and Europe.

Although a recent Business Week article called Shimano the Microsoft of the bike industry, as a parts supplier the Company is more often compared to Intel. It has a dominant share in components for racing and mountain bikes; notably, in driving components, it has an 80% share of the global market. Since the 1990s, a majority of the world's professional bicycling teams have used Shimano components, burnishing the Company's reputation for high-performance products. Profitability exceeds the competition's: over the past three years, the Company's operating margin ranged from 12.3% to 17.4%, versus the sector average of 10.8% for Japanese bicycle makers.

Since mid-2006, the share price has become more volatile. The immediate reason is the Company's negative surprise for midyear (June) 2006 results: year-over-year revenue declined slightly and recurring profit fell 34%, causing Shimano to shave its fiscal 2006 estimate. Investors thought that this super-premium niche manufacturer with worldwide diversified sales should have been better able to estimate profits and manage its financials, and punished the stock accordingly.

However, in 2007 the mid-term profit surprise was on the upside. On August 22, Shimano announced that revenue rose 24% to ¥99.8 billion and operating profit gained 47% to ¥14.3 billion, primarily because of robust sales for medium- to high-end mountain bikes in Europe and the US. The Company also raised its fiscal 2007 revenue estimate from ¥184 billion to ¥195 billion. These numbers were released just a few days after a sharp sell-off on the Japanese market due to concerns over the subprime loan problem.

Although Shimano's share price has recently recovered on the back of the positive news, the current level of ¥3,740 (9/14) is far below the previous high of ¥4,330 in June this year. Based on the revised estimate for FY 2007, Shimano has a P/E of 18.6, not quite cheap but below the average for Japanese bicycle makers of 25.

At this point, we believe that the stock's positives outweigh the negatives. The latter does include volatility in the financials. The Company attributed lackluster 2006 revenue to bad weather in Europe. But industry sources tell a different story centering on Shimano's product and market segment strategy. The Company initially focuses on gaining market share and, after gaining a certain level of market exposure, it begins to emphasize higher-margin and replacement markets. At the start of the cycle, there is margin pressure due to the aggressive pricing and sales/marketing expense. It seems like 2005 and 2006 -- when Shimano introduced a series of major new products geared to the high-end market -- represented this early phase of the cycle, while 2007 is indicative of a later, more profitable period.

As long as the premium competition and recreational bike market continues to grow, Shimano has a solid position selling parts to bicycle makers. It provides components as a package instead of individually, making them easier for bike manufacturers to install as compared to designing bikes based on separate parts. Thus the cost of switching to other makers from Shimano is high. One last wild card is the Company's new "Coasting" system which includes a computer that automatically shifts gears. It's like an automatic transmission for bikes, and it's targeted to leisure bikers who prefer not to deal with 30 shift gears. Introduced in 2007, it's put in bikes with prices ranging from $450 to $700.

Some industry sources say this is the boldest concept in the industry in 25 years. Still, we think it's too early to place this item in the overall profit picture. Even if Shimano sells at the upper end of its estimate of 50,000 to 100,000 units in the initial year, the added revenue to the entire company would be only around 0.5% of the sales. On the other hand, if we hear our mother-in-law start talking enthusiastically about this "entirely new biking experience" and telling all 20 of her cycling friends, we'll be calling all the bike shops to monitor closely the sales trend.

2007-09-05T10:29:00.000-07:00

TEPCO Shares Gain Attention from Individual Investors
The August 21 issue of Nikkei Money, a magazine on Japanese investing, had a poll of individual investors regarding their views of the Japanese market and promising stocks. Of the names investors are paying most attention to now, the number-one choice was somewhat surprising. Leading such internationally known blue-chip companies like Toyota, Sony, and Honda was Tokyo Electric Power, or TEPCO (9501, TKECF), the normally stable (and boring) utility that supplies 30% of Japan's electric power.

A poll of individual investors may not be the best authority for stock selection. However, in this case, especially for long-term oriented investors, the current price of TEPCO justifies consideration. After more than doubling in price over the past four years, the stock nosedived last month after the 6.7 magnitude Niigata earthquake hit the Company's Kashiwazaki-Kawari nuclear plant, leaving it inoperable at least for a few months.

In its July 31 release of 1Q 2008 results (ended June), TEPCO estimated the damage from the incident to be around Y282 billion and revised its March 2008 net profit estimate downward from Y310 billion to Y65 billion (or Y230 to Y48 on a per share basis). The financial damage was so extensive because, in addition to paying for repairs, TEPCO will be forced to replace the lost energy through alternative sources that are expensive due to high oil prices.

On August 16, the stock reached a calendar 2007 low of Y2,965, compared with a five-year high of Y4,530 in February. However, investors seem to think the worst is over. At a price of Y3,080 as of 9/3, the P/E based on 3/2007 net is about 14, and the valuation based on the previous, pre-earthquake estimate is 13.2, as compared with the sector average of 23.4. Worst-case scenarios add virtually no risk: this quasi-public supplier of 30% of Japan's power won't be allowed to go out of business, and it has sufficient liquidity and funding sources to turn to. On August 9, Moody's rated TEPCO's bonds Aa2 and said it didn't see any impact on the Company's credit rating from the plant damage. While TEPCO hasn't released the estimated re-start date of the plant yet, over the medium- to long-term we expect profit levels to return to the prior-year level and the trend of steady growth to continue, which should be reflected in the stock price.

2007-08-08T19:57:00.000-07:00

Green Investing in Japan
Environmental (or green) funds, which have until recently posted strong results in the U.S., are gaining popularity in Japan. Nikkei recently reported that the balance of green funds in Japan at the end of June was 720 billion yen (about $6 billion), double what it was the year before. The global warming issue has attracted keen interest in Japan, and individual investors are demonstrating their concern by dramatically increasing investments in environmental funds. Two fund companies, Shinko Investment Trust Management and Deutsche Asset Management, have recently launched new green funds. The new Deutsche vehicle started with a high initial asset balance of 154 billion yen, ranking third among new funds established this year.

As in the US, the definition of a green fund varies – some funds are more purely environmental plays than others. The Nihon Securities Journal reports that some of the major holdings by environmental funds include large-caps like Toyota (7203), Kyocera (6971), Denso (6902), and Shimadzu (7701) that are perceived as environmentally friendly, but would not ordinarily be considered green investments.

Other funds include stocks that are specifically driven by environmental factors. For example, Ibiden (4062), the world's leader of filters for diesel engine, plans to increase its production capacity by 70%, as both U.S. and Europe will force tougher regulation on emissions from diesel engines. In another sphere of environmental investing, Japan Wind Development (2766) is changing its business model from an importer/marketer of wind power generators to that of an operator of wind power. The company expects to double its capacity and sales volume from wind generated electricity this year.

2007-08-01T14:11:00.000-07:00

Mitsukoshi and Isetan Department Stores May Combine
Mitsukoshi (2779) and Isetan (8238), the fourth- and fifth-largest department stores in Japan, are reportedly in talks for a capital tie-up and an integration of their operations. Together the two firms generated 1.6 trillion yen in sales for the February 2007 year. Thus the combined company would be the largest department-store operation in Japan, exceeding Daimaru-Matsuzakaya whose merger into the new firm J. Front Retailing is expected to be completed in September.

A Mitsukoshi-Isetan combination would be something like a merger of Saks and Macy's. Mistsukoshi, whose history extends back to the 17th century, caters to a rich, upscale clientele, while Isetan has a strong following among younger people for its fashion sense. Although some observers suggest that matching the old and rich with the young and hip makes a nice fit, it would also seem the new company would have to move carefully to avoid alienating either group of core customers.

Geographically, though, the two firms are a good match. Mitsukoshi's historic base in Tokyo is Nihonbashi and it has stores in Sapporo and Nagoya; in total, Mitsukoshi has 20 units. Isetan's Tokyo home is Shinjuku, with six other stores in the Tokyo area, including Kichijoji, Tachikawa, and Urawa (Saitama); it also has four regional stores and eight shops in Asia. Mitsukoshi's units are located throughout Japan and Isetan's are mostly in the Tokyo area, so except in Fukuoka, there isn't much overlap between them. There's also geographic diversity overseas, because Mitsukoshi has more shops in Europe than in Asia.

Mitsukoshi has been having financial difficulties for a long time. The chain depends heavily on seasonal gift-giving by corporate customers, and sales for this group fell 15.5% last year. Japanese department stores suffered heavily during the long business drought of the 1990s, and they have been stung by competition from supermarkets, specialty stores, convenience stores, and other retail formats. Lately things have picked up a bit: Department-store sales rose 5.5% in June, the fastest pace in nine years, although much of that may have had to do with starting summer discounts earlier to take advantage of an extra Saturday in June.

Analysts expect that a Mitsukoshi-Isetan would soon achieve benefits through integration of purchasing, logistics, etc., led by the well-respected Isetan team. Isetan has already made substantial headway in streamlining its operations, while Mitsukoshi still has a way to go in improving its stores outside major metropolitan areas.

2007-07-25T13:56:00.000-07:00

J-SOX: The Good, The Bad, and the
(Not So) Ugly
The Financial Instruments and Exchange Law is Japan's version of the Sarbanes-Oxley Act, or SOX, hence its informal name of J-SOX. Scheduled to go into effect for Japan's 3,800 listed companies and their foreign subsidiaries in April 2008, J-SOX is being adopted by many firms right now. SOX was adopted following the Enron scandals that rocked the US business world, and J-SOX is being instituted in the wake of corporate misconduct as exemplified by Livedoor and Seibu Railway.

SOX has elicited a chorus of complaints from US businesses who argue it puts them at a disadvantage in world capital markets and has driven listings of public companies overseas. Japan's regulators have sought to avoid the missteps of SOX by implementing a less onerous regime based on broad principles that leaves much of the actual procedures up to company managers.

This has led to the usual debate and trade-offs between the "rules regime" of the US and the "principles environment" of most other places. Putting specific rules in place leads to an outcry about their inapplicability to specific firms and their high expense, but people know what they're supposed to be doing. Providing just general principles will elicit fewer complaints from Japanese companies, but also a lot of confusion about just what they should do to comply.

Among the worries Japanese managers have is finding the personnel to do the work. Japan has only about 17,000 CPAs, a small fraction of the number in the US, and importing Japanese-speaking accountants from abroad does not seem a realistic possibility. Audit automation will thus be critical to the process.

Not surprisingly, many Japanese business people don't even know what J-SOX is. In an online survey taken in April, some 46% of respondents had never heard seen or heard of the "SOX Law." One problem the authorities face in gaining broader recognition is that, like many new words and acronyms written in katakana or romaji, J-SOX means little to the ordinary Japanese.

Will J-SOX do much good? My view is colored by my experience as an accountant, but my prejudice is that rules that heighten the awareness of internal controls and their importance to both the audit and work processes are to be welcomed. Although initially met with complaint and resentment, they can be the catalyst for introducing operating improvements that benefit the long-term health of the firm.

In the Harvard Business Review (April 2006), two Deloitte executives contributed the article The Unexpected Benefits of Sarbanes-Oxley. The authors noted that the introduction of SOX, along with its drawbacks of higher expense, has had significant benefits, including standardizing work processes, reducing complexity, and minimizing the human error caused by manual processes.

Of course, it may be impossible to have spent the kind of money spent on SOX without experiencing some ancillary benefits, and there may have been far more efficient ways of bringing about these improvements. Moreover, there's no guarantee that any similarly benign effects will be seen in Japan.

Nevertheless, smart managers will look past the immediate costs and hassle of J-SOX and see it as an opportunity to review and overhaul their work processes and introduce new technology that both safeguards shareholder assets and improves company operations.

2007-07-18T16:23:00.000-07:00

Steel Partners Is an "Abusive Acquirer"
Last week, the Tokyo High Court handed not only a defeat but a tongue lashing to US hedge fund Steel Partners. In upholding a lower court decision that would allow Bull-Dog Sauce Co. (2804) to issue stock warrants as a takeover defense, the Court labeled the American firm an "abusive acquirer" solely focused on making a short-term to medium-term profit. As described in this story from Nikkei Net (subscription required), the Court gave this explanation of why Steel's activities were wrong:

The high court...defined a stock company as a for-profit organization that makes distributions to shareholders by maximizing enterprise value. But "it cannot pursue profit on its own because profit is generated through economic activities with employees, consumers and others," explained the ruling.

Darrel Whitten has a nice roundup of recent events at his The Japan Investor. He notes that:

The high court ruling came as a shock to Steel and those hoping that activist investors would shake things up enough to accelerate Japanese management's slow and reluctant shift to shareholder capitalism. Heretofore, the perception was that the courts in Japan were protective of shareholder rights.

It's been interesting to talk to friends in Japan and read commentary on Steel in the Japanese press, like this piece from Business Media Makoto. The concept of the corporation as something more than the creature of shareholders -- ie, a true community of stakeholders comprising employers, suppliers, customers, etc. -- seems to resonate in Japanese society. Shareholders should not simply look out for their short-term gain but rather consider the long-term success of the firm, which may not be the course of action mandated by IRR and discounted cash flow calculations.

To what extent this concept is truly felt by the Japanese public, and how much is simply rationalizing a dislike for the external, foreign, unsettling forces Steel represents, is hard to say. In many ways, Japan remains extremely, even oddly, conservative, and the antipathy shown toward Steel's motives is more than just a manifestation of xenophobia. It will be interesting to see if other American funds, or even Steel itself, can repackage and rebrand itself so that what it is selling is more palatable to the nation's shareholders.

2007-07-11T19:02:00.001-07:00

Fast Retailing Bids for Barney's

With all the talk (and it's still mostly talk) of foreign firms buying Japanese ones, it's useful to remember there are still Japanese companies taking over foreign firms.

Fast Retailing is a Japanese clothing store chain with over 780 shops. Its attempts at opening stores outside Japan have been less than successful, however -- only 30 of its units are overseas, and it's Uniqlo brand name is largely unrecognized outside Japan.

In 2006 it attempted to open a Uniqlo store in NY, but sales were disappointing. Last week, in another move to establish itself in the US, the Company bid $900 million for Barney's of New York, a 34-unit chain that is part of Jones Apparel Group. Barney's was already slated to be sold to Istithmar, a Dubai group, for $825 million.

Jones Apparel had already accepted Istithmar's offer, but the firm has until July 22 to consider other bids (although it would incur a breach of contract fee of around $21 million if it were to accept one).

The offer follows other purchases of overseas assets by Fast Retailing in the past few years:

First was the acquisition in February 2006 of the French lingerie brand Princesse Tam-Tam, then four months later Fast Retailing bought Comptoir Des Cotonniers, the chic French womenswear chain that has outlets sprinkled across London. These joined Theory, the clothing line known for its stylish jersey pieces, and the fashion label Helmut Lang, which Fast Retailing snapped up in 2003. It also owns an Italian tailor, Aspesi.

The Barney's purchase offers new avenues for the firm. According to Forbes:

Buying Barneys would provide Fast Retailing with a stepping stone for the low-priced retail chain to climb up to the high-fashion market. It would also provide it with a solidly performing brand name at a time when a number of other acquisitions it has made are struggling.

Nevertheless, whether this proliferation of brands makes sense is open to question. Motley Fool's Nathan Parmalee gives his opinion in a good article on the company:

I'm not a fan of retail companies that view themselves as a portfolio of brands. Gradual extensions of a brand can make sense, but when companies begin piling on brands, it rarely works out well. With every new brand added to the business, I wonder how Fast Retailing will focus and grow any of them meaningfully without materially increasing its cost structure.

2007-07-04T20:25:00.000-07:00

Steel Won't Buy Tenryu Saw
Steel Partners has failed in its attempt to take over Tenryu Saw Manufacturing. Only 2.6% of shareholders agreed to sell their shares. As Bloomberg reports, the setback comes on the heels of Steel's failure to buy Bull-Dog and follows a long string of unsuccessful takeover attempts, including Yushiro Chemical Industry Co., noodle maker Myojo Foods Co. and brewer Sapporo Holdings Ltd.

2007-06-26T08:05:00.000-07:00

The Comsn Affair
Comsn is a nationwide nursing home operator that has given false information when applying for permits to open new facilities; it has also been receiving benefits illegally. In consequence, the central government has decided that it will not renew the operating licenses of over 80% of its nursing care centers when they expire in 2011, and it has been asked by authorities to return funds it received illegally.

Comsn is part of the Goodwill Group, which offers services in areas stretching from staffing to pet care. It is run by Masahiro Origuchi, who is both admired and disliked for employing aggressive business tactics not usually seen in Corporate Japan. He initially made his fame at 30 by opening the trend-setting disco Juliana in Tokyo. He eventually lost control, but a few years later started the Goodwill temp and recruiting company and made it into a big business.

On June 11, Goodwill decided to sell off all of its troubled subsidiaries in the nursing-care business, setting off a scramble to acquire the assets. Origuchi hoped to sell them to a single company, but with Comsn operating over 2,000 facilities and providing a wide variety of eldercare services, that does not appear to be the most likely outcome.

Among the names of suitors that have appeared in press reports are Nichii Gakkan, Watami, Tsukui Corp., Japan Care Services, Bennesse, Saint-Care Holding, and Welcia Kanto Co. coupled with Wisnet. In all, Goodwill has received proposals from over 30 companies. It expects to make a decision on asset sales by the end of July.

The Comsn scandal should be considered in light of Japanese attitudes toward eldercare. Traditionally, the aged have been taken care of by their families, particularly daughters and daughters-in-law, and nursing homes have had a small role. Moreover, much elderly care in Japan takes place in hospitals, which historically have had far more hospital beds per capita than the US. Thus the nursing home business has an uncomfortable place in Japanese society; even younger Japanese women who reject their traditional obligations toward parents may hesitate about putting them in a home. The Comsn scandal will do little to calm their anxieties.

2007-06-25T14:30:00.000-07:00

Bull-Dog Growls at Steel Partners
Reuters, Nikkei Net (subscription), and FT all have round-ups about the approval of a poison pill by shareholders of Bull-Dog -- a maker of Worcester, tonkatsu, and other sauces -- seeking to thwart Steel Partners's effort to take over the company.

According to the FT, Bull-Dog wants to dilute Steel's stake from 10.5 per cent to about 3 per cent by issuing new stock to shareholders other than the fund. At the general shareholders meeting on Sunday, more than two-thirds of the vote was cast for management's plan, which would give shareholders other than Steel Partners three new shares for each existing one, while paying Steel Partners in cash.

Steel will be fighting the legitimacy of that outcome in court, and according to the AP, a Tokyo District Court may issue a ruling as early as this week. (Here's a useful Reuters analysis of courts' attitudes toward poison pills.) The forthcoming decision may have potential implications for hundreds of similar defenses, although some analysts caution that not all poison pill defenses are alike, and thus there won't be a general precedent from any one ruling.

In weighing the impact of the vote, the Asahi Shimbun notes that there has been a general rise in shareholder activism at board meetings, which stands in some contrast to the image of compliant Bull-Dog shareholders eager to throw their support behind management against foreign invaders, no matter the cost to shareowner value. With foreigners now accounting for 28% of shareholder stakes and stockholders increasingly willing to voice their dissent at meetings, there's a body of opinion that believes attitudes in Japan to M&A are slowly starting to change, whatever the outcome of the fight for Bull-Dog.

2007-06-22T08:07:00.000-07:00

Japan's Auto Parts Makers Poised for Higher Stock Prices
These have been flush times for Japan's auto industry. Toyota (TM) is now the biggest auto company in the world, Japanese makers continue to gain share in the U.S., high oil prices are boosting the sale of Japan's energy-efficient cars, and, as the worldwide auto market continues to expand, the cheap yen aids profits. 2007 should be another banner year for Japan's auto industry.

But finding value among Japanese auto stocks is difficult. The big names like Toyota, Honda (HMC), and Nissan (NSANY) are widely followed and very likely fully priced. Goldman recently released new target prices for Honda and Nissan, but as Steven Towns has commented, there's no excitement, as actual prices are around (or, now, above) target prices.

Focus has thus begun to turn to the auto parts and manufacturing equipment industry. However, according to S&P Japan's classifications, there are some 122 publicly traded auto parts/equipment companies in Japan. There are big, well-known names like Denso (JP: 6902) (DNZOY), a Toyota keiretsu major parts manufacturer with over $30 billion in market cap (about the same as Ford and GM together). But many are small firms; some are microcaps. A majority of the companies have no analyst coverage.

Mizuho Securities recently released a report on this industry. Among the major upgrades were Koito (JP: 7276), an automotive lighting manufacturer; Tokai Rika (JP: 6995); and Denso. Nihon Securities Journal recently recommended Nisshinbo (JP: 3105): while only 20% of sales are auto parts, they account for the bulk of operating profit, which grew 28% for the segment in the March 2007 year (according to a Reuters article dated May 23), Steel Partners has about a 5% stake).

Among much less well-known companies is H-One (JP: 5989), a new name as a result of a merger of two Honda group parts companies. Year-over-year sales and net profit comparisons (plus 211.9% and 167.3%, respectively) aren't useful because of the merger, but other measures seem to indicate that the combination resulted in some improved ratios (per share profit is up 64.4%, ROE improved from 7.6% to 14.7%). Trading at a (historical) P/E of 9, the company might be good value for small-cap investors who believe Honda will continue to grow in the world's marketplace (90% of H-One's sales come from Honda).

2007-06-14T11:48:00.000-07:00

Previews from the Latest Kaisha Shikiho
The Kaisha Shikiho, issued quarterly by Toyo Keizai, is considered by some to be Japan's investment bible. This thick, paperback-size publication covers all of Japanese public companies, over 3,700 in number. It's like Value Line but has a much wider readership -- Toyo Keizai says Shikiho has a 70% share of Japan's investment periodicals market.

Indeed, you will often see the most recent version on the desks of both brokers and small investors. Wahei Takeda, perhaps Japan's largest individual shareholder, is said to read Shikiho as his main information source for investing. In the US, investors know the English-language edition as the Japan Company Handbook, which appears about a month after the Japanese edition (Toyo says the English version includes any subsequent earnings revisions).

Prior to the release of the summer issue on Friday, June 15, the publisher ran a number of "preview" articles for subscribers of its online magazine. While of course there's no guarantee that its comments and earnings forecasts will prove accurate, the mere fact that so many investors read them might be worth considering, especially for stocks with large individual ownership.

Here are selected comments from the Shikiho on three stocks that caught our eye:

McDonald's (2702, Parent MCD)
As in the US, McDonald's Japan is doing nicely. A revamped breakfast menu, new products like the MegaMac, and 24-hour outlets should push same-store sales up 8% for the fiscal year ending December. The company has embarked on an aggressive store-closing program, and eliminating losses from these operations will give a nice fillip to profits. The company is also remodeling its 200-store base to include "one-seaters" that will make its outlets more attractive to lone diners. Shikiho is raising its net income forecast for calendar 2007 to 6.2 billion yen, a big jump from the 1.5 billion earned in 2006.

Komori Corp. (6349)
The printing press equipment maker should benefit from better sales in China, and overall higher unit sales will benefit operating profit. The company's official recurring profit estimate, based on a conservative exchange rate, is flat. But Shikiho expects a 10% advance for recurring profit to 18.5 billion yen for the year ending March 2008, as well as a higher dividend.

Fanuc (6954, FANUF)
This leading factory automation and robotics maker should benefit from the recovery of capital investment in the auto industry. Numerical control units are expected to be a core strength. The company continues to benefit from its skills in producing servo motors, and it plans to reduce delivery times. Interest income should be helped by higher rates. Shikiho thinks the company's estimates of slight growth in revenue and flat operating profits are conservative. It forecasts an 8.7% rise in net income to 116 billion yen for the year ending March 2008.

2007-06-05T09:15:00.000-07:00

Rule Revisions to Support Tokyo's Bid as Financial Center
In our May newsletter, we discussed Tokyo's move to reclaim its place as one of the world's great financial centers. Yesterday a government panel made recommendations for achieving that goal. Among the steps that may be taken:

(1) Creating an exchange that offers a wider range of products, including stocks, derivatives, and commodities;

(2) Lowering barriers to global financial transactions, trade, and tourism to stimulate economic growth. Such steps might include lifting securities regulations that prohibit sharing compliance executives between affiliates, which creates burdens for overseas companies.

(3) Establishing a more hospitable physical environment, along the lines of London's Canary Wharf, for Tokyo's financial center of Nihonbashi.

No doubt some moves will need to be made to compete with regional centers like Hong Kong, which is studying the creation of a commodities derivatives market.

UPDATE 6/25/07 Apparently some executives at foreign securities houses are less than impressed with the plan:

"(The plan) is typical of the old-fashioned way of thinking that focuses on
putting up buildings," said Masaaki Kanno, chief economist at JPMorgan
Securities Japan Co. The emphasis should be placed on "building invisible
infrastructure," such as reducing taxes on hedge funds, which are said to be
higher in Japan than in the U.S. and Europe, and adopting global accounting
standards, he added.

2007-05-19T09:51:00.000-07:00

Japan Has More Old Companies than Other Countries
An interesting piece in Yomiuri Online says more old companies are to be found in Japan than any other country. I'm not sure if this is correct, but the article seems to be saying that Japan has over 100,000 businesses that are more than 100 years old. The article certainly says that Japan has more than 100 businesses that were established before the 14th century, ie, before the oldest known companies in France.

I find this longevity surprising, because the 20th century was turbulent in Japan, and I would have thought most old businesses had disappeared. But then again, there's the famous example of the zaibatsu reconstituing itself after the War, even in the face of opposition of the American occupation.

It seems in the US we place great store in protecting old buildings from being torn down, while the Japanese, at least comparatively speaking, couldn't give a damn. In contrast, the Japanese take it hard when an old firm dies, but in the US we place relatively little importance on maintaining old businesses. (Although I suppose a lot depends on how you define "maintain old business." AT&T and Bank of America are still around, but only because their new owners want the cachet of their names, not anything about the underlying businesses themselves.)

2007-05-18T10:16:00.000-07:00

Impact of New M&A Rules
The Financial Times had a good article yesterday on the impact of the introduction of triangle mergers in Japan. It summarizes many of the points knowledgeable observers have made, namely:

(1) The new rules are almost exclusively for friendly takeovers, thus restricting their scope.

(2) Transactions will also be limited because Japanese tax authorities will consider them taxable events under rules that might be difficult to circumvent. Foreign companies may be forced to set up actual operating subsidiaries in Japan to enable the transactions, which defeats the purpose if that's precisely the kind of business they are seeking to acquire.

(3) Because of the new rules and previous law changes, Japanese companies are busy introducing poison pill and other defenses against takeovers. Nevertheless, there is some improvement in corporate governance to be seen, because the companies are now asking for shareholder approval first.

(4) The impact of the new rules may not be more foreign company takeovers, but rather increased consolidation among domestic firms -- a trend that will improve companies' profitability.

2007-05-18T09:25:00.000-07:00

Is Japan's Suicide Rate So Abnormally High?
We see lots of news stories like this one from the AP that say Japan has one of the world's highest suicide rates among industrialized countries. However, a quick search found this World Health Organization page on world suicide rates that show Eastern European nations like Lithuania and Hungary have notably higher rates. (We're talking about guys here -- women have much lower rates everywhere.)

Even if the WHO data is somewhat old and even if Hungary isn't quite the industrialized nation Japan is, the data does raise the question whether Japan deserves its unwanted reputation. Suicide rates in countries like Finland and even Belgium are not all that different from Japan's. Add into the equation certain cultural factors -- the US's relatively low rate may merely average out lower rates among Catholics against higher rates among non-Catholics -- and Japan's suicide level may not be all that different from other industrialized nations.

2007-05-18T08:37:00.000-07:00

Japan's "Lost Generation" of Workers
Business Week has a good article about the problem of underemployment of 25- to 34-year-olds in Japan. These young men and women came of age after the Bubble Collapse and have never been fully integrated into the workforce -- even as the country's economy now recovers.

The article breaks down several groups within this cohort. There's keiyakushain, contract workers at companies paid at lower rates than salarymen; hakenshain, employed by temp agencies; freeters, who go from one dismal job to the next; and NEETS (an acronym coined in Britain for those not employed, in education, or in training).

Although the phenomenon of contract workers receiving less pay and fewer benefits than regular staff for the same work can certainly be found in the US, the Japanese situation is structurally different.

US workers in their 40s and 50s have a hard time gaining full-time employment, especially by high-tech companies. But if you've picked up good skills as a contract worker and you're still in your late 20s or early 30s, it's relatively easy to get full-time employment at your current company or another firm. In Japan, these workers represent a "lost generation," since most firms much prefer hiring new graduates rather than those who have been contract workers for long stretches.

Japan is now making efforts to re-integrate these workers, who number 3.3. million, into the workforce; but at least from what can be gleaned from the BW article, not much is being done. The underemployment raises further difficulties for the country as it tries to lift its birth rate and solve its pension problems.

2007-05-15T09:37:00.000-07:00

The Impact of Triangular Mergers on Japanese M&A
The introduction this month of triangular mergers (see our recent post) is causing much debate on the law's possible impact. Some salient points:

(1) According to the EU, the level of cross-border mergers in Japan compared with that of the EU and the US is minuscule. The value of cross-border mergers (sales) in Japan amounted to US$2,512 million in 2005, while it was US$429,146 million in the EU and US$105,560 million in the US. The value of cross-border mergers in the EU is thus 170 times higher, and in the US 42 times higher than in Japan.

(2) As reported by the WSJ (subscription may be required), the law is unlikely to increase hostile mergers, since a two-thirds majority of shareholders must approve, as well as the board of directors.

According to the JT, "Japanese businesses fear that a hostile takeover would be possible if a foreign company launches a public tender offer to acquire a majority share in a targeted Japanese firm, then installs sympathetic members on the board. If the foreign business can purchase more than two-thirds of the voting rights, carrying out a triangular merger will be possible. However, considering how much cash would be required to pull off a takeover in this fashion, many M&A experts question whether such a tactic will be popular."

(3) For the merger to be tax-free, the foreign subsidiary must have an actual, physical presence in Japan, including office and staff. Thus entities that have been established just to meet the merger are unacceptable.

(4) Some Japanese columnists such as Nobuo Sayama of advisory firm GCA point out that Japanese companies have much smaller market capitalizations than their US and European counterparts, which is why company managements are so afraid of being gobbled up by them.

(5) Interestingly, though, Sayama and others believe that the new law easing triangular mergers won't necessarily have that much impact. Rather, it will be one more factor in an environment that overall will tend to increase M&A activity in Japan.

2007-05-09T06:44:00.000-07:00

Triangular Mergers Introduced in Japan
New rules introduced in May will allow so-called sankaku gappei, or triangular mergers. These will permit a foreign firm with a Japanese subsidiary to acquire a Japanese company by having it merge with the Japanese sub. In this post I will discuss some background and details; in a follow-up post, I'll talk about the possible effects of the new law on Japanese business and investors.

As described in a brief paper by the Pillsbury law firm, formerly a foreign firm could use as consideration only shares of its sub to buy a Japanese company, which was impractical because this stock was rarely publicly traded. Now acquirors will be able to use cash, bonds, and other assets, including shares of the foreign parent. The new rules will apply to other reorganizations, such as stock swaps where the acquired company remains a sub of the foreign subsidiary.

The new rules are intended to raise foreign direct investment in Japan. According to the Japan Times, Japan wants to raise the proportion of foreign investment in GDP to 5% in 2010 from 2.2% in 2005.

But the new rules have met with opposition from Japan's business community. Originally intended to be introduced in 2006 following passage of a revised Company Law in 2005, implementation was postponed for a year. The Japan Business Federation (the Keidanren) continues to oppose the new rules and has been working to introduce rules that would make it more difficult to carry out triangular mergers.

In general, the new rules have added to the anxiety about M&A in Japan. According to the Times (London), at this year's round of shareholder meetings some 200 Japanese management teams will be proposing "...antitakeover strategies, including poison pills, golden shares and so-called advance-warning systems (AWSs)."

2007-04-30T14:22:00.000-07:00

Casino Gambling in Japan
It's no secret that gambling is enormously popular in Asia. Macao is booming, Singapore plans two complexes, and both Taiwan and Thailand may relax its gaming laws.

Thus it's no surprise that a recent report by Merrill Lynch, stating that the possibility of lifting restrictions on casino gambling in Japan is high, is attracting a good deal of attention. Japanese politicians figure that the super Las-Vegas-style casinos will boost regional economies and increase tax revenues. They also likely hope the new gaming facilities, which may include a complex in Okinawa as early as 2012, will attract more tourists to Japan. But with so much competition, it's questionable how successful Japan will be in that objective.

On the other hand, the casinos are likely to have an enthusiastic domestic audience. The Japanese share their neighbors' love of gambling. According to the London Times, Japan's 15,000 pachinko parlors see some 30 trillion yen in action from 17 million players each year. But the parlors are losing some of their luster. Stronger regulations will limit the size of jackpots, which will hurt an industry that increasingly relies on heavy gamblers. A migration to other gambling avenues would appear to be in the offing if the Diet passes appropriate legislation, perhaps as early as 2008.

There are several plays on the casino theme. Konami (9766) manufactures gaming machines and its units are in locations throughout the US and Australia. According to TodayOnline.com, it could team up with an American gaming giant like Las Vegas Sands and Harrah's Entertainment to build casino complexes. Sega Sammy (6460) is similarly positioned.

Aruze (6425) is an interesting story. Because it depends heavily on its pachinko machine business, it stands to lose from gaming operations that draw away customers. At the same time, the company holds a 24.5% stake in the US gaming giant Wynn and thus will benefit from an expanding casino market in Asia.

2007-04-29T17:08:00.000-07:00

Citigroup Completes Takeover of Nikko
Citigroup has gained control of Nikko Cordial. Nikko's shareholders tendered some 541 million shares, giving Citigroup 61% control of the scandal-plagued company. The $7.7 billion deal is the biggest foreign buyout of a Japanese company. The Nikko takeover is part of Citigroup's strategy to have 60% of its revenue come from non-US sources; the current figure is 45%. The acquisition will give Citigroup a total of 109 branches in Japan.

Several firms with large stakes in Nikko were unhappy with the terms of the offer, and they could still cause trouble for Citigroup as minority shareholders. Thus the bank may try to acquire additional shares to assure a dominant two-thirds ownership share, enabling it to merge or sell units without the consent of other shareholders. Bloomberg, Forbes, IHT

2007-04-17T18:08:00.000-07:00

Japan's Labor Productivity only 70% of the US
According to the Asahi Shimbun, Japan's labor productivity in 2005 was only 70% of that in the US. In technology areas like computer services, productivity was about even, but nonmanufacturing and distribution brought Japan's average down. The numbers demonstrate the potential for improving efficiency through rationalization of the lagging sectors.

2007-04-16T06:49:00.000-07:00

Will Japanese Consumer Spending Increase?
An article by Bloomberg forecasts higher consumer spending by Japanese, but the initial evidence offered isn't convincing. The author cites higher interest on savings accounts; but this will only put an additional $13 billion at consumers' disposal, hardly a big amount in a $5 trillion economy. He also mentions a World Bank estimate that consumer spending will help boost Japan's GDP growth to 2.3% this year from 2.2% in 2006, which is not all that notable.

The more convincing argument he offers is the coming spurt of retirements: "The Japanese workers reaching retirement age over the next three years represent 5.4 percent of the population, and have assets totaling ¥130 trillion, almost 10 percent of all personal financial holdings, according to Dai-ichi Life Research Institute." Whether the demographic blip that will boost retirements -- and spending -- for the shorter term can be sustained is open to question; but at least for now it should help prop up consumer spending and the economy.

2007-04-05T10:05:00.000-07:00

New Labor Law for Part-Timers

The Japan Times has a long, interesting article on the proposed revisions to the Part-Time Work Law. It discusses the status of part-time workers in Japan and why the new law is unlikely to do them much good (as few as 4% or 5% of part-time workers may benefit).

Accurate statistics about the level of part-time work in a particular economy are naturally hard to come by, but it seems the level of about 20% for Japan is not much different than that in the US. The proportion of part-time workers in Japan appears to have risen four percentage points or so in the past 10 years (or to put it in terms that show a substantial increase, the percentage itself has risen about 20%). Over the same period, the US level appears to have been relatively stable.

As shown in the chart above, the decline the permanent full-time workforce has been significant over the past ten years. I think the decline in full-time work is one reason that Japanese consumers remain tentative about spending despite the apparent business recovery.

As the JT article points out, the disparity in wages among those doing the same sorts of work simply on the basis of whether they are classified as part-time or full-time can be enormous. As in the US, this situation causes resentment among part-timers and, while the article does not say so, anger among full-time workers who fear part-timers will take away their jobs.

The beneficiaries, of course, are the employers, who no doubt face tough competition and need to reduce costs. Still, the situation makes one nostalgic for the Henry Ford philosophy of paying workers high wages so they'll have the money to buy your products.

2007-04-02T19:56:00.000-07:00

Latest Tankan Survey Indicates Slight Decline in Confidence

The latest Tankan survey showed a slight decline in business sentiment among leading manufacturers from 25 in December to 23 in March, a bit below expectations of a 24 reading. Commentators ascribed the decline mainly to a less stable US economy. Although the decline was the first in four quarters, the decrease did not represent a signficiant shift in sentiment.

2007-04-02T19:43:00.000-07:00

McDonalds Posts Best Monthly Results in 36-Year History

We've written before about the comeback of McDonald's in Japan. March results provide more confirmation of the success McDonald's is enjoying. Sales were over Y43 billion, the highest in the Company's 36-year history; on a same-store basis, they were up 8.4%. A new regular menu, limited-season dishes, and round-the-clock services all contributed to the better performance.

2007-03-29T06:36:00.000-07:00

Inflated Appraisals May Be Pushing Real Estate Values Higher

An interesting piece from Nikkei Business Online suggests that one reason for the sharp rise in prices for some real estate properties might be inflated assessments by appraisers. Since a private fund (which is the "seller" of properties in a REIT transaction) and the REIT (which is the " buyer") are often within the same financial group, a "public" assessment of the property is done to ensure a fair appraisal. But the assessment may be inflated, either because the private fund asks several appraisers and takes the highest price, or the appraiser is asked to come up with certain price. In either case, this may be causing real estate values to increase. While this prompts more cash flow into such funds and REITS, it could also lead to a new real estate bubble that some day may burst.

2007-03-15T13:08:00.000-07:00

The Impact of Overseas Business on Japan's Glass Makers

Three companies -- Asahi (5201), Nippon Sheet (5202), and Central (4044) -- have long held 90% of the Japanese glass market, and it's unlikely that their competitive environment will suddenly change. Moreover, in July of last year, Nippon Sheet bought Britain's Pilkington, and thus the oligopolistic character of the industry on a global scale has been enhanced. Together, Nippon Glass, Asahi, and France's Saint-Gobain now have 65% of the world glass market for construction and automotive use, and relative to the excessively competitive markets often seen in raw materials industries, the glass sector has been stable.

However, while global restructuring of the industry has not had a big effect on the financial strength of Japanese firms up until now, their ability to exploit overseas expansion will have a big impact in the future. Notably, Central Glass has little room to boost revenue and cut costs because its business focus is the domestic construction business where times are tough. Thus, the disparity between Central and the big firms that are geographically diversified is expected to grow significantly.

So while the Pilkington acquisition won't have a drastic impact on the industry's structure or competition, it does affect the profitability of the top players. The margins of glass manufacturers are influenced by the price of crude, and companies try to push oil price hikes along to users. This is difficult in Japan, as the major customers for glass are recession-affected building/construction, and the auto industry, where material costs are strongly controlled by the auto makers and are difficult to negotiate.

However, overseas, especially Europe, it is easier to pass along hikes in material costs through the transfer surcharge system, and better market demand helps pricing too. Therefore, by adding a big U.K. company to its group, Nippon Sheet has boosted its profitability: Fourth-quarter operating margins before depreciation were 12.9% versus 8.5% a year earlier. Asahi Glass also benefited from the recovery in results of its European subsidiary, and with profits in the sheet glass business up, the contribution from overseas operations for both companies is notable. (This story is substantially based on information provided from S&P Japan; subscription required).

2007-03-14T10:24:00.000-07:00

Hiring Up for New Grads
This is encouraging news: some 88% of new grads have already found jobs. The most telling statistic was that 98% of male graduates at vocational high schools found jobs.

Interestingly, the retirement of the baby boomers is cited as a reason for the strong hiring. As we've noted often before, the baby-boom generation is a short blip on Japan's demographic charts. But it's likely to have some significant effects on the economy for the next three years.

The high unemployment rate among Japan's young people in recent years mostly reflects the stagnant economy. But as with other affluent young people around the world, it appears that Japan's students are less interested in technical careers, and thereby have fewer skills employers really want and are ready to pay for. Those willing to train themselves for what the economy needs now seem to be finding jobs.

2007-03-14T08:40:00.000-07:00

Tokyo's Tiny Homes
Here's an interesting BW article on so-called micro homes, which are being built on miniscule plots (as small as a large parking space) in downtown Tokyo and other central-city neighborhoods. The micro homes cater to the growing number of adults in their 30s and 40s who want to avoid long commutes and stay close to the cultural amentities in the central city. The article describes the invention of architects in creating amenable homes in almost no space.

The back-to-the-city movement seems to be a growing phenomenon worldwide. In the US, it's associated with gentrification and has political implications, since up-and-coming young professionals often displace the longtime (and often darker-skinned) inner-city residents. Examples include Brooklyn, Seattle's Central District, and the Western Addition in San Francisco.

In Japan, of course, such ethnic tensions are not a factor. Although the market for micro homes is small, it does demonstrate the desirability of Japan's downtowns for residential housing, at least for a certain segment of the population.

2007-02-27T07:25:00.000-08:00

Japan's Monetary Policy Appears On Course
On the heels of a 4.8% boost in fourth-quarter GNP, on February 21 the BOJ raised its benchmark interest rate to 0.5%. The move was a little surprising to economists, the majority of whom thought the Bank would keep rates steady. At its January meeting, the BOJ had done just that -- and was promptly accused by some of bowing to political pressure.

Viewed over a longer time-frame, however, monetary policy appears on course. From March 2001 to March 2006, the BOJ maintained its so-called monetary easing policy. Instituted to combat deflation, the policy also helped to maintain stability in the financial system and get the big banks back on a sound financial footing. Although some now criticize the BOJ for allowing the yen to weaken, thus prolonging and deepening the yen "carry trade," a precipitous rise in rates would do more harm. The strength of consumer spending remains questionable, with the increase in the latest quarter merely offset weakness in the previous period. After 15 years of declining asset values and widening cracks in the Japanese lifetime employment system, who can blame the Japanese consumer for being wary of pronouncements of economic recovery?

The BOJ policy seems attuned to this sentiment, and the broader requirements of Japan's economic health. At least so far as the recent hike is concerned, executives at Japan's big companies seem to agree: according to a Nikkei survey, 60% of them thought it was an "appropriate time" for such a hike.

2007-02-22T13:29:00.000-08:00

Fallen Angel or Rising Phoenix? The Jury's Still Out on Raccoon

For a U.S.-based analyst, even thinking about recommending a company like Raccoon (Mothers; 3031), a Japanese online B2B wholesale broker that went public in April 2006, is a little scary. Raccoon's stock price, after hitting 3,860,000 yen a few days after its IPO and listing on the TSE's Mothers section -- known for its "new economy" companies with sky-high PEs -- continued to decline to a low of 285,000 yen, almost a 93% drop. Along the way, the company, which had been profitable for two fiscal years prior to the IPO, incurred a midyear loss in October, and revised its forecasts downward to net losses for the years ending April 2007 and 2008. Is this deja-vu all over again, a replay of the bust in US Internet stocks, circa 1999?

Source: Yahoo Finance Japan

Or is it really not that bad? Perhaps at the current price of 400,000 yen the company deserves another look. While it incurred a net loss of 77 million yen for the 6 months ended October 2006, compared with 35 million yen in net income for the year-earlier period, gross revenues increased 60.5%, and gross profit was up 28.2%. The net loss included a revaluation for the write-off of deferred taxes of 57 million yen. Operating cash flow was positive at 29 million yen.

More important, the revised forecasts to negative territory for 2007 and 2008 are largely due to the company's shift in its medium-term strategy. Judging that there is a significant opportunity in bridging the B2B business for Japan's small- and medium-size firms -- a sector known for its complicated, fragmented, and inefficient supply chain -- Raccoon decided to (1) change its fee structure from payments upfront to a recurring fee model, and (2) invest heavily in advertising to attract a retail-store customer base. The changes in fee structure had an immediate, negative effect on the bottom line, since some existing customers departed and there was a drop in initial, one-time revenues when new merchants signed up. However, the company's belief that the new fees will bring in continuing monthly income seems to make sense (see the chart below by Investment Bridge, Raccoon's IR firm).

Green bar - revenue model with former fee structure
Orange bar - revenue model under new fee structure

Is the increased advertising bringing in new customers and merchants? The jury's still out, but customer/merchant acquisition data shows an increase in the customer base of around 4% per month since October, and as of the end of January it is up 37.3% since the end of last fiscal year in April 2006. The company doesn't release monthly revenues, but in the past they have been strongly correlated to the number of customers.

We're not ready to call Raccoon a buy until we find out the relationship between new advertising/customer acquisition costs and their impact on revenues. The PE based on last year's results is approximately 20, while the forward PE based on the company's April 2009 results would be approximately 15. We know that Japan's new exchanges, especially Mothers, are supposedly scary places, full of new, risky companies with lofty PEs. But at least compared to some of the U.S. bubble-economy companies that in 1999 had PEs of 500 based on EPS five years or so down the road, Raccoon does not look so frightening.

Note, however, that even with a positive turnaround, the stock price may take a while to react. The pool of available is limited - at a per-share price of 400,000 yen (about US$3,300), quotes are too high for most individual investors, while at a market cap of about US$30 million, the company would be too small for many institutions.

2007-02-18T07:59:00.000-08:00

Citigroup to Apply for First Section Listing

Nikkei reports that Citigroup will apply within the year for a First Section listing on the TSE. The Bank wants to expand its operations in Japan and has decided a TSE listing is a necessity. The move could make it easier for Citigroup to buy Japanese companies through stock swaps.

The move comes as plans proceed to introduce so-called Japan Depository Receipts, similar to ADRs, through which yen-denominated foreign shares would be traded, as well as a possible tie-up between the New York and Tokyo exchanges. The TSE has continued to lose listings of foreign stocks and hopes to regain its international presence. 日経, Reuters

2007-02-15T08:16:00.000-08:00

Steel Partners Seek Two-Thirds of Sapporo

Following its attempt last November to take over Myojo Foods, Steel Partners now seeks to raise its stake in Sapporo Holdings, the well-known brewery and foods company, to 66.6% from its current 17.5%. Sapporo management has warned it will try to stave off the bid. Last year, it introduced anti-takeover measures that will allow it to dilute its stock to rebuff a hostile bid seeking more than 20 percent of voting rights.

Besides Myojo, Steel Partners has also targeted fast-food chain Mos Food Services Inc. and Brother Industries Ltd., the maker of copiers and inkjet printers. 日経, Bloomberg

UPDATE 2/16/07
As Sapporo stock's price surged more than 12% to Y891, talk swirled about Sapporo possibly tying up with other large beverage makers, most notably Asahi and Kirin. A tie-up with either firm would give the combined company more than 50% of the beer market.

This Reuters article has a lot of information about the recent developments and the companies involved, including one historical factoid I did not know: Asahi and Sapporo were a single firm in the early 20th century.

2007-02-12T17:06:00.001-08:00

Japanese Stocks and the Impact of Low Interest Rates

Equity analysts that work for the big banks have it relatively easy when it comes to economic forecasts. They can always use the projections of their in-house economist and, assuming his forecasts isn't off in left field, know that they won't be too harshly criticized when those assumptions turn out wrong.The rest of us aren't so fortunate. We can of course use consensus estimates, but that's a cop-out if forecasts are all over the map. Thus it's always disconcerting to read doomsday scenarios that are given credence by people who are a lot smarter in these matters than we are.

Some see looming disaster because of the giant credit bubble that Japan's low interest-rates are creating. There's been a great deal of talk of the "carry trade," ie, borrowers taken loads of cheap yen and investing them in higher-yielding currencies. One economist cited believes that the yen is as much as 29% undervalued. Eventually, the bubble will burst, exchange rates will realign, and the yen will appreciate to 100 yen -- even 70 yen -- to the dollar. In this scenario, even the offsetting advantages of cheaper imports would be insufficient to stem a sharp, broad decline in world and Japanese business conditions. While the authors don't explictly say so, it's hard to imagine that Japanese stocks would do well in such an environment.

It's a substantially different economic world over at Business Week. Although the piece on "low, low rates" naturally focuses on the US rather than Japan, there's no prognosis of the burst of a giant credit bubble. While cautioning about the impact low interest rates worldwide are having on credit quality, overall the article is positive. Companies are investing, profits are booming, and housing is making the all-desirable soft landing.

In the scenario seen by authors Michael Mandel and David Henry, the sources of excess liquidity are India and China (the BOJ isn't mentioned). These countries are very good at raising capital but very bad at allocating it. Thus the funds thereflow overseas. Coupled with the overall globalization of financial markets and the increasing sophistication of financial instruments (notably in the form of collateralized debt obligations), the real cost of capital continues to decline. The authors expect the low-interest rate environment to continue.

Getting back to Japan, according to a recent article in the FT, market observers continue to be bullish on the Japanese economy. And they expect 2007 to be a much better year for stocks than 2006. (Although that may not be so great for other world markets, since the Japanese bourse tends to have its own drummer.)

As I said, we like to focus on Japanese companies, not her role in the world economy. It's a sandbox I'm not comfortable playing in.

Still, a couple of gut-feel thoughts:

(1) If you look at a five year yen/dollar chart, the trading range is about 132 (beginning of '03) to 103 (end of '04). A rate of 121 or 122 just doesn't feel like a number that's so out of whack that it would have the dire consequences the pessimists believe.

(2) Despite all the talk about Japan's recovery, there shouldn't be any sense of irrational exuberance. Consumer spending has been up a bit lately, but overall it remains lackluster. Real estate prices have firmed, but except perhaps for a few pockets of Tokyo, they're hardly raging. Since January 2006, the Nikkei has stayed in the 16,000/17,000 trading range. Putting aside Japan's longer-term debt problems, which are considerable, the environment doesn't call for a huge rise in interest rates by the BOJ.

(3) Japan's exporters operate under their own economic law. They have made money at rates of 120 and 100 yen to the dollar, and if they had to do it at 90 yen, they would. I'm worried about people no longer buying Sony because of a declining reputation for creativity and quality, not because in a strong yen environment they wouldn't figure out how to make their stuff cheaper in the globalized workshop.

The upshot is that I don't see a wild surge in the yen and, even if it occurred, the Japanese economy and markets would react a lot better than some people expect they would.

2007-02-12T16:56:00.000-08:00

Generic Drug Makers to Benefit from Health Care Reform

Japan's brand drug makers are facing difficult challenges. The country's baby boomers – the cohort born between 1947 and 1949 – are starting to retire in numbers this year. With an aging population and limited financial resources, Japan's government is seeking to reduce ballooning spending by its national health care insurance system. Some consolidation in the industry is inevitable, as already evidenced by the recently announced merger between Tanabe (4508), and Mitsubishi Pharma.

One sector within the drug industry that should benefit from the new regulations aimed at cost-cutting is generic drugs. Since April 2003, co-payments for individuals in Japan's health care insurance system have been lifted from 20% to 30%, making consumers more sensitive to their healthcare costs. In the U.S. and many European countries, the generic drug market is well established, but Japan is behind as much as 20 years. On a unit basis, generics represent only 10% of Japan's drug market, against 40% to 50% in the US and Europe.

Source: Bando-Yakuhin
Note: Red bars are for units; blue bars are for local currencies

In addition to issuing various "guidance," the government has published regulations to promote wider use of generic drugs. These include price revisions in 2002 to provide additional incentive payouts to insurers for generic drugs, and last year's change in the prescription format to allow pharmacies to change to generics when pre-approved by a doctor.

Japan's generic drug industry is highly fragmented; there are about 200 manufacturers, mostly small, privately owned companies. The expanded market opportunities bring more competition, not only among generic firms but from entry by the big, name-brand pharmaceutical companies. Consolidation in this segment is inevitable. While there are a limited number of publicly traded generic drug companies, the leading names may offer investment potential because (a) by acquiring smaller competitors, the leading companies will post higher growth; and (2) they also are acquisition candidates for Japan's brand drug makers as well as large overseas companies.

Already, there are signs of foreign interest in this segment; specifically, several Indian generic drug makers announced they will enter the Japanese market to exploit their price competitiveness. Also, this year stock-swap acquisitions by overseas companies will be allowed, making purchase and investment easier for U.S., European, and Asian companies, many of which are better capitalized than their Japanese counterparts.

There are only a handful of publicly traded companies in Japan that focus on generic drugs. Their stocks trade at PEs of 20 to 25, about the market average. In addition, a few of the brand pharmaceutical makers get a good portion of their business from generics. Elmed Eisai, a subsidiary of Eisai (4523; ADR:ESALY), boasts the top reputation among medical professionals. Sawai (4555) seems the most reputable among independents; it's also the market leader and is increasing production volume by purchasing a plant owned by Schering Japan.

Nichi-Iko (4541) is aggressive in M&A and tie-ups; it has formed an alliance for itemization and standard-making with Towa (4553), another leading generic company, and Sawai. The company has had to revise its earnings expectations upward several times in the past few years. Towa is known for aggressive direct sales to pharmacies, which may be attractive to overseas companies entering the Japanese market.

2007-02-10T12:35:00.000-08:00

Implications of Fujiya's Problems for Japanese Business
Fujiya is caught in a scandal concerning the use of ingredients past their sell-by dates. Now apparently other poor practices, including "lax quality control systems and poor information handling," have been uncovered.

As I've mentioned before, I was often told while working in Japan that the country's vaunted reputation for quality did not extend to industries that center on domestic consumption. I haven't studied if the stories coming out of Japan on poor quality control in the food industry are more numerous than those in the US; but they do seem to occur (mislabeled beef, tainted milk) with regularity. I wonder at what point these stories -- along with bad publicity about Japanese products that are in fact used overseas, such as Toyota vehicles and Sony notebook batteries --begin to seriously damage Japan's reputation for quality goods.

Another revealing line in the article was "The environment was one in which employees observed experienced workers and emulated their skills." We usually think of this as a positive in the Japanese training system, the story of master craftsmen, their skills honed by years of on-the-job experience, patiently explain to young employees their insights and tools of the trade."

The downside of an emphasis on the way things are done instead of the way things should be done -- as would be taught in formal training classes -- is that bad habits can be handed down from generation to generation. Although graduates of formal training classes will do their postgraduate study in the school of "the way we do things around here," it's also likely that some of the admonishments of doing things by the book will rub off on them.

2007-02-09T09:25:00.000-08:00

Late-Night Hours Helps McDonald's Both in the US and Japan
Yesterday McDonald's reported net profits of 1.6 billion yen for 2006 in Japan after posting almost no income the year before.

What I found interesting was that the jump was due to many of the same factors mentioned in the Business Week cover story on the company a couple of weeks ago. Most prominently, McDonald's has extended its opening hours in many restaurants deep into the night or even 24/7. This is likely more of a competitive move in Japan, where the late-night convenience store, of which Japan has no shortage, is an important rival. Both articles also discuss McDonald's efforts to offer a more diverse menu (desserts were mentioned in both pieces) to customers.

2007-02-08T16:06:00.000-08:00

Machine Tools Orders Rose in January
There was a good number from the machine tools industry today. Orders in Janauary were up 5.7% year to year to about 120 billion yen, the second straight monthly increase. But the trend of domestic orders, down 7.5%, and foreign bookings, up 20.7%, diverged sharply. 日経

2007-02-07T15:38:00.000-08:00

Tourist Industry Looks to Boomers to Boost Revenue
As we've noted before, the baby boom generation is defined far differently in Japan than it is in the US. In America, it's those born between 1946 and 1964, a wide span that includes people about to retire as well as those having their first children. In Japan, the baby boom cohort spans a narrow three years, some 6.8 million Japanese born between 1947 to 1949. Although the shorter time-span makes the effect of Japan's baby boomers less powerful and pervasive, the more concentrated birth bulge makes their impact more certain. Moreover, retirement in Japan is more likely to become at a fixed age, ie, 60, making predictions even firmer.

In this latest piece of news, the Japan Travel Bureau now anticipates that overseas Japanese travelers will reach 17.9 million in 2007, up 1.4% from the year before. JTB says that overseas travel by younger people is stagnant, but increased trips from the retiring boomer generation to China and Europe will more than compensate for the slack. Together with strong business demand to Asia, particularly China, JTB predicts about a 2% increase in yen volume for overseas travel by Japanese.

2007-02-01T13:17:00.000-08:00

Head of BOJ Says Consumer Spending "A Little Restrained"
BOJ Governor Toshihiko Fukui, in response to a Komeito lawmaker's question in the Budget Committee of Japan's House of Representatives, said that the slow pace of wage hikes has limited the increase in consumer outlays. With respect to the recent decision of the BOJ's policy board not to hike interest rates, Mr. Fukui said that the choice was made based on various indicators of the economy's strengths and weaknesses, with the focus on measures of consumer spending. He said he thought consumer spending would continue to receive the spotlight at the next policy board meeting on February 20.

Mr. Fukui also noted that the strength of recovery in small and medium-size business has been varied depending on the size of the company and other factors. 日経

2007-01-25T13:33:00.000-08:00

Japan's Cross Shareholdings on the Rise Again

Cross ownership of publicly traded shares in Japan -- which was on the decline in the country's depressed economy in the 1990s when banks no longer could afford to maintain ownership of stocks at depressed prices -- is on the rise again. As of the end of September 2006, corporate equity ownership was up 17% year over year. According to Nikkei, in the past 2.5 years, cross-ownership has increased 31%, mainly as a tool to discourage hostile takeovers.

Cross share ownership has been considered a unique characteristic of Japan's equity market that serves to preserve the old corporate Keiretsu culture. What does this return mean to institutional investors? Will they have to watch liquidity factors more carefully?

2007-01-09T11:11:00.000-08:00

Good Outlook for 2007 M&A
According to FT Adviser, fund managers at Martin Currie arepositive about the outlook for Japan M&A this year. Mr. Millar, head of the Japan fund at the firm, says:

“M&A was a steady and supportive theme in 2006, and it has the potential to drive the Japanese market this year. There is an ongoing trend of companies selling low-return businesses, even where there are strong historic links. The frequency of deals is increasing.”

2006-12-15T09:54:00.000-08:00

Tankan Survey Buoys Spirits
The latest Tankan Survey had mostly good news for the Japanese economy. The main news was that the strength of the big manufacturers was spilling over to service businesses as well as smaller companies, which were increasing their capital spending. Japanese corporate profits rose at a 15.5% rate in the July-September period, the fastest quarterly increase in two years. Private consumption continues to be a problem, however; it declined 0.9% quarter over quarter.

2006-12-07T08:07:00.000-08:00

Is a Shrinking Population a Good Thing for Japan?
An intriguingly contrarian take on Japan's declining population is attracting much attention. In a recent article in Bloomberg, columnist William Pesek discusses a report from Sharmila Whelan of CLSA Asia-Pacific Markets. Pesek writes:

Whelan's optimism is based in part on history. Growth, she argued, tends to be driven by "specialization, innovation and trade.'' Investment, like labor,tends to go where returns are highest. As Japan moves more toward a knowledge-based economy driven by increased research and development, its citizens will prosper...Similar demographic trends didn't hold back Venice's economy in the 11th century, Whelan said. Nor did they imperil the Dutch Republic in the 14th century. Likewise, Whelan said, ``in the coming decade, Japan's shrinking population is the least of her problems as far as growth goes.''...Whelan also makes the argument that "Access to labor, technology and capital are the least of Japan's problems...creating an environment where there is unhindered entry and exit of new businesses and new ideas are born resulting in continuous innovation and cost savings is the greater challenge. Japan has a long way to go, but the process has started."

According to Pesek, Whelan cites "renewed foreign interest in Japan, a rise in mergers and acquisitions, and a growing number of start-up companies" as evidence that the forces of creative destruction are at work, and a more productive and dynamic corporate sector is in the offing.

Perhaps demographics isn't destiny, but I question just how much Japan is changing. The rise in mergers and acquisitions is notable. But the outcome of some M&A battles -- like the fight for Hokuetsu Paper where Oji Paper's hostile bid was set aside by company management -- is hardly encouraging for the forces of creative destruction. A few stories in the business press about Japan's new entrepreneurial class makes encouraging reading. But most of Japan's under-35 cohort still seems mired in the the worlds of salaryman/OL or arbaito/freelancer, neither of which are places from which ground-breaking economic change is likely to originate.

Further, even if Japan's population was only aging rather than shrinking, that would still augur poorly for the nation. Generally speaking, an older population is more conservative, needs to focus greatly on health needs, and consumes rather than innovates. Whelan may hope that the younger population that displaces it in government ministries will set the nation on a new course. But if the political environment is such that it favors the old over the young, those efforts are likely to be fruitless. With a greater number of older voters who are more reliable voters, a new generation of politicians may well be hamstrung if they try to effect change in traditional Japanese institutions too rapidly.

Still, it's encouraging to get a more optimistic view of Japan's prospects, and Whelan's contrarian view (if indeed it is as advertised -- we haven't seen her original report) is certainly to be welcomed, as it adds fresh energy to the discussion of Japan's future.

2006-12-06T14:30:00.000-08:00

Capital Investment Up 12% for September Quarter

According to the Ministry of Finance, capital investment of Japan's nonfinancial firms was 14.8 trillion yen in the July-September quarter, a 12.0% increase from the same period last year. Capital investment has now been up on a year-to-year basis for 14 consecutive quarters. However, the increase was below the 16.6% level recorded for the second calendar quarter, and below analyst estimates of a 15.3% advance.

2006-12-01T11:56:00.000-08:00

Japan and U.S. Unemployment Low, But Anxiety Persists
Recently announced unemployment rates for both Japan and the U.S. are at the lowest levels they've been for some years. At the same time, workers in both countries are showing considerable economic anxiety. In Japan, personal consumption has failed to advance in line with the better economy. In the U.S., Americans continue to spend, but we always do that. What we haven't usually done is worry inordinately about foreign workers stealing our jobs, especially in times when people who want to work can apparently get do so.

Some of the fear in the U.S. is both political -- internal, geopolitical, and somewhere in-between. The majority of Americans have lost faith that the Bush Administration knows what it's doing. Immediately after 9/11 Americans felt, as Jeff Greenfield put it, "thank God, the grown-ups are in charge." Iraq and Katrina changed that.

It seems odd to say it now, and certainly it's not a broadly held view among Democrats, but in fact part of the President's current problems are precisely because expectations for his Administration post 9/11 were so high. And indeed, if you asked most Americans on September 12, 2001, whether they would be satisfied with the President if their country five years hence enjoyed a good economy, had relative piece of mind about the threat of Islamic terrorism in their daily lives, but at the same time was mired in a small-scale war in Iraq with about 3,000 servicemen and women dead, I think most Americans would have been satisfied with those trade-offs. Unfortunately for the Bush Administration, those five years have revealed substantial incompetence in obtaining those mixed results -- not least in the inability to manage perceptions of that incompetence -- and so the President has lost most of his prestige.

This lack of confidence in the Presidency -- and, by extension, government -- is coupled with a much broader concern about the American way of life. I don't think most working Americans are very upset with illegal Hispanics in their midst. They are worried about what these people represent: the end of solid, long-lasting working class jobs relatively invulnerable to technological change and international competition. With the destruction of those jobs has gone a way of life, of union halls and company bowling leagues. Lofty notions of feminist independence may be useful for Vogue columnists, but they are empty promises for working-class women struggling to maintain family life and make ends meet, either on their own or with husbands whose jobs are vulnerable. As De Tocqueville recognized, Americans are so naturally drawn to associations that networking still thrives, and an astonishing variety of "communities" live on, much of it Internet based. But virtual communities can't replace the sense of place provided by physical community.

Japan faces somewhat different problems, but the sense of loss is similar. Between 1945 and 1990, the Japanese people broke their backs creating a powerful economy that somewhat compensated for the loss of World War II. The bargain was that the Japanese would work their asses offices, and companies would provide lifetime employment; all the while, family, company, and nation would prosper. Through the Nineties, Corporate Japan tried to maintain that bargain, but in a globalized economy (a cliche is no less true for being a cliche) that compact could not be sustained into the 21st century. Policies like merit pay that American workers feel relatively comfortable with, even welcome, are considered by many Japanese as disharmonious and jarring. There's much talk of a new entrepreneurial spirit, but the Sony or Canon hotshot who quits his job to start a new venture or even a Duncan Donuts franchise is still relatively rare. The safe, comfortable employment system of the postwar period, with all its drawbacks, is missed, and Japanese are uncertain about what is coming next.

Moreover, it's questionable if the traditional Japanese system could have been maintained much longer. It's one thing for salarymen to give their lives for company and nation when they are trying to expunge the memory of catastrophic defeat. The next generation feels no such obligation, and the Internet and their Hawaii vacations show them how the other 14% of the world's population that is middle-class lives, ie, with several weeks of vacation time and no 65-hour workweeks. Young women in particular find the social strictures of their mothers' generation -- with its obligations to workaholics husbands and infamously (if somewhat fictional) shrewish mothers-in-law -- unpalatable and even unbearable, and large numbers have opted out of marriage and childrearing.

Thus, despite record low employment, both Japanese and U.S. workers feel considerable economic anxiety, and uncertainty about the future of the society in which they live. A change in the Presidency (or even Mr. Bush's policial fortunes) in the US, and more solid economic data in Japan, may bring temporary relief and a lifting of spirits. But the long-term problems of workers trying to cope with rapid technological innovation, globalization, and societal change will remain.

2006-11-28T15:17:00.000-08:00

It's Official: Myojo Evades Steel's Grip
Japanese noodle maker Myojo Foods announced that it had avoided the clutches of U.S. hedge fund manager Steel Partners by agreeing to a takeover by white knight Nissin Foods. By buying Myojo, Nissin stands to increase its share of the instant noodle market to 50% from 40%. Steel won't have to go away empty handed, however: the shares are up some 40% since Steel's initial bid, and the firm is Myojo's top shareholder with about 23% of the outstanding equity.

2006-11-24T10:38:00.000-08:00

When Will Consumer Spending Rebound?
This article in Bloomberg reiterates some concerns often expressed about Japan's consumer spending. Base wages have declined over most of the past ten years and are now only slowly rising. Companies remain reluctant to hire full-time workers and part-time employment is expanding rapidly. With these conditions, consumer confidence is not high, even with the possibility of higher worker bonuses this winter.

2006-11-24T09:52:00.000-08:00

Japanese Gain More Living Space
A recent article by the BBC had this interesting nugget of information: The average floor area of a typical Japanese home increased from 60 square meters in 1963 to 94 square meters in 2003. Such stats should always be taking with a grain of salt and surely encompass all kinds of variables. Nevertheless, it does indicate a trend toward larger Japanese quarters with more room for amenities, including upgraded kitchens that are apparently now a key factor in the purchase decision.

2006-11-14T21:53:00.000-08:00

3rd Quarter GDP rises 0.5%, or 2% annually
In the July-September quarter, Japan recorded economic growth of 0.5%, or an annual rate of 2.0%. The increase in GDP exceeded analyst expectations. Although domestic consumption stalled, better-than-anticipated exports produced significant growth. One statistic that caught our eyes was that, while since the fourth quarter of 2005 total worker compensation has risen Y1,800 billion, total consumption was down Y900 billion. So perhaps the problems in private consumptionis are only partly structural in nature; they may also reflect a temporary unwillingness for Japanese to spend that will dissipate with greater consumer confidence.

2006-11-12T20:52:00.000-08:00

A New Way of Thinking about Japan
Anatole Kaletsky's Why the sun is rising over Britain, not Japan - Comment - Times Online is a good antidote for a half hour spent with Lou Dobbs or Pat Buchanan. Kaletsky demonstrates why our traditional notions of a strong, solid economy -- high savings rates, high investment, current surpluses -- have become superannuated in a world where manufacturing gravitates to the lowest-cost producer.

Kaletsky discusses the emerging "platform company" that has worldwide name recognition but no factories at all. As production costs costs fall steadily downward, the key for mature economies like Japan is not to invest in manufacturing facilities but to make certain they are fully integrated into the world economy. In this environment, "...countries that embrace high levels of borrowing and financial sophistication, such as America, Britain and Spain, take advantage of excess savings in more conservative countries such as Japan and Germany."

2006-11-09T11:26:00.000-08:00

Private Consumption Problems
Here's another article, this one from Business Week, that provides additional details on my earlier post about the export-driven nature of Japan's recovery, small wage hikes, and stagnant private consumption.

2006-11-02T12:57:00.000-08:00

Is Globalization a Major Problem for Japan?
There's an interesting article in the India Times on the impact of globalization on Japan. The author notes that the Japanese stock market has had a lackluster performance this year, which he attributes to stagnant private consumption, which in turn reflects the globalization that puts a lid on wage increases. Business investment has been responsible for the growth in the Japanese economy, but the rise in private consumption that had been expected hasn't kicked in.

While Japan's kept its economic system protected from much of the impact of globalization in the 1990s, the rise of China has forced it to change course. Although the immediate impact has been positive in terms of rising GDP, much of the longer term effect will be negative for the Japanese worker. These arguments follow much of the reasoning of Morgan Stanley economist Steven Roach. What Japan needs, says the author, is greater productivity and increased entreprenenurship.

2006-11-01T09:31:00.000-08:00

Myojo Foods Fights Takeover Bid
Noodle maker Myojo Foods has declared its opposition to a $194 million takeover bid by Steel Partners, a U.S. hedge fund, and said it had hired Mitsubishi-UFJ Securities to advise it on its strategy. Steel Partners wants to acquire the 77% of the company it doesn't already own. Steel had earlier proposed an MBO but Myojo's executives declined. Yahoo!ファイナンス

2006-10-31T11:39:00.000-08:00

Sumitomo Bakelite Makes Tsutsunaka Plastics Wholly Owned Subsidiary
Sumitomo0 Bakelite, which already owns some 51% of Tsutsunaka Plastics, will buy its remaining shares and make it a wholly owned subsidiary. Tsutsunaka has been under pressure because of high energy costs; in the March 2006 year, ordinary income was down by half to 1,085 million yen. Sumitomo intends to absorb Tsutsunaka operations by March 2007. By combining activities, Sumitomo aims to cut indirect expenses, rationalize distribution costs, and improve technology and marketing operations. 日経

2006-10-31T10:55:00.000-08:00

Japan's Population Declines for First Time
The population of Japan declined in 2005 for the first time in the postwar period. The verification of a stagnant population comes as no surprise, but a couple of related statistics are worth mentioning. First, the drop in Japan's population is in notable contrast to that of the U.S., which recently surpassed 300 million. Second, the number of unmarried young people in Japan, especially men, is remarkable. In the 25- to 29-year-old age group, some 72% of men and 59% of women were single. In the 30- to 34-year-old cohort, 47% of men and 32% of women were unmarried. These numbers represent significant increases of several percentage points from previous levels.

While the stats naturally have important consequences for marketers, from a broader vantage point they are also worrisome. A society with so many of its men unattached has a natural tendency toward social anomie. One wonders just how loyal many Japanese salarymen will remain to their companies without the bounds of responsibility marriage brings. By the same token, there's at least some question of how unique Japan is among Western nations. Even the relatively high U.S. marriage rate masks wide disparities among different relgious groups with different educational levels in different parts of the country.

2006-10-30T10:56:00.000-08:00

Abe Government Remains Popular
The new government of Shinzo Abe continues to enjoy a honeymonn with the public. Its approval rate is 68%, down only a few points from the month before. On Japan's economic sanctions against North Korea following the country's nuclear test, 50% approved, while more than 30% wanted even tougher measures.

2006-10-25T16:10:00.000-07:00

JSDA Tightens Rules for Capital Procurement
The Japan Securities Dealers Association (JSDA) has firmed up rules for securities firms' underwriting examinations of First Section firms making public offerings. Fifteen new provisions will go into effect in February 2007. The securities firms will be obligated to examine companies' record of achieving its past profit projections as well as the disclosure of appropriate data. The new rules may put a brake on companies' easy ability to raise new capital but will afford greater protections to shareholders. Securities firms will be audited under the rules set by the independent JSDA, and penalties will be prescribed for firms with violations. The rules extend widely to convertible bonds, bonds, and other types of financing.

2006-10-25T15:31:00.000-07:00

JFSME Survey Shows Improvements
The Japan Finance Corporation for Small and Medium Businesses announced results from its business conditions survey of 13 thousand firms, of which half responded (日経). Overall, the diffusion index (DI) for the summer quarter was minus 1.8 points, 0.3 points smaller than the year-earlier period and representing the first improvement in three periods. While the impact of high oil prices was felt, stronger sales strengthened the index. The sales DI rose 2.1 points to 9.4, reaching the level of fall 1991. On the other hand, reflecting higher stock costs, the DI for net profit drive further into the red, expanding 1.5 points to a negative 12.6. DIs for both manufacturing and non-manufacturing sectors improved, as did the DI for the outloook for business conditions for the fourth quarter.

2006-10-24T16:04:00.000-07:00

Required Disclosures for Quarterly Reports in View
Japan's accounting rule-making body has released details of required disclosures for quarterly reports. Although companies listed on the the First Section of the TSE must already file quarterlies, there are no hard rules for what they must contain and the releases differ from company to company.

The new rules are expected to take effect from March 2009. They would require disclosure of profit and loss, assets and liabilities, and cash flow, as well as a breakdown of results by product line. A summary of issued stock options and large risks would also be obligatory. In June of this year, the financial trading law established rules for quarterly disclosures by financial entities.
日経

2006-10-24T14:59:00.000-07:00

Japanese Supermarket Store Sales Down for Ninth Straight Month
Japan's Chain Store Association reported that in September sales at the the nation's supermarkets fell 1.9% from a year earlier, the ninth straight monthly decline. In a nice bit of timing, NPR had a story today about "100 yen stores," which account for about $8.5 billion a year in sales. It would be interesting to know how much of the drop in supermarket store revenue is due to the rise of Japan's dollar shops.

2006-10-20T16:07:00.000-07:00

Abe's China Trip Viewed Favorably
Apparently PM Abe did himself some good by choosing China as the first destination for his venture in overseas diplomacy since becoming prime minister. Most Chinese viewed the visit favorably, as did most Japanese.

2006-10-18T15:54:00.000-07:00

Night Trading at Kabu.com Off to Slow Start
Trading at online broker during the night-time hours of 7:30 to 11:00 is doing poorly, accounting for only 1% of the broker's trades compared with the hoped-for 20%. Market analysts cite the lingering impact of the Livedoor Effect, which doesn't make complete sense: Why would night-time trading be affected by scandal? But perhaps stock trading in the darkness of DST-starved Japan (see the post below) seems dicey.

2006-10-18T15:12:00.000-07:00

Still No Daylight Savings Time in Japan
One of the fascinating differences between Japan and the rest of the world is the adoption of Daylight Savings Time (DST). The US and most of the West has it; the Japanese don't. Alexander Jacoby in the Japan Times argues that DST offers huge benefits for the environment and would even provide a fillip to Japan's consumer spending. Jacoby traces the Japanese antipathy to DST to its apparently ham-fisted introduction, soon reversed, during the U.S. Occupation.

Maybe. But no Japanese I've ever met has expressed regret that Japan does not have DST. Indeed, Japanese in the U.S. find the whole system of pushing clocks back and forth weird, disconcerting, and difficult to get used to. I would be shocked if the Japanese adopted DST anytime soon, although I have been surprised that the Japanese have taken up anti-smoking measures as quickly as they have.

2006-10-18T15:01:00.000-07:00

Abe Popular with Japanese Public
Two weeks after taking office, Prime Minister Abe is popular with the Japanese people, garnering an approval rating of about 70%. The public appreciates his trips to Soiuth Korea and China soon after taking office, as well as the leadership he has shown in the North Korea nuclear crisis.

2006-10-17T07:14:00.000-07:00

The Limits of Japan's Recovery
Hisane Masaki discusses the relative weakness of the current economic expansion. Although the current recovery is one of Japan's longest, it doesn't match in breadth or scope previous high-growth periods. Growth has averaged only about 2% a year (interestingly, Masaki says many japanese households gauge economic strength by GDP figures; it's unlikely the same is now true for the U.S.)

Moreover, there is the perception, supported by some of the data, that the gap between rich and poor has widened. Rural areas and small towns, not to mention small companies, have done relatively poorly. Land prices in fashionable Tokyo sections like Roppongi are up, but rural land values are down. The Japanese government's fiscal condition remains sour, wages have fallen significantly over the past ten years, and workers are increasingly concerned whether they will receive the pensions they're due.

Notably, with the decline in wages, Japan's vaunted savings rate has dropped sharply. If Japanese decide they need to boost savings rather than buying, it is an all harbinger for a consumer-led expansion in the next phase.

2006-10-17T06:56:00.000-07:00

Demand for Fallout Shelters Boom
It is indeed an ill wind that blows no one some good. North Korea recent nuclear test has led to booming demand for fallout shelters. A primary beneficiary in Japan has been Oribe Seiki Seisakusho (not listed) , which builds shelters guaranteed to withstand nuclear explosions. The company said that in a good year it receives about 8 orders; in the past few days alone since the explosion, it has received 10 orders.

2006-10-12T09:32:00.000-07:00

A Different Take on the Japanese Economy
It's always refreshing to read economic analysis that differs completely from what most people are saying about Japan. In today's Japan Times, Gregory Clark rips Koizumi's economic policies, arguing that they have been the cause of massive increases in debt. He also belittles Koizumi's faith in structural form:

Koizumi's policies were the exact reverse [of what should have been done]: Cut government spending in vital areas, public works especially. Then compound that mistake with a witch hunt against all bad loans in the banking system (which creates more bad loans) combined with accounting changes that magnify losses. The result? A full-scale recession that cuts tax revenues far more than you have been able to cut government spending. A massive increase in government debtis inevitable.

This of course is blasphemy to the conventional wisdom, which was that Koizumi engineered tough reforms in Japan's economic system and thus made possible the recovery Japan now enjoys.

I'm by no means an economist, or even an astute economic observer. But Clark too seems to be framing the debate along traditional lines that seem outdated. Take the emphasis that many economists place on "public" versus "private" spending. But during Hurricane Katrina, Wal-Mart, because of its logistical expertise, did much better at providing vital "government services" than the government itself did.

By the same token, what possible use is it to a nation to have three different brands of chocolate puffed rice on supermarket shelves in three different size boxes? Couldn't the enormous private investment made in 16-oz Cocoa Pebbles have been used for something better than to give us an alternative to 21-0z Cocoa Krispies? Why is the allocation of resources to give us a hundred varieties of cereal and boxes deemed productive investment?

Can spending on OSHA really be that much worse? Maybe, if the OSHA rules are counter-productive and ideologically driven, rather than truly serve the cause of worker safety. But protecting workers is both a private and public good. And creating the rules and implementing them are both a public and private responsibility that should not be working at cross-purposes.

It seems to me Clark falls in the same trap when he argues for more public investment and dismisses criticism that Japan's public works programs build bridges to nowhere. Instead of arguing merely for greater public investment, Clark would do better to focus on what public investment would make the economy both more productive and best serve the Japanese people.

2006-10-04T11:21:00.000-07:00

Nomura Real Estate Holdings Skyrockets
On its first day of trading, Nomura Real Estate Holdings (formerly a unit of Nomura Holdings) rose 18%, thus demonstrating the strength of the Japan real estate market.

2006-09-27T12:24:00.000-07:00

An Unhappy, Aggressive Japan?
The LAT has a rather depressing take on Japan's current climate. Michael Zielenziger discusses the usual phenomena -- aging population, record suicides, youth underemployment --associated with Japanese angst. He then goes on to ominously predict the possible impact that a Shinzo Abe government will have, asking "Is it so far-fetched to imagine a day when a re-armed, angry and nuclear-potent Japan cuts its ties with Washington in order to reassert a more independent foreign policy?"

I think it is. Falling birth rates may worry demographers and children's wear executives, but it's unlikely that it upsets the average Japanese very much. In fact, the birth rate has turned up, albeit marginally, which seems to indicate that some more good economic news will help matters further. Anyway, if Japan is in danger of dying out, so are Italy Spain, the U.K., and, masked by the overall (and relatively high) US birth rate, upper middle-class New Yorkers.

Moreover, while nationalism may be on the rise among some (a few?) of the young, Japan remains deeply committed to pacifism. Indeed, the key symbol of Japan's imperial state, the Emperor, is an institution that receives little attention among Japanese youth. The Japanese remain reluctant to assert themselves overseas. If there has been an uptick in the willingness of Japanese to consider nuclear weaponry, well, maybe a few North Korean missiles flying over Japan has something to do with it.

Few people would argue that Japan is a cheery nation filled with happy-go-lucky people. But it would be worthwhile to wait a couple of years to see if the exit from economic malaise might stem the negative trends and outcomes Zielenziger describes.

2006-09-22T11:58:00.000-07:00

Business Confidence Improves for First Time in 3 Periods
The level of business confidence at large Japanese companies is up -- and up substantially -- for the first time in three quarters. The index of business conditions for the July-September period for companies capitalized at over Y1 billion yen rose to 10.5 from 1.8 in the April-June period; for large manufacturers, the index rose to 12.7 from 1.4. The index is expected to be 10.7 for the October-December quarter and 7.9 for the January-March period. For midsize companies capitalized at 100 million yen or more but less than 1 billion yen, the index rose to 3.2 from minus 1.5 in the previous quarter. 日経, Kyodo

2006-09-21T09:18:00.000-07:00

Abe to be Next Prime Minister
As widely anticipated, Shinzo Abe will be Japan's next prime minister (PM). He received 66% of the vote to be president of the Liberal Democratic Party, which holds a majority in the Japanese Diet. Thus his elevation to PM at a September 26 vote of the country's legislature is assured. Soon to be 52, Abe will be Japan's youngest PM. Supporters are optimistic he will continue the popular policies of outgoing PM Koizumi, while detractors believe his conservative beliefs will rattle relations with China and other Asian neighbors.

The general outlook on his pending accession can be found at Bloomberg, while this Mainichi piece focuses more on his political pedigree (his father was a foreign minister; his grandfather, a PM). The AP report focuses on the opposition forming to his conservative policies, which include an emphasis on patriotism in Japan's public schools. The FT editorial is balanced and thoughtful.

2006-09-17T18:18:00.000-07:00

Slow Car Sales in Japan -- Why?
A little while back Business Week ran a piece on how car sales in Japan have been lackluster. Given the improved Japanese economy, sluggish auto sales are indeed a surprising phenomenon.

According to the Japan Automobile Dealers Assn., total passenger car sales fell 1%, to 3.07 million units during the first six months of 2006. Strip out mini-vehicles—low margin, tiny cars limited to 660cc engines—and the figures are worse: down 3.8%, falling below 2 million units for the first time in 23 years.

The article says no one seems to have a clear idea of why sales are so dim.

Why anyone would want to own a car in Japan -- at least in the major metropolitan areas -- has always been puzzling for foreigners. Roads are jammed, gas is expensive, and public transportation takes you most anywhere you want to go comfortably and reliably.

The article touches on several possible reasons for the decline -- a decreased emphasis on market share by Japan's carmakers, a lower birth rate, a changing income distribution. Discussing the phenomenon with friends in Japan, I have heard related or different social/cultural reasons for low car volume:

The social norm of the Japanese nuclear family is changing, with many men and women not marrying until well into their 30s or not at all, and women pursuing careers more actively. With fewer traditional families, the need for Dad to buy a car to maintain the status of the family (and his own) has been diminished.
The percentage of the workforce that are "freeters" -- temporary employees -- has grown enormously, accounting for 20% or more of staff at large Japanmese companies. These workers do not have the job security that would allow them to purchase an auto.
Video games and other consumer electronics sompete with autos more vigorously for the attention of young Japanese guys. They may be more interested in the latest video game than the latest car model, thus making a lifelong love affair with autos that supports new car sales less likely.

It could also be that many Japanese have finally realized that they don't really a need a car.

2006-09-16T09:08:00.000-07:00

New Book Highlights Elders' Consumer Preferences
"Mirai-shijo Kanzen Koryaku Gaido" is a new book on the buying habits of Japan's elderly and not-so-elderly. As reported by Asahi, some of the findings are predictable, such as relatively few purchases of Western-style foods. But some of it is surprising, or at least interesting: while older people tend to avoid foods that hard to chew, they are still big fans of senbei, those hard rice crackers.

The book is based on stats from the Ministry of Internal Affairs and Communications' annual survey of household spending. Perhaps displaying self-interest or at least some wishful thinking, Asahi notes that the authors (23 students at the Shizuoka University of Art and Culture) believe the publishing industry should continue to do okay, since Japanese from 50 on up still spend considerable sums on newspaper and magazine subscriptions.

2006-09-15T15:04:00.000-07:00

Quality of Japanese Products Deteriorating?
I'm not sure what to make of this New York Times article on the decline in the quality of Japanese goods. Often such pieces are written after two or three notable cases are suddenly labeled a trend by journalists eager (or desperate) to find something to write about. The article cites Toyota and Sony as major culprits in quality decline. But the former's reputation, at least in the US, does not appear to be suffering the least bit, and the latter has had business problems for some time.

During my time in Japan during the Eighties, Japanese would often tell me that their vaunted reputation for quality excellence applied only to goods destined for export, and that the product quality of items destined for domestic consumption wasn't that high. It may be that with globalization trends this distinction is now blurred, and that a laptop battery is not easily labeled as Japanese or foreign. It may also be that the Japanese now have higher standards for domestic companies and the goods they produce for their countrymen and women.

The article cites the nefarious effects of Western influences, both business and cultural, on Japanese society. But it may be that Sony, Toyota, and other big firms are intrinsically less purely Japanese companies, that both staffs and product components are more international than they once were, and that Japanese firms are more exposed to external influences than they were 20 years ago.

2006-09-09T19:07:00.000-07:00

Forbes: Japan Is Back
Another article on Japan's comeback, this one from Forbes. The highlights:

After an extended period of flat stock prices, "many say" it is only a matter of time before equities rise.
Mentions four smaller Japanese companies that are doing excellent business: Fujimi, a maker of silicon wafer polishing materials; Strawberry Metals, a producer of high-function hinges for mobile phones; THK, a machinery maker; and Horiba, an engine-measuring equipment producer.
Financial institutions, steelmakers, and trading houses have all undergone major renovation and are doing well.

Most interesting quote:

By migrating from mass-market production to high-tech and high-valued-added manufacturing where entry barriers are extremely high, Japan has enjoyed near monopoly in segments such as car parts, precision equipment, electronics components, fine chemicals and ceramics, as well as fine metals, all of which bolster economic growth.

2006-09-01T12:34:00.000-07:00

Abe Would Reinforce Conservative Path
It appears likely that Shinzo Abe will be the next prime minister of Japan. This Asia Times article takes a detailed look of what his accession may mean for Japan's foreign policy and its relationship with the United States. One recent development the writer mentions, which is validated by my conversations with friends in Japan, is the rise of a new nationalism. The arrival of Abe will likely strengthen this trend.

It seems only natural that, 60 years after World War II, Japanese feel more confident about their country's role on the world stage and less guilty about its past atrocities. On the other hand, the level of hostility toward Japan still runs high in countries like Korea that experienced Japanese imperialism. The anger over visits to Yasukuni Shrine by leading Japanese politicians may seem overdone, but they remain a source of contention and resentment by Japan's neighbors.

Whether any of this will mean much for Japan's economy is open to question. Businesspeople of whatever nation want the highest quality goods and services at the lowest price, and political considerations are secondary at best. And as the article suggets, even Abe may may decide that such gestures as visiting Yasukuni Shrine may be more trouble than they are worth. Indeed, just as the Republican rank-and-file have generally acquiesced in spending by George Bush that they wouldn't have accepted from a Democratic president, the Japanese right-wing may feel relaxed about a prime minister Abe who foregoes visits to Yasukuni.

2006-08-30T10:46:00.000-07:00

Employment Situation Excellent
July jobs reports confirm the strong employment picture, with the unemployment rate at 4.1% and the job-to-applicant ratio at 1.09, the highest since 1992. The stat that really caught my eye was that the economy added 110,000 jobs. Japan's population is about 43% of America's, so the equivalent number for the US would be over 250,000 jobs. That's quite an accomplishment and provides overwhelming evidence that the economy is growing nicely.

2006-08-29T05:34:00.000-07:00

Sumitomo Metals's Narumi in MBO, Chinese Firm Does Financing
Narumi China of Nagoya, a subsidiary of Sumitomo Metals and one of Japan's top makers of bone china tableware, will go private through an MBO funded through CITIC Capital Holdings, a state-owned Chinese investment management and advistory firm. The new ownership's business plan is to expand into China and Southeast Asia and, according to the press release, go public in three to five years. Citic Holdings will have 75%-80% of the newly issued shares, Narumi's 12-member management team will have 15% to 20%, and Sumitomo Metals will hold 10% for the next two years. Narumi's

As a business proposition, the MBO appears to make good sense. Within the Sumitomo Metals family, Narumi was a noncore holding that lied outside the company's main business. In its new incarnation, funded by an established Chinese investment firm, Narumi appears well positioned to expand outside Japan and achieve higher growth.

MBOs financed by foreign funds are still relatively new in Japan, but CITIC Capital already has some experience doing it for medium-sized companies. The best known example is Pokka, a leading soft drink manuracturer, which was done in 2005.

2006-08-28T09:15:00.000-07:00

Oji May Abandon Bid
According to press reports, it appears increasingly likely that Oji Paper will abandon its bid for Hokuetsu Paper. Oji's offer runs until September 4 and now appears unlikely to succeed. Oji management has denied the report and says it will continue to work for the offer's success.

UPDATE On August 30, the president of Oji Paper said the takeover of Oji Paper was likely to fail. James Abegglen, chairman of Asia Advisory Service, said the company was too aggressive and should have worked behind the scenes to accomplish its objective. If Abegglen is right, it demonstartes that Japan's business community still feels most uncomfortable with aggressive M&A activity.

2006-08-26T10:02:00.000-07:00

Venture Capital Developments
Business Week has an article on the state of Japan's venture capital industry. It's mostly "a few signs of change in the still-hidebound Japanese business culture" sort of article, interesting but somewhat anecdotal and with few surprises. It does provide a few revealing statistics, however. Unfortunately, the numbers are a little stale, but still likely indicative of the venture capital environment:

Japan's startups attracted just $1.7 billion in venture capital in the fiscal year through March, 2005, according to the Venture Enterprise Center, a state-funded research firm that surveyed 105 venture funds.That puts Japan's market at roughly half the size of China's and less than a tenth that of the U.S. (U.S. venture capitalists spent a mere $100 million in Japan last year.) And startups that can't get funding early on can kiss goodbye any hope of listing on Japan's small-cap markets, such as the Tokyo Stock Exchange's Jasdaq and Mothers bourse.

2006-08-22T14:39:00.000-07:00

Births Up a Little from January to June
The number of birth rose slightly in the first half. If this trend continues through 2006, Japan's birth rate will increase for the first time in six years. The rate currently stands at 1.25, among the lowest of all industrial nations. The low birth rate has received widespread attention; the government has made some efforts to increase it, mostly without effect. Many Japanese consider the low birth rate one of the nation's biggest problems. The slight increase in births is probably indicative of the better economy, however, and may not be evidence of a turnaround in the long-term trend.

2006-08-18T17:01:00.000-07:00

Konaka Takes Futata
After weighing buyout offers from Konaka and AOKI Holdings, menswear chain Futata has decided to accept Konaka's offer. According to press reports, Futata said that its financial advisor Sumitomo-Mitsu had reported that the two offers "were almost the same." Futata had a previously existing alliance with Konaka, and thus can build on their collaborative relationship. The new firm will become Japan's third-largest menswear chains. AOKI had previously stated that it would not attempt a hostile takeover of Futata if it was turned down.

Notably, Kennichi Ohmae has expressed his doubts about the wisdom of AOKI's bid. He argues that buying relatively small Futata would do little to help AOKI compete against its nemesis Aoyama Shoji, the number-one menswear chain, and that it would be buying Futata shares at a high price. Despite all the recent chatter about the dawning of a new M&A age in Japan, Ohmae thinks that, compared with the U.S., Japanese companies have only begun to take its first steps in this area.

2006-08-17T13:58:00.000-07:00

M&A in Japan Up 9% from January to July
As Chako pointed out last week, recently released stats show a significant increase in Japanese M&A. This AP report does a poor job in indicating period-over-period increases, but the higher level of activity is still obvious:

Japan had 1,641 merger and acquisition deals worth more than 7.88 trillion yen (US$68.5 billion; euro53.86 billion) from January-July, according to data released by Recof Corp., a Tokyo-based merger consultancy. The total is up 8.7 percent from the same time last year, when Japan had a record 2,725 mergers worth 11.8 trillion yen (US$102.6 billion; euro80.67 billion) for the full 12 months.

Foreign acquisitions alone hit 173, reaching an all-time high of 4.45 trillion yen (US$38.7 billion; euro30.43 billion) in value, more than any other year in full. The previous record was in 3.41 trillion yen (US$29.7 billion; euro23.35 billion) in 2000.

2006-08-15T13:34:00.000-07:00

AOKI Won't Pursue Takeover of Futata If Denied
President Aoki of AOKI Holdings has told reporters that, if men's clothing retailer Futata doesn't approve AOKI's plan for buying the company, it would not pursue a takeover bid. AOKI is Japan's second-largest men's store chain, but lacks a presence in Kyushu, where Futata is based. Besides AOKI, Futata has received an offer from Konaka, Japan's fourth-largest men's store chain, which already has a 20% stake in the company and is proposing a strengthened tie-up.

Futata is being advised by Mitsui-Sumitomo Bank and plans to respond to both offers by August 18. Mr. Aoki said that he believes AOKI has made the best offer; but if Futata says no, he would only tell to do their best. Market participants are questioning whether both offers are too high, since shares of both AOKI and Konaka have recently declined.

2006-08-14T21:26:00.000-07:00

Oji's Takeover Attempt Appears to Be Flagging
The chances of Oji Paper taking over Hokuetsu Paper appear to be declining. On Friday, Hokuetsu Bank said it will not sell its two percent stake in Hokuetsu Paper. The target company had received a similar promise from another local bank, Daishi, the day before. Oji has said it has no plans to up its offer; but it may have to raise its bid before the September 4 deadline if it wants to complete the deal.

2006-08-14T20:40:00.000-07:00

Japanese Companies Positive on the Economy
A poll of 100 top Japanese companies indicated broad-based optimism about business conditions. More than 90% expected the economy to keep expanding until next spring. Sixty percent expected the BOJ to increase rates again before next March. Note, however, that the poll was taken before the government announced that growth in the April-June quarter was a weaker-than-expected 0.8%.

2006-08-11T21:48:00.000-07:00

Economic Recovery Benefits Career Service Firm
With Japan's economic recovery extending to one of the longest in post WWII history, businesses need to fill many positions. Some of the personnel and career service firms benefit from this needs, including en-japan, inc (Ticker: 4849), a young company founded in 2000 that provides web-based career change and temporary job information. It just reported the result for the 6 month period ended June 2006, with a 40.1% rise of sales and 25.6% increase of net profit.

2006-08-09T20:59:00.000-07:00

Japan's M&A Increases
Nikkei reports that total amount of domestic (between Japanese companies) M&A for the months between January and July 2006 totaled 7 trillion 880 billion yen, a 9% increase from the same period last year and may lead to a record transaction volume for the entire year. In particular, acquisitions through TOB (like the case by Oji Paper that Bob has been reporting) increased rapidly to 3 trillion yen. This is a substantial change from long history of aversion by Japanese companies of acquisitions, particularly hostile takeovers.

2006-08-07T11:43:00.000-07:00

Oji Faces Tough Battle for Hokuetsu
The forces against Oji Paper's takeover of Hokuetsu are gathering steam. Daio Paper, one of Japan's largest paper makers, said last week the combination would violate Japan's anti-monopoly law and will file a report detailing its stance with Japan's Fair Trade Commission. In addition, Mitsubishi completed its purchase of 50 million Hokuetsu shares for a 24.4% stake in the company. Bloomberg quotes James Abbegglen:

It's become messy with all the anti-Oji movement...it will cast a very deep doubt on future takeovers. Companies will be more reluctant than in the past to attempt hostile takeovers.