Tag Archives: Japan

inheritance tax changes as a lever for structural change in Japan

May 18, 2015 By in Asian economic development, family owned companies, Japanese development, mergers and acquisitions Tags: , , , , 1 Comment

value investing and corporate change…

One of the basic tenets of value investing in the US is that when a company is performing badly, one of two favorable events will occur:  either the board of directors will make changes to improve results; or if the board is unwilling or incapable of doing so, a third party will seize control and force improvements to be made.

…hasn’t worked in Japan

Not so in Japan, as many Westerners have learned to their sorrow over the thirty years I have been watching the Japanese economy/market.

Two reasons for this:

—culturally it’s abhorrent for any person of low status (e.g., a younger person, a woman or a foreigner) to interfere in any way with–or even to comment less than 100% favorably on–a person of high status.  So change from within isn’t a real possibility.

–in the early 1990s, as the sun was setting on Japanese industry, the Diet passed laws that make it impossible for a foreign firm to buy a large Japanese company without the latter’s consent–which is rarely, if ever, given.

The resulting enshrinement of the status quo circa 1980 has resulted in a quarter century of economic stagnation.

Abenomics to the rescue?

Abenomics, which intends to raise Japan from its torpor, consists of three “arrows”–massive currency devaluation, substantial deficit government spending and radical reform of business practices.

Now more than two years in, the devaluation and spending arrows have been fired, at great cost to Japan’s national wealth–and great benefit to old-style Japanese export companies.  But there’s been no progress on reform.  The laws preventing change of control remain in place.  And there’s zero sign that corporations–many of whose pockets have been filled to the brim by arrows 1 and 2, are voluntarily modernizing their businesses.  Mr. Abe’s failure to make any more than the most cosmetic changes in corporate governance in Japan is behind my belief that Abenomics will end in tears.

One ray of sunshine, though.

Japan raised its inheritance tax laws at the end of last year, as the Financial Times reported yesterday.  The change affects three million small and medium-sized companies.

The top rate for inheritance tax is 55%, with payment due by the heir ten months after the death of the former holder.   This development is prompting small business owners to consider how to improve their operations to make their firms salable in the event the owner dies.  More important, it’s making them open to overtures from Western private equity firms for the first time.  Increasing competition from small firms may well force their larger brethren to reform as well.

For Japan’s sake, let’s hope this is the thin edge of the wedge.

 

 

overnight: sharp drop in the yen, global stock market rally

October 31, 2014 By in economics, Japanese development, Long-term themes, Strategy Tags: , , , , , , , Leave a comment

what’s going on

A month or so ago–I don’t remember the exact timing–the Japanese central bank expressed concern that its weak yen policy was great for export-oriented companies but was hurting ordinary citizens, since food, fuel and other daily necessities are generally priced in dollars.  So these items cost a quarter or a third more today than they did before Abenomics kicked in.  The Bank of Japan intimated strongly that, because of the deterioration in citizens’ living standards, it was no longer interested in further yen weakness.

This morning in Tokyo the Bank reversed course and voted 5 – 4 to increase the amount of extra money it’s pumping into the economy, in what is now an all-out effort to create 2% inflation.

The yen has dropped by about 2.5% against the dollar, as I’m writing this just at the NY open.  The Japanese stock market rose by about 5% on the announcement.  Europe and US stock index futures are up as well.

my take

As I’ve written, probably too many times, I think Abenomics will end in tears.  Continuing currency weakness will just make the ultimate bad outcome worse.  That’s because I believe the root cause of Japan’s quarter-century economic malaise is that the country has chosen to defend its traditional way of life at the expense of economic progress.  One result has been to perpetuate a culture of covering up industrial/manufacturing mistakes.  Fukushima Daiichi is a terrible example; Takata airbags are the latest.  Impossible legal and cultural bars, many erected in the 1990s, still exist to removing from power people at the top of the pagoda, so to speak.

Continuing currency weakness will, in theory, buy more time for change to occur.  Admittedly, I’m no longer in close contact with the Japanese economy, but I don’t see any signs that effective change is happening.  Without it, the depreciation of the yen will mostly mean a massive loss of national wealth–and more time in power for incompetent industrialists.

(In my view, France and Italy have almost exactly the same issues.)

So, while the new tide of central bank money into the world will likely make markets move higher for a while, its main effect will probably be to smooth over economic bumps in the road for the US and China.  We should enjoy the ride.  But we’ve also got to think about how to defend ourselves from the ultimate negative consequences for Japan–and anyone who does business with/in the Land of Wa.

 

 

 

crunch time for Abenomics in Japan

May 27, 2014 By in Asian economic development, economics, Japanese development Tags: , , , , , , , 2 Comments

The economic program of Prime Minister Shinzo Abe to revitalize a Japanese economy that has been dormant for a quarter century has three main points, or “arrows”:

–increased deficit spending by a national government already very deeply in debt,

–loose money policy to weaken the currency, making Japanese industry more competitive while supporting the dismantling of a raft of protective practices that have debilitated a once-powerful industrial base, and

–the corporate overhaul itself–the elimination of a nexus of laws and policies that have perpetuated now-outmoded industrial practices from the 1960s-1980s, and which have  also made it virtually impossible to replace the incompetent top managements that have run many Japanese companies into the ground.

Arrows #1 and #2 have been fired successfully.

To my mind, however, Abenomics has always been about the government’s ability to fire arrow #3.

That’s not going so well.  More than that, almost thirty years of watching the Japanese economy and Japanese politics have made me skeptical that meaningful structural change is possible.  The forces of the status quo are just too strong.  That’s also despite the will of Japanese citizens that such reform take place.  (In many ways, too, I see Japan today as like the Ghost of Christmas Future for the US.)

the Kuroda message

Late last week, an interesting thing happened in Tokyo.  In an interview with the Wall Street Journal, Haruhiko Kuroda, a career politician who is currently the head of the Bank of Japan (the equivalent of the Fed in the US), urged Mr. Abe to get going on structural reform.  “Implementation is key,” he’s quoted by the WSJ as saying, “and implementation should be swift…The major work to be done is by the government and the private sector.”  Bad things will happen to the economy otherwise.

Mr. Kuroda’s bluntness contrasts sharply with the wishy-washy statements en Bernanke has made before the US Congress about the need for supportive fiscal policy–none of which has been forthcoming–to aid the recovery in the US.

Of course, the stakes are much higher in Japan, where currency depreciation has caused a loss so far of about a quarter of the nation’s wealth, and a corresponding reduction in living standards for average citizens.  This enormous cost can only be justified if it results in structural reform.  But so far just about nothing has happened.

what needs to be done

Yes, Mr. Abe pointed out to the Journal in a response to Mr. Kuroda that electricity prices have come down and that protection of domestic rice farmers has been reduced a bit.

On the other hand, all the legislation enacted in the 1990s to prevent foreign companies from having any influence in the running of Japanese firms (takeovers of any size are virtually impossible) is still on the books.  Shareholder activists, foreign or domestic, are as unwelcome as ever.  Major Japanese investment institutions, presumably with government “guidance,” continue to take a hands-off attitude toward the companies whose stock they hold.  And companies themselves, other than perhaps the autos, seem to be in no rush to modernize the industrial practices that have caused so much economic hardship since the 1990s.

And, as Mr. Kuroda observes, time is running out for Japan.  The kind of positive jolt that deficit spending/currency devaluation/uslta-loose money give to an economy only lasts for a few years.  Without other changes, an economy gradually settles back into its former lower-growth state, only with higher inflation.  In other words, the economy in question is worse off than it was before.

For the sake of Japanese citizens, I hope Mr. Abe starts working on arrow #3 before it’s too late.  Unfortunately, almost thirty years of watching Japan tells me he’ll end up posturing a lot but doing nothing.  The only chance I see for a better outcome is if other politicians follow Mr. Kuroda’s lead and begin to speak out.  Unless/until this happens, I think the Tokyo market will continue to be an unpleasant place to be.

 

 

 

 

 

gambling stock arbitrage

December 17, 2013 By in Asian economic development, Casinos, Entertainment, Hong Kong, Industry Analysis, Japanese development, Macau, Securities regulation, Stock ideas Tags: , , , , , Leave a comment

on a winning streak

Macau gambling stocks have been on a tear recently.

During the past three months, the S&P 500 is up by 4.5%, the Hang Seng down by 1.8%

Over the same time span, Galaxy Entertainment (HK: 0027) is up by 24.4%; MGM China (2282) is up by 30.3%; Sands China (1928) has gained 32.8%; and the current star of Hong Kong (although a severe laggard until the current run), Wynn Macau (1128) is up by 40%.

The three months have seen advances by the US parents of the Macau gambling stocks, as well, but of a lesser magnitude.  MGM is up by 12.5%. LVS by 21.5% and WYNN by 21.9%.  MPEL, an unusual situation, is ahead by 25%.

arbitrage situation?

This performance differential has created an unusual valuation situation:

—WYNN, for the first time I can remember, is trading at a slight discount to the value of its interest in Wynn Macau, meaning the company’s US holdings–the brand name, royalty/management fees from 1128, and the Las Vegas operations–are being valued on Wall Street at right around zero.

—LVS is a less clear case, since its valuable Singapore gambling subsidiary is 100%-owned, and therefore not publicly traded.  Still, LVS’s interest in 1928 represents about 3/4 of the parent’s market cap.  Even if we valued Marina Sands at 40% of the worth of Sands China, a figure I think is too low, the total of the two subsidiaries represents about 115% of LVS’s worth on Wall Street.

—MGM, in my view still by far the weakest of the Las Vegas Big Three, doesn’t get my hands racing to fill out a “buy” ticket.  But MGM does look far less risky than it has seemed to me in the past.  That’s because the value of its holding in MGM China now represents over 70% of the parent’s market cap.

why the strength in Hong Kong?

…and why should 1128 be leading the pack?  After all, Wynn Macau is presently capacity constrained, and its new casino complex won’t open until 2015.

I think the ongoing rebound in the Macau gambling market is part of the reason the stocks are strong.  Wynn Macau has been getting attention because it has been a severe laggard among the Macau casino companies in Hong Kong trading over the past year.  But I think there’s another important reason as well:

To my mind, the Hong Kong market has already understood the enormous potential size of the mainland gambling market in a way it failed to do initially.  I think it also has come to appreciate the earning power of the Las Vegas gambling model, which it woefully underestimated at first.  Now, the mind of the market, realizing that Macau has a superior product, is turning to the possibility that the Macau gambling companies can duplicate their success in other areas.  The catalyst for this is the introduction of a bill in the Japanese Diet to legalize casino gambling in that country.

What I think we’re seeing now is an anticipatory reaction to the possibility that one or more of the Macau gambling companies will get a Japanese casino license.

buy the parent or the subsidiary?

This is an age-old question–the pure play or the place where the brains of the operation have their own money.

The standard answer is that the safer place is with the parent, but the greater initial sizzle is with the subsidiary.

this situation is a little different

1.  It isn’t clear that everyone in Macau has the money or the inclination to apply for a license in Japan.

2.  It’s not a lock that everyone who applies will pass the local “suitability” tests.

3.  It isn’t clear what part of some of the various companies would hold a Japanese license.  A lot probably depends on the tax regime, but my initial thoughts are:

–for Galaxy Entertainment (0027) there’s no issue

–for WYNN, I presume a license would be held in 1128

–in the case of MGM, having a license inside 2282 means holders of the parent only have a half interest

–for LVS, it’s harder to say, since the company already has two completely unconnected Asian subsidiaries.  It could easily establish a third, meaning that Sands China holders would be left out in the cold.