Category Archives: Japanese development

Sharp Corp (6753) and Abenomics

January 29, 2016 By in Abenomics, Uncategorized Tags: , , , , 2 Comments

Abenomics in brief

Prime Minister Shinzo Abe’s well-known plan for reinvigorating the Japanese economy has three “arrows.”  The first two are large government deficit spending and ultra-loose money policy, which were designed to buy time for structural reform of Japanese industry.   The two have had toxic side effects:  they have mortgaged Japan’s future with lots of new government debt and, through the currency depreciation they engendered, have reduced national wealth by a third.

Regular readers will know that from the outset I’ve believed that Japanese corporations won’t restructure voluntarily and that the Tokyo government had no interest in forcing corporate leaders to do so.  In other words, Abenomics a very expensive farce, that had no chance to succeed.

the Sharp case

The latest case in point is Sharp, a heavily indebted chronic money-loser which is in the process of being nationalized by state-owned Innovation Corporate Network of Japan (ICNJ).  ICNJ is offering shareholders a total of $2.5 billion for their shares and the company a continuing supply of the opium of state support.

Hon Hai Precision, a Taiwanese company best known in the US as Apple supplier Foxconn, has bid twice that figure.  It has pledged to keep all Japanese employees and to transfer its management and manufacturing technology into Sharp.  As I’m writing this, news is breaking that Hon Hai is about to sweeten its offer by pledging to invest a minimum of $850 million in Sharp operations after acquiring it.

the board decision…

So, which will the board of Sharp choose:

–twice the money for shareholders plus an infusion of new technology and world-class manufacturing management?, or

–what’s behind the curtain marked ICNJ?

Although no final decision has been made, all the press leaks indicate that Sharp is going to choose ICNJ–and that the Tokyo government is encouraging the company to do so.

a wake-up call?

The Financial Times seems to believe that the Sharp case will prove to be the ah-ha moment that will cause foreign investors to understand that Mr. Abe never intended to fire the crucial third arrow of Abenomics.  It thinks an outflow of foreign capital will follow this realization.  For the sake of Japanese citizens who are bearing the burden of the first two arrows, I hope the FT is wrong.  My private reaction is to ask why it’s taking foreigners so long to smell the coffee.

 

Japan as a possible future for the US

November 24, 2015 By in Abenomics, Asian economic development, economics, Japanese development, Uncategorized Tags: , , , 2 Comments

Japan, in my subjective view

As I wrote yesterday, the Japanese economy continues to limp along at about stall speed, hugging closely to the 0% line between growth and contraction.  There are several reasons for this, in my :

–an aging population

–strong social prejudice against accepting women as working professionals (meaning Japan wastes potentially half its workforce)

–strong aversion to foreigners that manifests itself as an unwillingness to allow immigration

–therefore, a shrinking workforce

–money-based politics that fiercely defends the status quo

–veneration of age as the source of wisdom, meaning that older managers can’t/won’t solicit/accept suggestions from younger, more technically competent, subordinates

–a docile electorate

the US is the same, in…

–an aging population

–lingering discrimination against women

–growing political (shoot-yourself-in-the-foot) pressure to limit immigration overall, and especially by high skilled professionals from Asia

–money-based politics that defends the status quo, seen, among other places, in failure to reform the federal tax code (Japan and the US have the highest rates in the OECD)

the US differs, in…

–having a younger population than Japan, meaning we have time to make changes–and the example of the fate of Japan to motivate us to do so

–a better record on hiring women (not a high bar, though)

–political and cultural embracing of youthful entrepreneurs and disruptive ideas

summing up

The US has younger population tan Japan and a more vigorous economy, but is carrying similar dead-weight in the forces of the status quo, typified by politics in Washington.

In the past 25 years, Japanese voters have voted on two occasions to toss the dominant Liberal Democratic  Party out of office and replace it with the Democrats (formerly the Social Democrats, and the Socialists before that).  Both occasions triggered bitter intra-party warfare about who should receive credit for the victory.  Nothing got done, so voters quickly reselected the LDP, as the lesser of two evils.

Hopefully, we can do better than that.

 

Japan in recession …again

November 23, 2015 By in Abenomics, Asian economic development, economics, Japanese development Tags: , , , , Leave a comment

Assuming we take the simple, but commonly accepted, definition of recession as two consecutive quarters of negative real GDP growth as our measure–and there’s no real reason not to, I think–Japan slipped back into recession during its last fiscal quarter.  The reason:  in Groundhog Day-like fashion, the Tokyo government tightened fiscal policy prematurely earlier in the year, producing the same negative result for the third time in recent memory.

Three observations:

–the Japan experience is the reason Janet Yellen is so wishy-washy about raising interest rates in the US

–in a certain sense, technical recession isn’t as bad a thing for Japan as it wold be for, say, the US or China.

How so?

GDP growth comes from two sources:  having more people working, or having existing workers perform their jobs more efficiently.  Unlike the view (often) expressed by one of my Depression-era former bosses, productivity increases don’t come from imposing sweat shop working conditions.  They come from investment in education, training and productivity-enhancing equipment.

In Japan’s case, the domestic working population peaked around 1995 and has been falling by about 0.5% per year since.  One obvious solution to this problem would be to allow foreign workers to immigrate.  But, although there has been some slight movement lately, Japan’s borders remain rigidly closed to outsiders.

Productivity?   From 1950 – 19980, Japan was a productivity wonder.  However, Japan has struggled to keep up with the more intensive pace of change since then.  Why?  I think the rigidly hierarchical nature of company social interaction in traditional Japanese companies stifles the voice of innovation from younger employees.

Let’s say, though, that somehow Japan achieves productivity increases of +1% annually despite the “no comments; just follow orders” attitude of top managements.  I think that’s too much, but let’s go with it.  If so, the overall economy needs half that figure to overcome the decline in the workforce.  Real GDP growth has a trend ceiling of +0.5%.

So, the maximum sustainable rate of GDP expansion in Japan is barely north of zero.  It shouldn’t be surprising, then, if that figure spends considerable time south of breakeven.  As long as the numbers don’t get too negative, Japan will continue to stumble along on its journey to economic insignificance.

–what makes Japan important, interesting …and scary for the US and the EU is that we’re seeing a possible future for us in the Japan of today.

More on this tomorrow.

will the poor performance of Energy, Materials and Industrial sectors derail the S&P 500?

October 6, 2015 By in Current Market Thoughts, Energy, Japanese development, Portfolio management, securities markets, stock market, Strategy Tags: , , , , Leave a comment

In the course of doing a performance attribution for the S&P 500 year-to-date last week, I noted that the S&P 500 ex Energy, Materials and Industrials, is pretty close to flat so far this year on a total return basis.

But is it correct to conclude that the “healthy” sectors of the S&P will continue to be relatively immune to the economic illness caused by the price collapse of global mining commodities?   …or will they eventually be dragged down if, as I expect, commodity weakness continues for an extended period of time.

This isn’t as silly a question as it might seem at first.

In the early 1990s I was asked by the board of the company I worked for to present my views on the stock market in Japan at that time.  I created a presentation that divided the Topix index, which was trading at about 70x earnings, into three parts:

–highly speculative property-related companies that were trading at around 500x earnings and made up 10% of the market

–export-oriented industrials, such as the autos or tech companies like Canon, which were trading at 15-20x earnings and made up 30% of the market, and

–everything else, which made up 60% of the market and traded at around 25x.

I said what I believed:  that, while the index might do poorly as the speculatives came back to earth and the bulk of the market went sideways, the export-oriented stocks were cheap and would go up significantly in price–not only in yen but in dollars, too.  My model was the behavior of the US market throughout the second half of the 1970s, when former speculative favorites, the Nifty Fifty, were crushed while everything else went up.

An aside: a famous finance academic on the board, who made it clear he had not sought the opinion of a mere “practitioner” like me, objected that the low dividend yields of Japanese stock proved they remained wildly overvalued.  A little embarrassed (for him), I had to explain that Japanese tax laws did not provide the same preference for dividend income that the IRS did. In fact, dividend income was subject to income tax at an extremely high rate (up to 90%) in Japan.  Because of this, taxable investors (the majority at that time) had a very strong preference for (untaxed) capital gains.  Companies tended to make negligible cash payouts and to use stock dividends as a substitute.

Embarrassingly (for me), it turned out that my reasonable analysis was completely wrong.  Yes, the exporters were cheap, but for the next decade they significantly underperformed similar-quality companies elsewhere in the world.  In this case, the general economic funk that engulfed the Japanese economy hurt the stocks of all firms listed there.  There was no escape.

my thoughts

Thee aren’t a whole lot of relevant examples of this kind of situation to generalize from.  (Another might be the worldwide collapse in the price of mining commodities and of commodities stocks from 1982-86, which did not impede the upward progress of global stock markets from mid-1982 on.)

My hunch is that the contamination of “good” stocks in 1990s Japan is more a function of the continuing economic malaise in that country than of anything else.  What’s somewhat troubling is that the US today is very similar demographically to Japan back then, when lack of workforce growth was a significant contributor to Japan’s stagnation.  We have the same woes of extremely low interest rates and an impotent legislative arm tied to the status quo and unwilling to use fiscal policy to bolster the economy–another set of lead weights dragging Japan down.

 

At the end of the day, I’d argue that the US is inherently a much more dynamic country than others in the developed world.  Also, I see the commodities collapse as much more like an external shock than a sign of weakness in the domestic economy in the way the property collapse in Japan was.  So I see the chances that commodities/commodity stock softness will cripple the rest of the US stock market as low.  But there are enough similarities between us today and Japan 25 years ago to make me vaguely uneasy.

 

 

 

thinking about China: economic growth and metals

August 26, 2015 By in Asian economic development, China, economics, Hong Kong, Japanese development, Mining Tags: , , , 1 Comment

In the late 1970s, Beijing decided that its central planning model of economic development wasn’t working because the domestic economy had become too complex.  It reluctantly shifted to the model Japan had used to recover from WWII–concentrating on export-oriented manufacturing, offering cheap labor in exchange for technology and industrial craft skill transfer.  China became an increasingly large user of natural resources (oil and metals) as it created industrial infrastructure, industrial plants and provided housing and other public services for its large population.

Maybe ten years ago China realized that it was soon going to run out of low-wage farm workers willing/able to switch to manufacturing in order to sustain the export-oriented model.  Associated pollution and other environmental problems were also becoming more acute.  So the natural resource intensive, export path to growth was nearing an end.

Five years or so ago, China, now out of cheap labor, began the shift to a consumer-oriented, domestic demand approach to GDP growth.  Government stimulus to offset the negative effects of the recent recession gave exporters one final surge of vitality.  Still, for years manual labor-intensive businesses have been leaving China for, say, Vietnam or Bangladesh.  Beijing has also been cracking down on relatively primitive steel and aluminum processing operations.

Politically and socially, as well as economically, this is a difficult transition to make, because rich and powerful forces of the status quo don’t want things to change.  Japan, Singapore and Hong Kong (multiple times) have made the shift; Malaysia, Thailand and much of South America have not.

One of the main characteristics of this period of change is a slowdown in demand for base metals and other industrial inputs.  For China, which had been the dominant customer for almost any base metal, the transition comes just as global mining companies have made (inexplicably, to my mind) huge additions to productive capacity.

The result of increasing supply at a time of flagging demand is easily predictable–lower prices.

Why write about this?

Many financial markets commentators have been pointing to low base metals prices as evidence of cyclical economic weakness in China.  That may ultimately turn out to be the case.  But it’s equally a sign of:  1) structural change in the Chinese economy, which would be a good thing, and 2) witless mining companies.  So it’s by no means a sure thing that bears on China are correct.

By the way, the last global collapse in base metals prices came in the early 1980s.  That followed a decade-long period of mine expansion that was based on the idea that the United States couldn’t grow economically without using copper, lead, zinc and iron in amounts that would increase in a straight line with GDP expansion.  In hindsight, what a mistake!  Although Peter Drucker had been writing about knowledge workers from the 1950s, no one put two and two together.  It took almost two decades for world growth to absorb the excess capacity that miners added back then.