What you need to know about Japan as an investor

This post is about what you need to know about Japan as an investor.

 

Welcome. Who are you, again?

This is what you need to know about Japan as an investor:

 

There is a hierarchy. You are not in it.

Not only are you not producing anything, i.e. a bloodsucking capitalist, but a foreigner at that.

I have never heard anyone actually saying “Why do we need foreigners’ capital anyway?”, but I regularly feel this when reading between the lines in the newspaper.

The top of the hierarchy, traditionally, is the Emperor. The Emperor’s distant relative is the sun goddess, and he nor she can do anything wrong. Ever.

Perhaps coincidentally, it turns out that most people can do nothing wrong, and this is more true the more politically connected you are. If there is a problem at a company, it is not one single person’s issue, it is everyone’s issue.  The CEO might figuratively take one for the team and step down, but only with the full knowledge that he will get a cushy advisory job shortly thereafter.  If you double your company sales through your gallant efforts, you will be awarded with…nothing. Nothing to a foreigner, that is, but you will have everyone in the company speak a little politer and bow a little deeper. This is de-facto socialism. If Russia had this kind of mentality, then communism would be still alive in that country today.

Although the Emperor does have a good part of central Tokyo for his own use, in reality, the top of the pyramid nowadays is “the model”.

The model

This is the model of state-backed capitalism, in which the government (actually, the bureaucracy) gets heavily involved in industry and banking in order to ensure “stability”, and that Japan is a net exporter so it does not need to go to other countries for capital.  Japan decided on this policy about a hundred years ago due to its difficulties with the gold standard. This model worked really well after the war and particularly in the 1970s and 1980s, when Japan was getting into the car and electronics businesses, and thanks to unlimited capital and the government selecting winners, Japanese companies were able to effectively take the whole electronics business at that time away from the USA, which was light years ahead. The mercantilists won in the short term, but check out Sony, Panasonic, and Toshiba’s earnings now. Japan still has a war-production mentality in many ways, such as companies over-investing in production capacity until recently, companies talking about market share more than profits, placing undue value on producing things (even at minuscule margins), and financing still favoring capital projects for exporters. This is changing, but things do not really change quickly without a ministerial ordinance.

The meddlers

The executive branch of the model is the sprawling bureaucracy. The bureaucracy decides everything of importance in the economy. If a major loan is to be made for a construction project, you can rest assured that the government is involved, or at least available for consultation, just in case. The bureaucracy will propose and approve mergers of importance. They will make “recommendations” to companies on what to invest in. And, they will issue and enforce endless ordinances specifying in detail exactly how corporate citizens should behave, sparing the need for a proper legal system with a real impartial judiciary. The judiciary is in the organogram, but somewhat off to the side. It could be excised completely with no real impact on the whole structure. In some cases, such as TEPCO and Iressa (AstraZeneca plus the government vs. bereaved families), people get sued, but this is rare because the bureaucracy is all-seeing and all-knowing, and why do we want a public trial where the dirty laundry will be shown for everyone to see? In Japan, “open” in terms of culture is as bad a word as “closed” is in English.

Quick tip: Avoid suing big business, the government or members of the bureaucracy (if you do, drop me an email to let me know how you are doing in 10 years’ time) – check out what happened with Iressa – eight years of legal fighting for less than one million dollars’ of compensation for many deaths, then overruled.

The pillars

By corollary, the next step down in the food chain is the manufacturer-exporter.  Being a manufacturing exporter (a large one at least) means that you are a pillar of the system. Your capital requirements will be met forever, you will never have any serious issues with the government, and suppliers will prostrate themselves at your feet. If a pesky foreigner comes along and tries to influence management, best just ignore them, or get some staff to bamboozle them until they go away.

Interestingly, one of my friends, who is a top manager at a TV station in Japan, and in line to get the top job one day, told me that he cannot change the way in which people work (the conversation was about trying to get people to go home early and make them more productive), because his boss (the CEO) would not approve of such a move. I then asked him whether he would change the system once he becomes CEO. The answer was no, because he would have too much responsibility towards his employees. That is the circular way in which the Japanese way of working, another system, is kept going, and this illustrates how there will never be any realistic debate about the operating model of Japan Inc.

Social responsibility

The employees of the manufacturer-exporter are effectively equal in standing to the company itself. After all, what is the purpose of a company if not to take care of its employees? Have the employees not worked hard every hour available in order to ensure that the company prospers? Surely it is only fair that the company repays such generosity of attitude with a paternal approach to governing all aspects of the employee’s life.

Banks

Banks are important because they can allocate capital to the favorite political project of the bureaucracy. And, on a smaller scale, they make sure everyone in their family is kept supplied with capital. Banks tend to have their own family of borrowers, often with cross-shareholdings, and there is never any question of not lending to within the family. If you work at a car manufacturer in the same family as a certain beer producer, you and your colleges will exclusively drink that brand of beer. We are all in it together, after all.

Except for extreme cases, there is no such thing as credit risk in Japan. Why would a bank not lend against the instructions of the Ministry?

An extreme case would be where a bank or credit union would fail due to a lack of political support, or a company like JAL which lost so much money that it started to look embarrassing.

Vassals

Below the exporter-manufacturer is the supplier. The supplier is an important part of the food web, but must be kept in line much more rigidly than their senior counterparty. They are basically not allowed to go bankrupt, because this would cause an inconvenience to the manufacturer-exporter, but excessive profits are certainly not permitted.

Cannon fodder

At the bottom of the food chain we have small businesses, temporary workers, and odd-lots not connected politically – these serfs are not essential in any way to Japan’s industrial glory.  Who cares if a ramen shop goes out of business. The same applies for all the other little people – which in Japan means unconnected people.

The customer

We should mention somewhere here the customer. The fact that I have put them here at the end does not mean that they are not important, just difficult to place. However, while “the customer is God” is true in Japan, every company has very high quality customer service, and as customers are not actually producing anything, considering them is not strictly essential to “the model”. In essence, the real customers are consumers in the US, and the best way to keep them happy is to keep buying treasury bonds, which is taken care of by the bureaucracy anyway.

So, where do you fit in?