unrest in the Land of Wa

Contrary to market expectations, the Bank of Japan, that country’s equivalent of the US Federal Reserve, declined today to add to its already super-extraordinarily loose monetary policy.

Reaction in financial markets was in its own way extraordinary.  The yen rose by 3% against the dollar and Japanese stocks fell by three percent.  Not only that but ripples from the Tokyo decline have spread outward to Europe, and to the US in futures trading.

I can understand domestic Japanese distress.

Conventional economic theory says that if a country weakens its currency, lowers interest rates and ups government spending, all three forms of stimulus will act together to rev up consumer and corporate spending and thereby increase GDP.  Upward wage pressure will ultimately emerge, however.  This will create inflation, causing the economy in the end to settle back to its old, slower rate of real economic expansion.  But the nominal figures will be higher because of the now-higher inflation rate.

Abenomics has done all the stimulus stuff, adding to already huge government debt and substantially reducing the purchasing power of ordinary citizens in the process.  But there’s no sign of the economic growth or of the inflation (which Japan would love to swap for the deflation now plaguing it) that theory promises.  Worse than that, the recent upward movement in the yen, helped along by today’s surge, has undone about a third of the currency weakening the government engineered a few years ago.

There are lots of possible reasons why Abenomics has not worked–aging population; resistance to immigration; entrenched, incompetent corporate managements; two political parties (one = pro-farming, the other = pro-North Korea, pro-pachinko, anti-nuclear weapons) with little relevance for modern Japanese life.

None of this is new.  After all, Japan is more than halfway through its third decade of deflationary economic stagnation.

But why the flow-through to other markets?

Maybe this is just day traders’ reflexes and the weakness outside Japan will begin to dissipate once trading in New York begins.  On the other hand, the EU has more than a passing resemblance to Japan.  It’s just not quite as old.  Maybe that’s what the world is starting to be worried about.

 

 

 

 

 

Japan as a possible future for the US

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

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.

Toshiba and the Japanese business establishment

First there was the Fukushima Dai-ichi nuclear disaster, where nuclear power plants were installed incorrectly and both the utility and government regulators falsified inspection reports to cover this up.

Then there was Olympus Optical, whose tip management lost billions in stock market speculation because it was unwilling to restructure loss-making operations and covered up the fact for over a decade by fabricating its financial statements.

Now there’s Toshiba, which falsified results for years, under pressure from unrealistic profit goals set by a series of CEOs  (shades of Jack Welsh at GE).

 

Not that surprising, in my view, given the Japanese corporate world’s widespread adherence to a samurai-like code of absolute, unquestioning obedience to instructions given by older/more senior managers in one’s company.  After all, many of these enterprises have their origin in samurai cast adrift as regional warlords were marginalized during the early shogun days.

This mindset is also a reason why a lot of Japanese business is still stuck in the 1980s–that the world is changing at a fast clip, but you pretty much have to have white hair before anyone will listen to what you have to say.  To be clear, I don’t think this samurai-ness is a universal attitude in Japan as a whole.  Unfortunately,it thrives in the Tokyo/Osaka-based, export-oriented industrial sector which is the primarily beneficiary of the deep depreciation of the yen engineered by PM Abe.

Why don’t out-of-date sixty- and seventy-somethings just retire and let a younger generation take the reins?

For one thing, speaking as a sixty-something myself, it’s hard to go from being king of the world to being just another nameless retiree.

I think, however,that there may also be a deeper, more damaging reason than the ego problems of the people in charge:

One of the first companies I followed as an analyst was a small copier manufacturer/distributor.  The firm was in enough financial trouble that it bought breathing room by selling a large chunk of its plant and equipment and leasing it back from a bank.  That netted $50 million or so in cash.

Soon afterward, Carl Icahn bought  5%-10% of the company’s stock and threatened to make a hostile bid for the rest.  The firm quickly bought back Icahn’s shares for, as I recall, about a 30% premium.  I was shocked.  I didn’t get it at all.

Only when the firm subsequently went into Chapter 11 did I learn the CEO, a former accountant, had been fiddling with the books for years.  That fact was the real leverage Icahn had over his target, whether he knew it or not.  The CEO couldn’t let an outsider in, because the accounting shenanigans would be discovered and he would be disgraced.

I don’t know, but I suspect–because I’ve seen the same pattern in numerous smaller firms in Japan that Olympus and Toshiba are only the tip of the iceberg in Tokyo.  If I’m correct, Abenomics is even more problematic than I’ve been writing.

 

 

 

 

 

 

Abenomics and outside corporate directors

The original plan—and, in my opinion, fatal flaw—of Abenomics regarding reform of industry in Japan to make it more profitable was to depreciate the yen in a significant way that would supposedly compel now-more-profitable corporation to invest in expansion.  That would increase the number of employed and boost wages for all.  This would, in turn, generate a positive, self-reinforcing spiral of economic activity.

The depreciation has happened.  The hoped-for wage increases, employment gains and new investment haven’t.  This has been devastating for ordinary Japanese citizens, for whom a sharp decline in the currency has only meant an increase in the cost of living and a tremendous loss of wealth.

Tokyo has recently decided to try to force recalcitrant firms to use the increasing piles of cash that depreciation has brought them.  The vehicle is new legislation that mandates that publicly traded concerns install board members who are not insiders—that is, who have no connection with the firm.

The idea is that these fresh eyes and new voices will somehow compel companies to change their ways.  The initiative has received lots of praise from brokerage firms and the financial press.  For Japan’s sake, I hope they’re right.  Unfortunately for the country, my guess is that this enthusiasm is misplaced.

My son-in-law and I were talking about this the other day.  He immediately said what I have been thinking from the start—“What about Olympus?”

The Olympus in question if Olympus Optical (8831).

Several years ago, the head of that company’s European operations was made CEO of the entire company.  An outsider but an accomplished businessman, the new CEO found that he was not given the full access to corporate information he (justifiably) expected.  His requests for certain data were routinely deflected by the rest of the board.  Through a combination of whistleblower information and forensic accounting he conducted in secret, the CEO discovered a massive accounting fraud Olympus had been perpetrating since the early 1990s.  (The company hit hard times in the late 1980s.  Embarrassed, and unwilling to restructure, Olympus decided to supplement profits with stock market speculation.  The company, of course, experienced massive losses and covered the whole mess up.)  After confronting key board members, he ended up resigning and fleeing the country, saying that he feared for his life.

I’m not contending that the introduction of outside board members it going to create a whole raft of new Olympus-like incidents (although if there were a way to wager a small amount that there would be at least one, I’d be willing to bet).

am saying that I think the culture of protecting the status quo and of regarding any sort of restructuring as meaning creating/enduring life-shattering shame is still pervasive in Japan–and that simply adding a few outside directors won’t be enough to change that.

To my mind, the obvious thing to do is to dismantle the legislation enacted in the 1990s to protect Japanese companies from potential foreign acquirers–and therefore from activists.  But I don;t see that as on the cards any time soon.