Bureaucrats, Parochialism, and the Japan Discount

Since Junichi Koizumi retired from the Prime Minister's post, Japan's reform efforts have not only derailed, but there has been a serious backlash against reform and creative destruction on multiple levels. While the government on the surface continues to encourage direct foreign investment, trends at the grass-roots level are very much the opposite.

How government bureaucrats and the bulk of Japanese corporate management really feel about shareholders has been made clear by the recent comments of METI vice minister Takao Kitabata, who dismissed day traders as capricious and irresponsible fools that do not deserve voting rights, and who sees (activist) shareholders as fickle and irresponsible in only taking limited responsibility while greedily demanding high dividend payments and threatening corporate managers as well as other shareholders.

Japan's phobia against takeovers is almost as strong as it was in the early 1980s, and has elicited consistent efforts to exorcise such agents, from Boon Pickens in 1989 to Livedoor and the Murakami Fund in 2006. In this light, TCI's (The Children's Investment Fund) efforts to effect better shareholder returns at J-Power is seen as a challenge to METI policy itself and a bit of battling windmills.

Efforts to fend off unwanted shareholders such as increased cross-holdings and the evoking of poison pills are of course a financial drag and a waste of resources. Eventually, poor corporate governance will only encourage more predatory investors and discourage the very long-term individual and institutional investors these companies are trying to attract. However, campaigning by foreign activists is more likely to cause Japanese management to further entrench rather than immediately change.

Indeed, we suspect a much stronger impetus for change at Japanese companies is the simple "Wall Street" walk. Continued selling by foreign investors--who now own about 30% of the market and account for over 60% of trading value--of companies with poor corporate governance, and of Japanese stocks in general, would be the most convincing wake-up call. Thus our advice to foreign investors is, "vote with your feet" if you don't like how a Japanese company is run.

Disclosure: No positions.

Comments

[User 181652]

<em>Since Junichi Koizumi retired from the Prime Minister's post, Japan's reform efforts have not only derailed, but there has been a serious backlash against reform and creative destruction on multiple levels.</em>

With all the talk about Sentaku being all the rage, do you think there's any chance the cycle's about to turn - especially with a LH election sometime in the next 17 months?

[DarrelWhiten]

Actually, I think the best thing that could happen is for the LDP to lose big in the upcoming elections, meaning they would lose control of the Upper and Lower Houses. The Lower House is more important because that is where budget control originates. If the LDP loses this, Japan will have its first truly two-party system--which we believe would work to make both parties mroe respondent to the voting public and help to elimnate over 40 years of pork barrel politics in the LDP.