Third Point, Sony and Abenomics

the Three Arrows” of Abenomics

Abenomics, the ambitions plan of the Liberal Democratic Party to jumpstart the Japanese economy after a quarter-century of stagnation, has three “arrows”:

–currency devaluation

–increased government deficit spending, and

–bringing an end to widespread squandering of corporate resources by complaisant and inefficient managements, either through bureaucratic/administrative pressure or by repealing laws that effectively bar bad managements from being ousted and replaced.

Arrows one and two have been fired

Arrows one and two were fired very quickly, as was expected.

Japanese export-oriented industry was in favor of the first.  And everyone likes to get a check in the mail from the government.  Neither arrow, however, will make a lasting positive impact on Japan.  Both seem to me designed to buy time for Japanese corporations to change their stripes and become more modern and more profitable.  But the moves will prove disastrous in the longer term for Japan if Arrow three doesn’t hit its mark.

Third Point and Arrow #3

Enter Daniel Loeb, whose Third Point hedge fund bought a large position in Sony and began to beat the drum for change–to wit, a partial sale on the stock market of Sony’s media subsidiary.

The proposal/demand is squarely in line with standard American financial theory:

people dislike buying bundles of disparate businesses.  Unbundle them and investors will pay higher prices for the component they prefer than for the entire package.

Sony the least difficult target

It’s important to note that in Sony Mr. Loeb picked a company that would arguably be the most open to new ideas.  Sony is not an “establishment” company in Japan.  It has no roots in the pre-WWII zaibatsu industrial conglomerates, nor in their successor keiretsu groups.   Instead, it was founded by two mavericks in 1946.  It’s free of much of the social pressure to maintain the status quo  that bears down on the keiretsu, as well as of the tangled web of affiliated company cross-shareholdings that enmeshes, say, Panasonic.

In addition, Sony’s chairman, Kazuo Hirai, has an international background.  More than that, he witnessed first-hand the destruction of Sony’s video game business at the hands of his tradition-bound predecessor there, Ken Kutaragi, through his lack of openness to new ideas.

One might have thought, too, that pressure from Mr. Loeb might serve as an excuse (gaiatsu) that Mr. Hirai could use to deflect blame from himself while still making difficult changes.

But no.

score one for the status quo

The reports I’ve read suggest that interaction between Third Point and Sony has proceeded in traditional Japanese fashion.

Mr. Loeb met with Mr. Hirai, who listened politely to his requests.  Mr. Hirai may even have made affirmative noises that avoided open disagreement, but which meant “I understand what you want,” not “I agree and will act as you suggest.”  An “independent” panel of experts, paid by Sony, was assembled to analyse the Loeb proposal.  An appropriate period of time passed.  Then Sony said thanks, but no thanks.  Case closed, without giving anyone direct offense.

only one company?

Yes, we shouldn’t rush to generalize from one instance.  On the other hand, the cards were about as stacked in favor of a shake-up of the status quo in this case as we’re ever likely to get in Japan.  Sony’s decision to remain a conglomerate is one more reason to worry that Arrow three will never leave Mr. Abe’s quiver.

That, in turn, is cause to begin to imagine what the Japanese economy will look like in the event Abenomics is unsuccessful–and to consider what the negative repercussions might be for the rest of the world if Japan collapses in a heap.