News from and on Japan August 20 – September 2, 2017

Theresa May in karaoke? What rocket flew over Japan? The yen as safe haven, Toshiba’s continued troubles, Canon relocates its plants and … whaling

What has a North Korean rocket to do with the yen exchange rate? It was one of the surprises last weeks when the Intermediate Range Ballistic Missile (IRBM) Hwasong-12 travelled 2700 kilometres and reached a maximum altitude of 550 kilometres, before splashing into the sea about 1000 kilometres east of Hokkaido. The yen gained in strength. Moreover,  it is seen, even after this event as a safe haven, below an explanation.
Here comes the News from and on Japan from August 20 – September 2, 2017.
Latest news on North Korea’s nuclear test today at the end of this mail.
  • Politics:
    • The big news in the last weeks of August was obviously Kim Jong-un’s ballistic missile that flew over Hokkaido, Japan’s most northern big island. It was not for the first time that a North Korean rocket landed east off Japan (there have been 4 earlier rockets launched by Pyongyang, see https://en.wikipedia.org/wiki/North_Korean_August_2017_missile_launch_over_Japan), but this one was different: it was the first ballistic one and the previous rockets were fired by Pyongyang “to launch satellites”.  What types of rockets does North Korea have? The Center for Strategic and International Studies / CSIS showed the 11 types, class and range of its missiles, as far as we know. See also this footage by the Korean Central news Agency http://foxtrotalpha.jalopnik.com/that-ballistic-missile-north-korea-fired-over-japan-was-1798640118.
      Peace, or better: the absence of war is a delicate balance. The Financial Times reported that 2 days ago that North Korean fishing vessels were expelled from Japan’s territorial waters. Utmost care was taken not to make some of these wooden boats sink, but imagine what would happen if some North Korean fisherman were killed? Stumbling into war, we have seen that before.
    • Abe’s troubles with Trump could lead to his downfall”, headed the Financial Times. “A united front between Japan and the US over North Korea masks growing tensions”. North Korea, Trump’s retraction from the Trans Pacific Partnership agreement (revived by PM Abe without the USA), but also American sanctions against Chinese trade policies, it all make Japan’s Prime Minister walking on a tightrope. “The philosophical gap in the approach of both nations to trade is exemplified in sectoral discussions, which Japan wants to view through the lens of regional rules. More broadly, the US retreat from the region is a chance for Japan to create its own foreign policy independent of America. Sticking with the liberal international order is its long-term strategy. … But here lies a third major risk to Mr. Abe’s agenda. Sudden US disengagement weakens Japan’s position and leverage in Asia. Regional diplomacy will be considerably tougher for Mr. Abe.” 
    • Japan vs. China in Asia: that’s a challenging game for Japan when it comes to Overseas Development Aid. China has its “21st Century Maritime Silk Road” initiative, one of two pillars of President Xi Jinping’s Belt and Road Initiative. Japan promotes its “free and open Indo-Pacific strategy.” But in terms of funding China has the upper hand. “We can no longer reject cooperation with China, which has tremendous financial and technological power,” a senior official at Japan’s foreign ministry said. The Nikkei concludes that “Tokyo clearly needs to reinvent its ODA strategy to ensure that it can wield its limited financial resources to respond to China’s growing influence.”
  • Economy:
    • A North Korean rocket over Japan … and the yen as winner. Why is that?, asks Bloomberg. “The explanation for the yen’s attractiveness appears to be a combination of factors, chief among them the size of Japan’s foreign assets. They trump proximity to Pyongyang in the eyes of investors because, at times of tension, funds may be repatriated. That in turn would spur currency gains. Japan’s net foreign asset position is ‘very, very significant,’ according to Mitul Kotecha, head of Asia FX & Rates Strategy at Barclays Plc. The yen is therefore ‘always going to have this safe-haven bid when you do see bouts of risk aversion’”. Japanese purchases of foreign debt tripled to JPY 4.46 trillion yen (USD 40.4 billion) in July, the most in a year, according to figures from the finance ministry. The yen’s proven historical performance at times of global risk may also be a factor. Alongside Treasuries, the currency is the strongest “safe-haven” investment in periods of excessive volatility, according to a study in last November’s edition of Financial Markets and Portfolio Management, states Bloomberg.
    • Japan should prove happy hunting ground for buyback fans”, writes John Authers in Smart Money / FT. Why? “Japanese stocks have lagged behind the rest of the world since the beginning of last year, largely thanks to the strength of the yen. Foreign investors forever see a tight link between the currency and the stock market. Yet there has been strong profit growth, with pre-tax profits up 19 per cent year-on-year in the latest quarter, with a 6.6 per cent rise in sales for non-financials. Further, the arguments for de-equitisation in Japan are stronger than anywhere else. This has been true for more than two decades, thanks to Japan’s persistent low interest rates. Investors have long been disappointed by Japan but could corporate governance provide a catalyst? It is at least possible. Passive funds are not as influential in the Japanese market, and Japan is trying to improve corporate governance. It is early days, but there is some evidence that this is having an effect. Nicholas Smith of CLSA reported that 77 per cent of the companies whose CEO approval dropped below 85 per cent at last year’s annual general meetings subsequently went on to outperform. Companies are cash-rich. Unlike US executives, they do not have to deal with activist investors, or with the threat of leveraged buyouts. But the slightest increase in shareholder activism would raise the incentive for de-equitisation, by buying stock, paying dividends, or other means.”

  • Corporate:
    • The Toshiba saga reads like a classic Shakespearean drama: King Lear. The break-up of the conglomerate is caused by the need to sell some of its assets to cover Toshiba’s liabilities at its bankrupt U.S. nuclear unit Westinghouse. It’s chip unit, the world’s no. 2 producer of NAND chips, has to be sold – price between USD 17 and 18 bln – but this division is now at the mercy of Toshiba’s joint-venture partner Western Digital. Foxconn and a consortium with Bain Capital and Apple are possible buyers. Western Digital brings Toshiba to court, and its CEO, Steve Milligan stated that “As you know, time is not our friend. … The only people benefiting from this prolonged dispute are the competitors to our joint ventures.” King Lear dies at the end. Let’s hope that a once Blue-Chip company like Toshiba survives (Reuters).
    • Re-shoring or re-location of production facilities back to Japan is a big theme for Japanese electronics makers. Casio, Pioneer and now Canon are coping with rising wage costs in Asia, while production automation makes it more affordable to have Japan as a prime manufacturing location. “At a key plant in Oita Prefecture, the manufacture of some products is now more than 70% automated”, writes Nikkei. “Various business units are experimenting with automated production of office machinery and other equipment as well.”
    • When Danish windmill manufacturer Vestas was in trouble some years ago, Mitsubishi Heavy Industries stepped in, in particular in its off-shore windmill manufacturing operations. That is paying-off now: MHI Vestas Offshore Wind, the 50-50 joint venture between both companies, has won a tender over Siemens to supply 31 8MW wind turbines to be placed in the Deutsche Bucht, north of The Netherlands. Europe accounts for 90% of the global market for offshore wind power, and most of the facilities are in the waters off the U.K., Denmark, Germany, Belgium and the Netherlands, where the winds are strong and scaling up is relatively easy (Nikkei).

  • Society:
    • Japan’s whaling program: it is a sour point in the relations between Japan and many other countries. Sea Shepherd, the action ship owned by Sea Shepherd Conservation Society (SSCS), an international non-profit, marine wildlife conservation organization with its global HQ in Amsterdam, will not disturb Japan’s whaling fleet this year, according to its press release some days ago. See https://www.seashepherdglobal.org/latest-news/whale-wars-continue/.  
      There are more links between Japan and the Netherlands when it comes to whaling, see https://en.wikipedia.org/wiki/Whaling_in_Japan and  https://en.wikipedia.org/wiki/Whaling_in_the_NetherlandsBoth countries started whaling centuries ago but the Dutch halted their whaling activities in 1964 when they sold their whaling factory ship Willem Barendsz + whaling rights to … a Japanese company, Nitto Hosei, that sold it to Nippon Suisan. The ship was scrapped in Japan some years later.
    • UK PM Theresa May was in Japan to discuss a UK – Japanese trade agreement (to little success) and to secure the activities of many Japanese companies in the UK after Brexit. In Japan she confessed PM Shinzo Abe “It may be a shock to you all, but I’m not a great karaoke fan. I’ve never done karaoke, actually, I’m afraid.” The Guardian suggested that she takes up karaoke anyway as “Karaoke is a great unifier, bringing together the vocally skilled and the vocally challenged in one great, unabashed outpouring of noise and emotion.” The Guardian was so nice to suggest Mrs. May some songs that she could practice, incl. “I Just Don’t Know What to Do With Myself” (Dusty Springfield), “Sorry” (Beyoncé) and “Hot N Cold” by Katy Perry.
    • Prisons in Japan are no fun, I wrote some time ago on these pages. Well, that’s different in Nara where the juvenile prison (built in 1908)  will be converted into a 150-room hotel. The prison closed in 2016 due to concerns about earthquake resistance.  See attached article and https://video.asia.nikkei.com/detail/videos/editor-s-picks/video/5557263210001/a-prison-hotel-fit-for-tourists. When there is an earthquake I hope that the bar in the hotel-to-be will serve great cocktails that can help the guests to get shaken but not stirred. Another great new hotel-concept in Japan can be found here: https://blog.gaijinpot.com/millennials-kyoto-capsule-hotel/ Work, Nap, Work, Beer. Think outside the Box, Sleep insite the Box.
  • On September 3 North Korea had a new nuclear test, the strongest so far, claiming it was a hydrogen bomb that could be mounted on one of its ballistic missiles. A short explanation of a “hydrogen” or “thermonuclear” bomb, that is exponentially more powerful than nuclear ” fission” or “atom” bomb.
  • Japan Today writes that “Japan is debating whether to develop a limited pre-emptive strike capability and buy cruise missiles – ideas that were anathema in the pacifist country before the North Korea missile threat.”
  • The Japan News / Yomiuri Shimbun writes that North Korea, according to the statement carried by the state-run Korean Central News Agency, claimed that “all components of the H-bomb were homemade … thus enabling the country to produce powerful nuclear weapons as many as it wants.”
Have a fruitful working week.
Radboud Molijn