More Japanese Polarization: Only the Truly Global Will Prosper

Foreign investors continue buying while domestic investors continue selling--yet another example of the “polarization” prevalent in Japan at present.

On the surface, Japan’s mutual fund industry has come roaring back, with total assets under management renewing historical highs. But Japan continues to rank eighth in the world in terms of its mutual fund industry, despite having the world’s second-largest economy and the second-largest pool of savings. Most of the rebound in mutual funds is actually being driven by individual investment in foreign currency denominated bond and equity funds.

The reasons that domestic institutions are selling Japanese equities actually have little to do with their confidence in Japanese stocks. New “Basil II” risk asset standards from April 2007 ostensibly will force domestic institutions to calculate the risk of rising rates on government bonds, and the stricter guidelines are discouraging investment in domestic bonds as well as stocks.

Strong equity market performance in 2005/2006 pushed portfolio equity weights well above “strategic” levels, and Japanese institutions have become enthusiastic users of alternative investments given the environment of record low interest rates.

Japan has also been slipping as a major financial center, and while the economy continues to emerge from the debilitating deflation of the past 10 years, corporate profits are at historical highs, and foreign investors are buying Japanese stocks in record amounts, Japan’s banks remain too dependent on the hope that BOJ rate hikes will fatten loan-deposit spreads.

Given weak global competitiveness, mature loan markets in Japan and a very slow-moving BOJ on monetary policy, we just don’t see that much to get excited about with the banks, especially after they have finished reporting reversals of loan-loss reserves which significantly boosted net income. We view them as mainly trading plays, and would certainly not give up on the secular strength in shipping, construction equipment and real estate merely on the conjecture that the BOJ may bump up Japanese rates one more time this year.

Comments

[Gen Kanai:]

Darrel, I appreciate your sentiment but who would you point to in Japan as a "truly global" enterprise.

I've worked for the "leading" Japanese automaker and the leading Japanese consumer electronics brand and neither enterprise was "truly global" by my own estimation (i.e. board of directors and senior executives 90%+ Japanese.)

2007 May 22 08:41 AM

[Darrel Whitten:]

Gen;

I would make a distinction between nationality of board members and "global mindset" as compared to the globally competitive nature of the business/products, i.e., is the company really globally competitive or not? I agree with Mitarai-san of Canon that "form over substantance" is not the solution to Japan's corporate governance issues, and for that matter, profitable investments in Japanese stocks.

Sure, Toyota has way too many board members by international "standards", yet they are one of the most respected (feared) automobile company in the world today. A relaively small company like Ushio Electric is also very respected for its niche products where they have global market shares in the 70%~80%. Japan's shipping companies operate in truly global markets and while not perhaps the most competitive firms out there, are nevertheless benefitting very nicely from global trends.

The point that I was trying to make is there is a big difference between firms who are able to leverage (benefit) from global trends as opposed to firms who are basically local clones of successful global business models, which in my mind includes may of the "new economy" Interntet companies listed on the Junior markets whose businesses are now struggling, but for which investors paid high premiums for when they were first listed.

2007 May 23 09:54 AM

[jason.Gudaitis:]

Nintendo

2007 May 22 09:56 AM