Tag Archives: Japan

a look at Tokyo Electric Power (TEPCO), JP: 9501

March 31, 2011 By in Asian economic development, economics, Industry Analysis, Japanese development, Utilities Tags: , , , , , , 2 Comments

“9501” says a lot

Unlike systems using letters to form ticker symbols for stocks employed in many Western markets, Japan has four-digit numbers that identify the stocks traded in that country.

The initial number indicates a company’s sector.  The 9000 companies are in the Service sector.

The second number is the firm’s subsector or industry.  The 9500 companies are Utilities.

The third and fourth numbers form a pair.  Firms are ranked in order of their importance in the industry (or at least their importance when the code numbers were initially given out), with “01” at the top.

So 9501 is the designator for the biggest and most important utility in Japan.  That’s TEPCO.

Foreign investors coming to Tokyo (other than those from Korea or Taiwan, which have similar number codes) might scratch their heads at Japanese ticker symbols.  But does a system where stocks can be designated “HOG” or “LUV” have a right to criticize?

As recently as the 1980s, the power of the “01” was immense.  Industry leading firms were magnets for the most talented university graduates.   The stock market invariably awarded the industry “01” the highest price-earnings multiple, regardless of relative growth rate or asset value, making it easier for these companies to raise equity capital if need be.

post-earthquake

I can’t imagine ever buying TEPCO again (I held tons of Japanese utility stocks in the late 1980s—that’s another story, though, having to do with a since changed electricity price setting mechanism).  So I haven’t done–and have no intention to do–the work I’d need to give an investment opinion.  What follows are observations rather than analysis:

1.  Japanese stocks are subject to maximum daily fluctuation limits, both up and down (don’t ask what the rules are).  The idea is that this gives panicky investors time to get their emotions under control so they don’t sell at crazy-low prices.  In my experience, however, wherever they’re in force the limits have the opposite effect.  There’s nothing like a day or two where your stock goes limit down with no trade–and all you can do is watch–to bring panic to never before experienced heights.  TEPCO had three such days in a row.  So the stock lost two-thirds of its value before anyone had a chance to get out.

2.  It’s not clear to me that TEPCO would be able to raise new capital from non-government sources if it operated in a market like the US.  But it doesn’t.  It’s possible that the Japanese government will pressure banks and insurance companies to provide funds.

3.  TEPCO is part of the industrial grouping (or keiretsu–another long story) led by the Mizuho Bank.  Group companies may feel a special obligation to lend support.

4.  There have been rumors that the Japanese government itself will make a large capital injection.  Since regulatory negligence seems to have been a contributing factor to the nuclear reactor disaster, this makes sense to me.  Certainly, the country has to replace the lost electric power somehow.

5.  The CEO of TEPCO has reportedly been hospitalized, suffering from a number of maladies.  It’s possible that Mr. Shimizu actually is sick.  But a company-announced hospital stay is also a ritual Japanese way for firms to sack unwanted executives.  The disappearance in January 2010 of Hirohisa Fujii as finance minister in the current administration after losing a power struggle to Ichiro Ozawa is a very recent example.

I think we’ll find that this “hospitalization” is the first step in a reorganization of TEPCO’s operations.  Interested investors should watch to see who’s appointed.

G-7 intervention to stop the yen’s rise: will it work?

March 18, 2011 By in Balance of Payments, comparative advantage, currency effects, Current Market Thoughts, J-curve, Japanese development, Purchasing power parity (PPP) Tags: , , , , , , , , , Leave a comment

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Will G-7 intervention work?

Yesterday, the G-7 group of major industrial countries announced plans for coordinated intervention in the foreign exchange markets in order to halt the rise of the yen against the currencies of other developed nations.  In the wake of last week’s earthquake and tsunamis, the yen had risen by about 5% against the dollar.  Will the G-7 be successful?

The short answer is “…most likely, no.”

How so?

The main reason is that the major international commercial banks, who are the main forces in the global currency markets, are far larger and have greater financial resources than national governments do.  That might not have been true twenty-five or thirty years ago, but it is today.  Even the G-7 nations acting together don’t have the financial firepower to oppose a concerted move by the banks.  In the past, it hasn’t helped either that governments have typically tried to defend currency values that were politically attractive but economically unsound.

Japan the most skillful government player

I’ve been watching the currency markets as a global investor for over twenty-five years.  Over that time, the country that, to my mind, has the best record in influencing the direction of its currency is the Japan.  Understanding it can’t oppose the banks directly, it has waited until a wave of speculation has almost exhausted itself and then applied enough pressure to send the yen in the opposite direction.

Japan’s present stance is a curious one, though.  The current administration in Tokyo, the Democratic Party of Japan, came into office with the intention of reversing the long-standing (and very outdated) policy of the Liberal Democratic Party of always aiming to weaken the yen in order to help the prospects of export-oriented industries.  Nevertheless, when the original DPJ finance minister tried to enforce the new policy, he was replaced with someone more willing to cater to the Keidanren.  The new minister immediately began selling the yen in what I saw as simply a wasteful attempt to establish his pro-industry bona fides.  That was Naoto Kan, who is now the prime minister.  Who knows what he’ll do now.

A second curious aspect of the situation today is that there’s no good reason for the yen to be a strong currency.  The country’s workforce is shrinking.  The government is ineffective and heavily in debt.  The budget is in deficit.  And the country hasn’t shown any real growth in over twenty years.  Japan’s most “positive” feature  vs. the euro or the dollar is that it’s a known quantity and has less near-term potential for negative economic developments than the EU or the US.

Why has the yen been rising, then?  After the Kobe earthquake in 1995, Japan repatriated large amounts of money invested abroad.  Insurance companies needed funds to pay claims.  Parties–individual or corporate–who had no third-party insurance needed money to rebuild.  this activity drove the yen up by about 20% against the dollar in the months following the earthquake.  It’s probably too soon for this to be happening again.  The yen probably started to rise early this week as speculators began to bet the same thing would happen again.

Interestingly, the yen gave back almost all its gains as soon as the G-7 announced its plans and Tokyo was seen selling the yen aggressively in the currency markets.  To me, this suggests that the big players in the market haven’t decided what to do yet.  In the end, though, it will be the banks, not the G-7, that decide whether the yen strengthens or not.

investment implications

What’s the significance of a rise in the yen for investors?

An appreciating currency has two effects:

–it slows economic growth in local currency terms, and

–it reorients what economic energy there is–away from export-oriented industries, and toward domestic-oriented firms and importers.

If you were investing in Japan and thought the yen would rise, you would overweight domestic firms and underweight exporters and other companies with large foreign-currency exposure.  But the most sensible thing for most people to do, as I suggested a couple of days ago, is just to stay away.  (I own two social networking stocks in Japan, DeNA and its smaller competitor, Gree.  For now, I’m keeping them both.  These are youth-culture special situation stocks that are growing very fast, so I think they’ll be relatively unaffected by problems in the overall economy.  But I wouldn’t advise anyone to follow my lead.)

investment thoughts on Japan, post earthquake

March 15, 2011 By in Asian economic development, economics, Japanese development, Recent Market Action, Strategy Tags: , , , , , , , , , , Leave a comment

the earthquake

The Japanese government is calling last Friday’s severe earthquake and resulting tsunami the worst disaster to befall the country since the Second World War.  Early estimates suggest that at least 10,000 are dead, and perhaps many more.  Hundreds of thousands are homeless.  Severe damage to nuclear power plants in the worst-affected prefectures, north of Tokyo, has necessitated rolling electricity blackouts in Japan for the first time in a half-century.

investment implications

This is a terrible human tragedy.  But today I’m taking off my hat as a human being and putting on my hat as a portfolio manager to write about what I see as the major investment implications of last week’s event.  They are:

1.  The yen will have a short-term tendency to rise, as insurance companies liquidate foreign investments and bring money home to pay earthquake-related claims.  Both individuals and companies will do the same thing.  In the months after the Kobe earthquake of 1995, for example, the Japanese currency rose by about 20% against the dollar.  If so, export-oriented firms will struggle some more.

2.  Technology-related parts shortages are possible, but I think they’ll be less serious and shorter in duration than commonly expected.  Several reasons why:

–In the thirty+ years I’ve analyzed companies it has invariably been the case that the damage to industrial plants due to explosions, wars and natural disasters is initially overestimated–usually by a lot.

–Ingeniously jerry-rigged solutions to production bottlenecks are almost always found.

–Ex autos, Japan isn’t the cutting-edge technology giant it was twenty-five years ago.  It’s major IT products are commodity semiconductors, glass for flat panel TVs and monitors, and consumer electronics thingamajigs, like capacitors and connectors.

–The earthquake missed the industrial heartland south of Tokyo, where most of the country’s factories are located.

–Korea, Taiwan and China make adequate substitutes for almost everything (ex autos) that Japan produces.  These areas can take up at least part of any slack from Japan.  For example, TXN, one of the few international firms announcing significant damage, says it has already found replacement manufacturing capacity for 60% of the output from its Japanese fab in Miho.

3.  Electric power may be an issue for some time.  The obvious reason is that it will take a while to fabricate and install new nuclear power plants.  NIMBY is another issue, especially if damaged reactors begin to release radiation.  In addition, I think there are two non-obvious factors at work here as well:

–The main political platform of the post-WWII Socialist Party in Japan was anti-nuclear weapons, based on the damage done at Hiroshima and Nagasaki.  After the Cold War ended, the Socialist became the Social Democrats.  Their anti-nuclear stance transmuted itself into one against nuclear power plants.  The 21st century successor to the Social Democratic Party is the Democratic Party of Japan, which is in power now for the first time since a brief stint (before self-destructing) over twenty years ago.  Will the DPJ be as aggressively pro-nuclear as the Liberal Democrats, the other main party, were?  I don’t know…but probably not.

–The predominant feeling today is that the half-dozen or so nuclear reactors that aren’t completely stable or that have already failed, have done so because no one planned for a 9.0 magnitude earthquake or a tsunami.  I hope that’s right.

But in my experience, Japanese managers are under intense social pressure–in a way I as an American can’t really understand–to produce products that are up to specifications, and delivered on time and on budget.  It’s virtually impossible for a manager to endure the shame of letting down his company, his coworkers, his neighbors, the people he went to school with…by telling his boss he can’t do so.  That’s true, even if the requirements are completely unreasonable.

A manager may resolve this conflict by building a sub-standard product and asserting that it does indeed meet required specifications.  I’ve seen this phenomenon in many Japanese companies, including (unfortunately) one or two that I’ve owned, where apparently no one has checked the manager’s work.  Any hint of this practice in the nuclear reactor post-mortems could delay the approval of new nuclear plants.

Update: the LA Times suggests that two separate worker errors at one of the nuclear power plants owned by Tokyo Electric Power have increased the chances of a significant release of radiation into the atmosphere in Japan–escalating the political and stock market crisis there.  It now seems to me that the odds of an anti-nuclear backlash have risen significantly.

4.  Infrastructure being rebuilt will be state-of-the-art, and very energy-efficient, particularly so if there are delays in adding to electricity-generating capacity.

5.  What the private sector rebuilds, and where, is open to question.  Individuals will likely rebuild their houses, though perhaps on a more modest scale than they had.  But corporations with a freshly signed check in hand may opt to move production overseas, something they might feel constrained from doing under normal circumstances.

early stock market reaction

The Japanese stock market opened on Monday down almost 10% on news of the earthquake/tsunami damage but rallied to close down about 6%.  As I’m writing this on Monday night, another reactor explosion has been announced and the TOPIX is down another 4%.

Some people are arguing that this decline represents a buying opportunity.  They reason that money policy will be accommodative enough, and that reconstruction spending will give the economy a big enough fiscal boost, to break Japan out of the malaise it has been in for two decades.

I don’t agree.  I think that the core Japanese economic problem is its decision to defend the status quo of the 1980s rather than let creative destruction reshape the country to meet current and future needs.  The country has chosen to retain a traditional way of life, even if that means no economic growth.  While this remains so,  I continue to think that Japan is reduced to being a special situations market, not one you need to have general exposure to.  Of course, the current downturn is giving you a chance to buy special situation names relatively cheaply.

In New York, COH and TIF both sold off by more than 5% on Monday, on worries about their Japanese businesses.  I guess I can’t quarrel with that, given that both stocks are up 50% or so in the past six months.   Declines in LVMH or Hermès, which were down on the day by 2.5% and 3.5% respectively, despite the fact that both have arguably more to lose in Japan that either TIF or COH.  On the other hand, the Europeans haven’t been the recent market stars that the American firms have.

The main point with any foreign luxury goods firm in Japan, however, is that the market there went ex-growth during the recent recession.  Western companies have since switched strategies from expansion to extracting their invested capital as quickly as possible.

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Japan’s curious currency intervention

September 26, 2010 By in Asian economic development, Current Market Thoughts, Japanese development, Recent Market Action, Strategy Tags: , , , , , , , , Leave a comment

This is an update on my recent post about the sharply appreciating yen.

About a week ago, the Bank of Japan intervened in the currency markets.  It reportedly spent about $20 billion in a (so far) successful attempt to depress the value of the yen against the US dollar.  And as the dollar began to give back some of its 4% gain against the Japanese currency this past week, in response to the Fed’s indication it hasn’t ruled out further quantitative money easing, the BOJ is hinting it may not be done.

Experience and financial theory both tell us that intervention can do no more than buy a little time for a country to implement structural change.  But Japan shows no signs, to me anyway, of wanting to reverse its stance that preserving a traditional social order is its preferred alternative, even if it involves economic senescence.  So the money spent on currency intervention is ultimately wasted.  The BOJ certainly knows this.

The move wins Tokyo no friends in Washington, which is trying to pressure China into allowing the renminbi to rise.

Why intervene, then?  I think it’s an issue of partisan politics.  The Democratic Party of Japan was swept into office last year in a mandate for change from the corrupt money politics practiced by the Liberal Democrats. This shows voters’ extreme dissatisfaction with the LDP, since one of the DPJ’s leading lights is Ichiro Ozawa, who has long been associated with back-room money politics.

Having somehow escaped involvement in a recent corruption scandal that forced then-Prime Minister Hatoyama to resign, Ozawa decided to emerge from the shadows and challenge the new PM, Naoto Kan, for leadership of the DPJ.  Ozawa was resoundingly defeated.

I think the intervention was the price Mr. Kan had to pay to sway the votes of JDP party stalwarts in the Ozawa faction.  The timing of the intervention is one reason I’d cite in support of my opinion.  The second is the willingness of the BOJ, an independent body, to go along with an ultimately futile gesture.  However odd the present DPJ government, it’s certainly better than an Ozawa-led one–or a return to the LDP.

The BOJ has supposedly drawn a line in the sand at $1 = ¥ 82.  The parties seeking to push the yen higher are supposedly not the major global commercial banks but Japanese individual margin players.  If so, further substantial intervention may not be needed to maintain the status quo.  After all, the government can always tighten margin requirements.

From an equity investment point of view, however, the fact that the value of the yen is not front-page news shows how far into irrelevance the Japanese economy has fallen.  To my mind, Tokyo is now a special situation market, driven by smaller counterculture” firms.  They actually benefit from a stronger yen.

the sharply rising yen

September 1, 2010 By in Current Market Thoughts, economics, Japanese development, Recent Market Action Tags: , , , , , , , Leave a comment

the rising yen

Since the beginning of April the Japanese yen has risen by about 11% against the dollar.  Over the same time period, the currencies of Europe have  either held even or fallen against the US currency.  So this is not primarily a dollar issue.

At first glance, there doesn’t seem to be much reason for the move.  The domestic Japanese economy is weak.  Export champions continue along their well-worn track of loss of market share to nimbler Korean or Chinese rivals.  Last year’s reform promises from the Democratic Party seem to have had no more permanence than the cherry blossoms of the spring (see my post on the resignation of prime minister Hatoyama for more details).  In fact, with Ozawa loyalist Naoto Kan as the new PM, the sitting government, to my eyes anyway, is looking more and more like a rerun of 1980s-style Liberal Democratic Party administration.

Tokyo is even talking about intervening in the currency markets to stop the yen’s rise.  The just released results of a poll by the BIS illustrates just how futile a notion this is.  The survey reveals that the world currency markets have growth by about a third over the past three years and amounts to $4 trillion worth of trades each day. The ten largest bank participants account for three-quarters of the business.  How can any government compete with this size–much less one so heavily in debt as Tokyo.

So the economy’s dysfunctional–with even modest deflation for the past twenty years.  Interest rates are as close to zero as you can get.  Ordinary citizens are nostalgic for the “golden” days of the early nineteenth century, when Japan was isolated from the rest of the world.  How is this a recipe for a rising currency?  After all, it wasn’t that long ago that these attributes were ones that motivated international speculators to short the yen, not buy it.

As the endaka economy began to crumble as the Bank of Japan raised rates to cool speculative fever, the country chose, for good or for ill, to maintain its traditional way of life rather than to face its economic problems and restructure.  Periodic political attempts to revisit that decision have all failed, the latest being the election of the Democrats last year.  If this analysis is correct, the outstanding characteristic of the Japanese economy is that things just aren’t going to get better any time soon.

Odd as it may seem, I think this is what is attracting currency investors to the yen.

Real short rates in the US are negative; real short rates in Japan, even at zero nominally, are positive because of the country’s chronic deflation.  The only way this difference can express itself is through mild appreciation of the yen against the dollar.

Also, economically the worst is past for the US.  At some point, the domestic economy will become strong enough that the Fed will change its current extraordinarily loose money stance.   Then bond prices will fall.  We don’t have that worry in Japan.

Why now?

What made the currency markets decide to play this idea starting in April?  Maybe it was political developments in Japan.  It certainly shouldn’t have been signs of a slowing economy in the US, since that diminishes the chances of rising rates.

Twenty-five years of watching currency markets as an international equity investor have taught me that the currency markets march to their own drummer and are almost always way ahead of everyone else.  This is a short way of saying I don’t know.

But the political events in Japan were highly predictable.  So I don’t think they can be the reason.  Arguably, then, currency traders may be saying that the recovery in the US may be stronger than domestic markets expect and that rising rates are a more serious concern than we now realize.  That would fly in the face of the consensus, however.  We’ll see.