Tag Archives: Japan

China and Japan weight in on the US debt ceiling debate

October 8, 2013 By in China, Current Market Thoughts, economics, Hong Kong, Japanese development, Recent Market Action, Strategy Tags: , , , , , , , , Leave a comment

China and Japan are our two largest foreign creditors.  Beijing holds $1.3 trillion in Treasury securities and Tokyo $1.1 trillion.  Together, they account for 21% of all public holdings of Treasuries, and 45% of foreign lending to the US government.  So what they say counts for a lot.  Of course, whether they choose to roll over their Treasury exposure as it matures counts for a lot more.

Needless to say, neither is thrilled by the current shenanigans in Washington   …but for different reasons.

Japan is worried that a US default would cause a decline in the US$ and a flight to safety in the ¥.  Japan has spent the last year engineering a sharp depreciation in its currency as part of a last-ditch effort to revive its moribund economy.  The last thing it wants to see is one of the three pillars (or “arrows”) of Abenomics, a weak yen, destroyed.  (On the other hand, there’s still no evidence that the third, and most crucial, arrow–reform of antiquated corporate business practices–will ever leave the quiver.)  What I find interesting about this attitude is that there’s no trace of the deference toward US interests shown by a prior generation of Japanese leaders–men who believed their loss of WWII obligated them to act this way.  No surprise here, except maybe to  politicians in Washington.

China is expressing concern that its very large investment in the US could lose value as a result of political stalemate in Washington.  In itself, this isn’t much of a surprise, either.  China has been working for several years to reduce its exposure to US government debt by spending its large surplus of dollars as fast as it can.  No matter what the outcome of the debt ceiling issue in Washington, Beijing will doubtless redouble its efforts to reduce its Treasury exposure.

The way it has framed its concern, however, should be sending chills down the spines of any US entity with direct investments in China.  Beijing points out that China has large investments under the stewardship of the US–predominantly Treasuries.  Conversely, the US has large investments under the stewardship of China–in the form of manufacturing, distribution and retail ventures that US corporations have established there.  The two governments have reciprocal obligations toward each other.  The US must be a responsible steward of China’s investments; China, in turn, must be a responsible steward of foreign direct investment from the US.

The implication is that US failure in its obligation releases China from its duty.

If I’m understanding China correctly, the negative consequences for US companies with China businesses of the current goings on in Washington may be far greater than I think Wall Street realizes.

If so, very bad for the US.  From a practical standpoint, probably better to get China exposure through the Hang Seng than the S&P.

Third Point, Sony and Abenomics

August 8, 2013 By in Asian economic development, economics, Japanese development, Recent Market Action, Strategy Tags: , , , , , , , , , , 4 Comments

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.

Bain Luxury Goods Spring update (II) : structural changes in the luxury market

June 21, 2013 By in Asian economic development, Bain luxury goods study, China, economics, Hong Kong, Industry Analysis, Japanese development, Luxury goods, Retail, Stock ideas Tags: , , , , , , , , , , Leave a comment

structural changes

Yesterday I wrote about Bain’s analysis of prospects for global luxury goods sales in 2013.  Today, I’m going to take a look at what the consulting company perceives as possible structural changes in the worldwide luxury goods market.

There are two big ones:

Asian tourists remaining closer to home

Japan:  Twenty years + of economic stagnation had finally begun to take a toll on the seemingly insatiable Japanese demand for European luxury goods a few years ago.  Recent sharp devaluation of the yen has depressed this appetite further.  Skeptics (like me) of the ultimate success of Abenomics must believe that this is a permanent change.  Given that, pre-devaluation, the price of luxury goods in Japan has typically been much higher than elsewhere, the negative effect of lower Japanese spending on the profits of luxury goods manufacturers will probably be disproportionately high.

China:  Weakness of the renminbi vs. the euro is a mild negative.  More important, Bain points out that Chinese luxury buyers are beginning to turn away from Europe toward Macau, Hong Kong and Australia as vacation destinations.  On the surface, it shouldn’t make much  difference whether Chinese customers on holiday buy in France or Cotai.  However, the change in vacation travel venue may give a significant opportunity for budding Pacific-based luxury brands to take business away from European rivals.  I think this is already happening.

the Baby Boom passing the baton

Bain characterizes the luxury goods preferences of different age groups as follows:

Baby Boomers (55+)  want:

–a bricks and mortar store

–a one-to-one interaction with a salesperson who represents the brand ans who also knows them well

–high-priced scarce or one-of-a-kind items that they think confer status on them individually as people of unusual taste and means

–a formal buying ritual.

In contrast, Generation Y (20-35) and Generation Z (0-20)–i.e., the children of Baby Boomers–want:

–instant availability 24/7, whether through physical stores or online makes no difference

–to be defined by brand values, but to be able to influence those brand values as well

–unique or novel items, which are not necessarily the most expensive, but which are personalized and which identify them as members of a certain group

–to be entertained.

In a nutshell, this is the difference between buying statement jewelry in a private room and buying a handbag in an online flash sale.  The branding, selling and infrastructure skills differ greatly from the first transaction to the second.

This difference in outlook is increasingly important, because the Baby Boom is retiring and its children are emerging as a new generation of luxury buyers.  One might even argue–with how much validity I’m not sure–that the sudden drying up of demand for traditional high-end European luxury goods in Japan is mostly a function of an aging population and a shrinking workforce.  If so, we may begin to see the same phenomenon in Continental Europe before this decade is out.  Again if so, luxury goods companies that don’t refocus themselves to cater to the preferences of a younger generation of consumers will find themselves struggling to retain relevance.

an Abenomics scorecard

June 6, 2013 By in Current Market Thoughts, economics, Japanese development, Recent Market Action, Strategy Tags: , , , , , , Leave a comment

summing up Abenomics

Abenomics is the name given in the press to the radical macroeconomic rescue policies promiseded by Japanese Prime Minister Shinzo Abe in his successful election campaign last year.

The idea is to try to end a quarter-century of economic stagnation through the firing of three “arrows”:

1.  a massive increase in the domestic money supply

2.  further stimulus through deficit government spending, and

3.  structural reform legislation.

In many ways, this is an all-or-nothing bet.

Arrow #1, which is already in flight, has triggered in a massive 20%+ devaluation of the Japanese currency–and a consequent staggeringly large loss of national wealth.  Arrow #2, which is in the bow, will add to Japan’s massive national debt–run up to dangerously high levels through decades of politically motivated but economically wasteful porkbarrel government spending.

The consensus view of economists throughout the world, which I believe is correct, is that this “all in” bet depends crucially on the success of Arrow #3.  My view has been, and still is, that it will never leave the quiver.

For  Japan’s sake, I hope I’m wrong.

the Japanese stock market as barometer

I’m writing this post to make two points.

1.  One of the main arguments being used for the potential success of Abenomics in jump-starting the Japanese economy is the strong performance of the Japanese stock market since last July.  This performance, however, is considerably less than it’s made out to be.

From the low point for Japanese stocks last July 26th to the peak of the market (so far) on May 22nd, the main indices rose by about 85% in local currency terms.  They’ve since fallen by almost 18%, for a net gain in ¥ since July of 50%+.

Factor in the currency loss and the return in US$ is 20.2%.  That’s almost precisely what the S&P 500 has done over the same time period.  It’s well below the 35%+ gain in US$ that European stocks have posted.

2.  To my eye, the daily fluctuations in the Japanese stock market over the past ten months have been uncharacteristically wide.  This suggests to me that the main actors in the market have been foreigners.  Not just any foreigners, either.  I suspect the current market bulls are top-down investors driven by general macro concepts–and without much knowledge or experience of the Japanese economy or its securities markets.  I don’t detect any great desire for Japanese professionals to participate.

I’m not sure what this means, if I’m correct.  My experience is that Japanese institutions don’t often cover themselves with glory in their domestic stock market.  On the other hand, they have the inside track in assessing what is/or is not possible politically.

 

In short, I think there’s much less positive about Abenomics than meets the eye.

 

 

 

I’ve been VERY wrong about the Japanese stock market

May 16, 2013 By in Asian economic development, economics, Japanese development, Portfolio management, Recent Market Action, Strategy Tags: , , , , , , , , , , Leave a comment

The Liberal Democratic Party retook control of the national government in Japan late last year on a platform of massive monetary stimulation aimed at shocking the economy out of its quarter-century of torpor.

Most economic effects have been as expected.  The ¥ has lost about a quarter of its value.  This has given export-oriented industries a big boost.  The price of imports has risen by enough, however, that the overall effect of devaluation on Japan has been slightly negative so far.  The trade balance will doubtless improve as Japanese citizens adjust to the tremendous drop in their standard of living that the devaluation has brought about.

Where I’ve been wrong has been in handicapping the behavior of the Japanese stock market.  In the only other recent episode of a big fall in the ¥, the Topix index (Tokyo large caps, the index professional investors use) rose as the currency declined, but only by enough to keep a dollar-oriented investor from losing money.  Yes, export-oriented stocks did better than Topix, but the overall index was unchanged in dollar terms.  I thought something similar would happen again.

Not this time, though.

Since the Abe administration took office and made it clear it would carry out its campaign promise, the Topix is up by 66% in local currency terms, meaning a dollar-oriented investor in the index has made a 25% gain.  Buyers of down-and-out consumer electronics firms like Sony have made twice that.  The long-Topix, short-¥ trade has made a killing.

As I see it, the rise in the Topix has been driven by foreigners.  Locals–never, in my experience, the canniest of investors–have  been mostly using the opportunity offered by devaluation to declare victory in their foreign investing forays and are bringing money home to put into things like real estate.

Press reports indicate new investors in Japanese stocks, including high-profile Western hedge funds, believe very strongly that the change in money policy also heralds a new era of openness to structural economic reform by Tokyo, and that foreigners will be allowed to play a significant role in the latter process.

My view, based on almost 30 years of watching Japan, is that Tokyo insiders regard devaluation as a substitute for reform, not a precursor.  I’d point to the experience of former Prime Minister, Junichiro Koizumi, who was given an overwhelming electoral mandate for reform but who resigned as PM after five mostly fruitless years (2001-2006) of trying to effect change.  As soon as he left, the Diet immediately began to reverse the progress he was able to make.

For Japan’s sake, I hope I’m wrong again.  But I’m not willing to bet on the possibility.  As for the new wave of foreigners, I find it hard to figure whether they have a much more sophisticated read on the political process in Tokyo than I do or whether they’re completely clueless.  Given that reversal of the deep social/political aversion to disruptive change should make me wildly bullish about Japan, in some sense I must think the latter is more probable.  My official position, though, is that I don’t choose to bet.