http://www.feer.com/features/2008/april/Japans-Great-Leap-Backward
April 2008 Japan's Great Leap Backward by Marc Goldstein Posted April 10, 2008 Tokyo — Japan’s stock markets are caught in a vicious cycle, a downward spiral of take-over fears and flagging stock values that politicians and regulators seem incapable of bringing to an end. Sadly, the biggest losers here are not those who play the market, but those Japanese households that are unable to rely on the markets to provide an adequate return on the pension-fund assets invested there. Japan’s benchmark Topix index has fallen more than 25% over the past 12 months, compared to a near 5% drop in the S&P 500. Part of this decline can be explained by the pressure on Japanese earnings from the weak U.S. economy and the yen’s strength against the dollar, and by profit-taking by foreign investors. But there are other factors at work as well. In response to a series of (unsuccessful) hostile takeover attempts, Japanese companies have rushed to implement poison pills, rebuild cross-shareholdings, and otherwise protect themselves against even the possibility of a hostile acquisition. In the absence of a genuine market for corporate control and the attendant pressure on management, merger premiums still lag behind those in the U.S.—as do dividend payout ratios and returns on equity—meaning that the Japanese market offers neither developing country growth rates, nor developed country income. It is hardly surprising that foreign investors have been reducing their holdings of Japanese shares, and hardly surprising that Japanese investors have not been rushing to replace them. As stock valuations plunge, companies find themselves even more vulnerable to an opportunistic takeover, which only increases their motivation to take defensive steps, which in turn drive away ordinary investors, perpetuating the cycle. In the U.S., poison pills designed to lessen a firm’s attractiveness are supposed to be used by target company boards as negotiating tools to win better terms from a would-be acquirer, or a white knight. But in Japan, where boards are still dominated by lifelong employees, pills have been used to delay such negotiations or avoid them completely. The reluctance of domestic investors to file lawsuits in such cases means that boards get away with blatant entrenchment. In a sense, the return of cross-shareholdings—reversing 15 years of progress in unwinding such relationships—is even worse for the market than poison pills. As Japanese companies learned when the 1980s bubble burst, tying up corporate assets in the shares of a business partner is a risky strategy: By committing to hold such shares indefinitely, and vote them with management in all situations, corporate shareholders are denying themselves both a voice and an exit—a situation which is hardly conducive to maximizing the value of the investment. According to estimates by Japan’s Nikkei newspaper, the overall value of corporate shareholdings fell 30% in 2007-08, meaning that such holdings underperformed the Topix and the Nikkei 225. Yet out of fear of hostile takeovers, Japanese companies seem determined to ignore the lessons of the post-bubble years, and are continuing to buy shares. Mark-to-market accounting is forcing companies to take losses as the value of these holdings declines, and once again the falling profits and falling share prices reinforce each other in a vicious cycle. But cross-shareholdings do more than put corporate assets at risk. They reduce liquidity by lowering the free float, and send a signal to the market that ordinary shareholders’ interests are not a priority. Owning shares in a customer or supplier is bad enough, but companies in Japan’s steel and paper industries are buying shares in companies that are ostensibly their competitors. Why should a fund manager buy shares in a company whose own executives would rather use spare cash to invest in a rival than to invest in their own business? Japan’s Ministry of Health, Labor and Welfare has jurisdiction over the pension system, but is unable to regulate corporate behavior that threatens the solvency of that system. The Ministry of Economy, Trade & Industry, meanwhile, claims to want to increase foreign investment in Japan, but has also been helping companies block any investments they’re not ready to accept. And addressing the market downturn seems far down on politicians’ list of priorities. That leaves the Tokyo Stock Exchange, which could ameliorate the situation with stricter rules on free floats and concentration of ownership, and above all by requiring the appointment of independent directors to help protect shareholders’ interests. The TSE has historically been more attuned to the interests of issuers than those of investors, but if it truly wants to be one of the world’s leading markets, it will have to do more to ensure that the companies listed there are attractive investments. Japan’s pensioners and future pensioners have the most to gain from such a development. Mr. Goldstein is head of research at RiskMetrics Group/Institutional Shareholder Services in Tokyo. The views expressed here aren’t necessarily those of RMG. _______________________________________________ Marxism-Thaxis mailing list Marxism-Thaxis@lists.econ.utah.edu To change your options or unsubscribe go to: http://lists.econ.utah.edu/mailman/listinfo/marxism-thaxis
