Investing
In Asia
Already, Japanese consumers are free to buy foreign stocks,
bonds and mutual funds, and they can keep their money in foreign-currency
banks accounts. They can now choose a foreign stockbroker rather
than a Japanese one, and since October they’ve been able
to negotiate a commission directly with their broker instead
of having to settle for the standard going rate.
The impact of this last move is already severe. Commission
rates have dropped so low that many of Japan’s biggest
stockbrokers are feeling the pinch. Of the 2,000 brokers now
trading in Japan, some observers think that only 20 or so will
be able to survive the full onslaught of foreign competition.
Many of the rest will fall into the hands of the hundreds of
foreign institutions eager to get their hands on this massive
market but Big Bang also sends another message about how Japan’s
business climate is about to change.
Investing In Asia & Tokyo
Once Tokyo’s institutions have been forced to compete
head-to-head with their international rivals, it follows that
their investors will start to demand international-sized profits
from their companies, and that the banks’ customers will
start to demand international-sized returns on their deposit accounts.
Now that Tokyo’s stock market investors are free to buy
foreign shares and foreign investment trusts for their pension
funds, are they likely to be satisfied with the paltry profits
and dividends that they now accept as standard from their Japanese
investments? Do we really need to ask?
The more you think about this change in the business climate,
the easier it is to get frightened. In theory, the best way
for Japanese companies to start delivering these higher profits
will be to slim down their workforces now. But the government
doesn’t want higher unemployment either, because it would
be bound to send the retail spending figures down at precisely
the moment when they seem to be recovering. Indeed, it might
even provoke a kind of social revolt that most Japanese would
regard as completely unthinkable. What to do?
Investing In Asia & The Prime Minister
Nothing, seems to be the response so far. Prime Minister Ichiro
Ozawa’s Liberal Democrat government has always been rather
good at avoiding direct confrontations with its adversaries, preferring
to negotiate behind closed doors whenever possible, and it’s
behaving true to form at the moment.. Consensus is a pattern of
political behaviour that goes back half a century or more. But
today’s consensus has been built upon generations of patronage,
factionalism and often institutional corruption on a scale that
would shock Westerners although it doesn’t seem to bother
the Japanese very much. On the plus side, it’s allowed Japan
to grow fast and without social tensions; but on the minus side
it doesn’t provide much of a platform for major social or
economic revolution.
Unfortunately, a major economic revolution is what Japan needs
most at the moment. The old corporate traditions of big cheap
loans, zero costs of capital, inefficiency and poor profits
(plus poor dividends, of course) have really got to go if Japan
is going to compete in the international markets of the twenty-first
century. In the last analysis, its investors will accept nothing
less. And if we had any doubts about the long-term inevitability
of this change, we wouldn’t be suggesting that you think
about buying Japanese stocks now.
Investing In Asia - As Things Stand
As things stand, Tokyo’s p/e ratio of 80 seems extortionate.
But consider three things. First, company earnings are artificially
depressed at the moment because companies are writing off their
old liabilities: if we could only find a way of cutting through
the fog of Japanese accountancy to the true profits, we might
find that the true p/e was closer to 50. Secondly, things can
only get better. And thirdly, the tidal flow of money coming into
Japan at the moment is having a beneficial technical effect, which
we can hardly afford to ignore.
At the beginning of this article we made a passing mention
of a rather startling fact. The Nikkei 225, we said, has done
well enough this year, but the Second Tier index on the Tokyo
stock market has grown four times as fast. That’s a big
discrepancy to find in any country. What’s going on?
Many analysts will tell you these days that it’s the Nikkei
that is unrepresentative of the market and the Second Tier that’s
getting it right. The Nikkei 225 is a fossil that’s hardly
changed its composition since it was started 40 years ago. The
Nikkei doesn’t include such modern giants as NTT DoCoMo,
the world’s biggest mobile phone corporation and the biggest
company in Japan; it does, however, include a whole range of
tiny manufacturing corporations that used to be important a
few decades ago and which now tell us virtually nothing about
the state of Japanese industry.
Investing In Asia & Nikkei
Worse, the Nikkei is heavily loaded with the kinds of big consumer-oriented
companies that are suffering worst at the hands of consumer
reluctance - Sony, Nissan, Mitsubishi and all the big banks.
But rival indexes like the Second Tier (or the main-market
Topix index, for that matter) will show you a better sampling
of go-ahead firms like Softbank, a Japanese software company
that’s now bigger in capital terms than the mighty Sony
itself - and largely invulnerable to the consumer downtrend
because it deals directly with businesses instead. If you make
only one new year’s resolution this January, resolve to
forget the Nikkei and watch the Topix instead.
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