News from and on Japan from June 25 – July 8, 2017

Political upheaval after last Sunday’s Tokyo elections, corporate governance in Japan, squaring the melon, less tax for Mr. Abe and again: Toshiba

Last week saw a wake-up call for PM Shinzo Abe when Tokyo’s Governor Yuriko Koike won big in the elections in this metropolis. At the same time, Abenomics seems to work-out well – after quite some years, reported MUFG Morgan Stanley. But there is more to report on the developments in Japan in the last two weeks:
  • Politics:
    • It was a regional election, albeit in one of the biggest cities in the world Tokyo, so this is not about national elections but … Ms. Yuriko Koike’s victory on Sunday July 2 can’t be ignored. “Prime Minister Shinzo Abe’s Liberal Democratic Party (LDP) suffered a historic defeat in the Tokyo metropolitan elections. Though on one level, the election was about how Tokyoites felt about Governor Yuriko Koike’s year in the governor’s office so far, on another level, it was a condemnation of the LDP’s ‘arrogance’ in the past months. Abe accepted the results as a ‘very severe judgment’ on his administration”, writes The Diplomat, an online Tokyo based magazine. The 3 million dollar question is: will Ms Koike run for the nations’ highest job in some years?
    • But PM Shinzo Abe won big last week when signing the EU – Japan Free Trade Agreement – that is yet to be ratified. The EU – Japanese trade makes up for 30% of the world GDP, so this trade agreement is no small issue. What is it about? Abolishment of import levies on a wide variety of products like Japanese cars (10%), Japanese car parts (3 – 4%), wine from Europe (15%), European cookies (13 – 15%) and chocolate (10%). There will be winners and losers and for Japan’s agriculture sector it is “change or die”. Read this article in Japan Today and see why whisky from Scotland might be a victim. Brexit …
    • How difficult is it to enter politics in Japan? Well, one hurdle to take is money, as deposits to be paid by candidate politicians can be high. The Economist carried an article on the difficulty for newcomers to compete with the vested parties. Kokumin Ikari no Koei, The angry Voice of the People, was a start-up political party that aimed to win 10 seats; when the voters proved to be less angry than anticipated, the founder (a political scholar) was left with a debt of JPY 60 million, the price of a nice apartment in Tokyo. “Never again”, he claimed.

  • Economy:
    • “Japan’s economy gains momentum in struggle to escape deflation”, heads Bloomberg. “The positive output gap shows Japan is making progress toward becoming a normal economy,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley in Tokyo. “We are now in a similar situation as before the Lehman shock in 2008, when Japan enjoyed a prolonged recovery thanks to a global economic expansion.” But like in many other aspects, Japan is a country of evolution rater than revolution, so reaching a 2% inflation level, the Bank of Japan’s target, will take considerable time.
    • Less tax than projected: Japan’s fiscal 2016 tax revenue came in around JPY 2.1 trillion (USD 18.5 billion) below the initial forecast – and that is no good news for a government that has to cope with a debt of over 250% of its GDP. “This was the country’s first drop in tax revenue in seven years, falling by 800 billion yen from the previous year to roughly 55.4 trillion yen, the Ministry of Finance announced Wednesday. When the government drew up the budget in December 2015, it estimated fiscal 2016 tax revenue at JPY 57.6 trillion. In January 2017, that figure was revised down by 1.7 trillion yen and again later by 400 billion. The ministry has blamed the decline largely on special factors. But critics say the government’s projections were overly optimistic.” (Nikkei)
    • GPIF or Japan’s Government Pension Investment Fund is the world’s largest pension fund with staggering assets of over USD 1.3 trillion, “enough to buy Apple and Exxon Mobil and still have change” (Bloomberg). GPIF returned 5.9 percent, or JPY 7.9 trillion (USD 70 billion), in the year ended March 31, which was very different from its performance in 2016 when it lost USD 51 billion. By the way, the # 4 largest pension fund in the world is Dutch ABP. 

  • Corporate:
    • Three articles on Toshiba, the embattled Japanese corporation. “Six months into its financial crisis, Toshiba is shaping up as the Sistine Chapel of corporate catastrophes: you have to lie on your back to appreciate its scale, and once you get your eye in, the beauty is mesmerising”, writes Leo Lewis in the Financial Times. “Previous crises – like those at Olympus or Kanebo could be passed off as company-specific. Toshiba, in its role as exemplar of corporate Japan, gives no such leeway: its problems are Japan’s problems.” Toshiba is suing its partner in semiconductor manufacturing Western Digital, it risks to loose its status as a TSE 1 listed company and its auditor refuses to sign off on the accounts for the most recent financial year.
    • The company has to act quickly in order to prevent a bankruptcy, so it is looking for unconventional solutions. it now discusses a credit line with its main lenders but “rather than using the traditional route of pledging shares as collateral, the new loans will involve Toshiba depositing with its banks a number of share certificates in the chip business, which was spun off this year in preparation for a sale.”
    • It sold already its medical equipment business to Canon Inc for USD 6 billion last year. There are plans to list Toshiba’s smart meter business Landis+Gyr, but that will not plug the gap. Toshiba turned down offers from buyout group CVC and industrial conglomerate Hitachi to buy the business for almost USD 2 billion earlier this year, sources have said. Toshiba cannot raise cash by issuing shares because of restrictions imposed by the bourse after the 2015 scandal (Nikkei).
    • “Japan’s push to improve corporate governance began in earnest only recently”, writes the Nikkei.  “The government of Prime Minister Shinzo Abe, who took office in 2012, made corporate governance reform one of the three main pillars of its economic policy. In 2014, the Financial Services Agency introduced the Japanese version of the U.K’s Stewardship Code for institutional investors. The following year, the agency, together with the Tokyo Stock Exchange, introduced the Corporate Governance Code to encourage listed companies to try to raise their corporate value.” Attached a long read on Japanese corporate governance changes. 

  • Society:
    • Tragedy in Kyushu: floods and mudslides caused by heavy rainfall of sometimes more than 50 mm an hour resulted in at least 15 people dead and over 20 not accounted for. The government dispatched 12,000 people incl. members if the Self Defense Forces, the police and firefighters (Japan Today). More heavy rain is expected in the coming days. The northern part of this beautiful island is a region that is prone to flooding. In 1953 the torrential rain of the rainy season, amounting to more than 1,000 mm on Aso and Hikosan mountains, produced the great flood to many rivers such as Chikugo River and the toll of more than 1,000 people dead and missing. 450,000 houses were flooded and 1,000,000 people suffered from the flood. The fundamental change of flood control in the Kyushu area was needed and the standards of flood control have been taken against further floods (Wikipedia).
    • Squaring the circle, that’s what I always have to think about when I see square watermelons in Japanese supermarkets. Why are they square? A square melon is simpler to transport, but the taste is the same as its round sibling. So, why not improve the square melon? Japan Today reported on the Suika (watermelon) Pan (bread). That is even not the end of the story: best to toast your slice of Suika Pan! So we have a round water melon, make it square, disguise it as bread and treat it as toast …
    • Japanese service … that is not squaring the circle but trying to make the circle even more circle. American Express asked customers in various countries the following question: “I take my business elsewhere after one bad service experience”. The answers will not fully surprise you but the majority of Japanese respondents (56%) claimed that they will not come back. Americans, Canadians (32%) and Hong Kong-ers (23% are more forgiving. I wonder what the answers would be in The Netherlands. Our famous phrasing “moet kunnen” does not sound very much promising.
Have a great Sunday and awarding working week.
Radboud Molijn