News from and on Japan in June 2018

Einstein in Japan, Shinzo Abe as “Trump before Trump”, a new Work Reform Bill, PE entering Japan and too many public companies

Is Japan in the grip of the successes of its soccer team, the Samurai Blue? Its spectacular win over Colombia raised expectations in Japan and abroad, its draw against Senegal tempered the mood and its loss against Poland, with both teams playing tiki-taka soccer for the final 15 minutes surely doesn’t record as a fine match. Nevertheless, Monday’s match against the Belgian Red Devils in the knock-out phase will be interesting, no doubt about that.
Now, there is more in Japan than soccer, football or sakkaa, in whatever way you pronounce the mother of all games – and let’s look to what was newsworthy in Japan in June 2018.
  •  Politics:
    • Now that the dust has settled on the Trump-Kim summit on June 12 in Singapore, it could be well possible that Japan is the big looser of this circus. Trade between North and South Korea is increasing, hardly any word on the missing Japanese hostages kidnapped by the North, no military drills anymore in South Korea and no signs of de-nuking according to Slate Magazine, with the (expanding?) North Korean nuclear facilities in Yongbyong at less than 1.000 km from Japan. On June 29 James Mattis, US Defense Secretary, visited Tokyo and met with Itsunori Onodera, Japan’s Defense Minister to reassure Japan of its commitment to stand-by Japan. Speaking at an international security conference in Singapore, Onodera said North Korea agreed to give up nuclear weapons as early as 1994, but has continued to develop them in secret and until last year threatened surrounding countries with a series of ballistic missile launches (Boomberg.)
    • Despite domestic scandals as reported in this summary in the Japan Times, the Japanese public also seems to stand-by their man, PM Shinzo Abe. His approval rates are above 50% again according to a Nikkei poll, here quoted by the Japan Times. That will boost the possibility for Mr. Abe to be re-elected in September as head of the ruling LDP and he could become Japan’s longest serving PM (JapanTimes.)
    • A remarkable article in The Diplomat on Steve Bannon’s admiration of Japan. Trump’s former strongman praised Prime Minister Shinzo Abe as a “Trump before Trump”. And not only Bannon, also Jan Moldenhauer, an ideologue of the xenophobic Alternative for Germany (AFD), states that when it comes to immigration, “Japan is the alternative”. The article, written by Reto Hofmann, Associate Professor at Waseda University in Tokyo, also refers to Japan’s immigration policy. As a side note: two weeks ago we accompanied a Japanese engineering company with its visit to a successful Dutch company in waste water management and big water-data. The Dutch company, established in 2003 and exporting to 50 countries has been established by … a Syrian refugee to the Netherlands and has 10 nationalities among its young, 26 staff, some also coming from countries like Eritrea, Serbia and Greece. Quite special to see the dynamics of so many eager-beavers vis-à-vis a traditional Japanese company.

  • Economy:
    • On Friday June 29 the Japanese Diet (parliament) passed the Work Reform Bill, regarded by Shinzo Abe as his most important piece of legislation in the current session, writes the Nikkei Asia Review. “The law consists of three pillars. One is the implementation of ‘equal pay for equal work’ in order to eliminate wage gaps between regular and non-regular employees. The second is a cap of 100 hours a month on overtime, unprecedented since the Labor Standards Act took effect in 1947. Employees are limited to 720 hours of overtime a year. It comes into effect April 2019 for large companies and a year later for small- and medium-sized companies. The third is a system of exemption for white-collar workers from overtime limits. It applies to those with annual incomes of more than JPY 10.7 mln (apr. EUR 85,000) and will include product developers, financial traders, bankers, consultants
      and researchers, among others. For all of you working in Japan or collaborating with colleagues in Japan, take this as an important development.
    • The looming trade war between the USA and the rest of the world, is forcing also Japanese companies to look for escape routes. The Nikkei provides an overview of Japanese cars in the US market. A 25% levy on imported cars could result in USD 21 bln in lost earnings for Toyota, Nissan, Mazda and other Japanese brands, as also Japanese cars manufactured in e.g. Mexico would be taxed extra. “Auto sales in the USA came to 17.3 million units in fiscal 2017. Japanese automakers had a roughly 40% share with Toyota Motor, Nissan Motor, Honda Motor, Mazda Motor, Subaru and Mitsubishi Motors accounting for 6.77 million vehicles. Of that tally, roughly half – about 3.45 million – were produced in the USA. Around 30%, or 1.77 million, were exported from Japan, and the remaining 1.55 million were shipped in from elsewhere, including Mexico, Canada, Europe and Asia, for a total of 3.32 million units exported to the USA. … Even if Mexico and Canada were exempted from the hike, the higher tariffs on cars exported from Japan would still cause losses of  JPY 1.2 tln (or USD 10 bln).”
    • After many years of testing the waters, Private Equity firms, long seen as something non-Japanese, are gaining ground in Japan, writes Financial Times. And that could be a true benefit for Japan, as steering on profitability and shareholder value could turn a large number of Japanese companies or divisions of major corporations into real jewels. In fact the major breakthrough was Bain Capital and partners investment in Toshiba’s semicon division (USD 20 bln), a move that saved Toshiba, despite METI’s initial unwillingness to allow this. “At the smaller end of the industrial scale, private equity has established a strong foothold as a go-to buyer as the founders of Japan’s thousands of SMEs face retirement without a successor. ‘They know it may not be so bad to team up with private equity because they realise the limits of their own management style,’ said Megumi Kiyozuka, head of Japan CLSA Capital Partners.” My personal observation is that this could be a win-win for all parties, also as there are often excellent technologies to be uncovered within Japanese companies.

  • Corporate:
    • … but with (US) PE funds getting rooted in Japan, also remunerations for top-management will be on the rise – and that will further deteriorate Japan’s image as a country that is proud to have less inequality than the USA. “CEO pay tends to be lower in Japan than in other developed countries. Willis Towers Watson found that median CEO compensation at big companies in fiscal 2016 came to around USD 1.2 mln in Japan, compared with USD 11.7 mln in the USA and USD 5.3 million in the UK”, writes the Nikkei Asian Review. “The number of Japanese executives paid at least JPY 100 mln (USD 903,000) annually topped 500 for the first time last fiscal year as global competition for talent spurred broader use of lucrative Western-style compensation structures. A total of 538 senior officials at listed companies that closed their books in March made JPY 100 mln or more in fiscal 2017, up 15% on the year, according to data compiled by Tokyo Shoko Research from financial filings. A record 240 companies reported having such executives, 17 more than in fiscal 2016.” Sony’s CEO Kazuo Hirai tops the list of best paid Japanese CEO’s with USD 24 mln for his final year in Sony.
    • At the end of June a very large number of Japanese companies had their annual AGM’s, and only between June 26 and June 29, apr. 900 (!) companies had their annual meetings. Japan has too many listed companies, states the Financial Times. Both the USA and Japan have apr. 3.600 public companies, “but the US economy is four times the size of Japan’s and the combined market capitalisation of listed US companies is roughly five times greater than that of their 3.600 Japanese counterparts.  … About a quarter of Japanese companies (by value) are trading below tangible book value. Approximately 40 per cent have no analyst coverage. Private equity firms are circling, with ever greater purpose, around listed subsidiaries of large industrial conglomerates that really do not belong on the market. Foreign investors, needless to say, have been whingeing for years that the managements of Japanese companies should either pay greater attention to the demands of shareholders, or delist.”
    • Softbank, it is one of the most enigmatic Japanese companies. Four weeks ago I visited one of their subsidiaries and found a very different business atmosphere: much looser, informal and with an incredibly speedy decision making. Financial Times made a thorough analysis of this company that is a universe by itself. “inside the ‘Wild West’ USD 100 bln fund shaking up the tech world”. Well, actually the fund is USD 93 bln, with the last USD 7 bln somehow difficult to raise. The article shows where the money comes from (Softbank itself, Saoudi, Abu Dhabi and some others) and the variety of investments (transport, AI / chips / robotics, tech and Apps. At the core of this Vision Fund is Arm Holdings, a UK chip design company that Softbank bought thee years ago. Mr. Son believes Arm’s technology will become ubiquitous in a world where connected devices and artificial intelligence will shape a networked future.There is admiration for Son’s vision, like from Stephen Schwarzman, the billionaire co-founder of private equity firm Blackstone, who says Mr. Son is redefining technology investing. “No one has ever done that before at this kind of scale,” he says. “It’s unprecedented but it’s meeting a market demand.” Others, like analysts at Goldman Sachs have warned that the Vision Fund could turn into a “large black box”. What becomes clear is that the financial engineering by Mr. Son’s co-Board member Rajeev Misra, former executive at Deutsche Bank, is as daring as the fund’s size and speed.

  • Society:
    • Children of poor, jobless single moms have become an underclass in Japan”, writes Japan Times in an article compiled by Bloomberg. “Most single mothers in Japan have to survive on less than half the national median income, the poverty line defined by the Organisation for Economic Cooperation and Development (OECD). Their children are, on average, poorer, less educated and have fewer prospects – an underclass in a wealthy and aging nation that can ill-afford to lose a significant chunk of its future workforce. One in every seven children in Japan experiences poverty. Failing to address that will cost Japan JPY 2.9 tln in lost incomes and JPY 1.1 tln in lost taxes and social security payments for each year of children at school, according to the Nippon Foundation in Tokyo. The estimate calculates the impact over the future working life of 15-year-olds. It’s also a lost opportunity for a country that desperately needs as many young, and highly skilled workers as it can get.
    • As I wrote earlier in this newsletter, every day there are 1.000 less Japanese in Japan – and the only answers to this rapidly shrinking population are: a. accepting it (a government institute projected in April 2017 that the population would fall below 100 million in 2053 and drop to 88.08 million by 2065), b. immigration (difficult) or: c. more babies. That last option is easier said than done: Japanese parents want more children but between dream and the deed there are above all practical objections. Most importantly: child raising in Japan is very, very expensive., an on-line platform that publishes articles on politics, economics, society and culture ranked all the reasons why parents do not want another child. Interesting read – and you can only wonder why the Japanese government is not drafting a Major Big Plan to reverse this situation. Toshihiro Nikai, Secretary-General of the ruling LDP party, even claims that “not having children is selfish”, as quoted by Japan Today.
    • Albert Einstein in Japan: great story how the originator of the relativity theorie experienced Japan when he toured the country in 1922. “The Japanese do appeal to me… better than all the peoples I’ve met up to now: quiet, modest, intelligent, appreciative of art, and considerate, nothing is for the sake of appearances, but rather everything is for the sake of substance. – Albert Einstein, letter to his sons, Dec 17, 1922”. Well, that is at least a firm statement.

  • Book (for the beach, your holiday or to read at home):
    • Convenience Store Woman, by Sayaka Murata, just published in English, might also give some reasons why there are too few babies in Japan. Murata was interviewed by Leo Lewis of Financial Times. “In my novels, I describe a lot of lonely people,” says Murata whose work at the convenience store found her constantly selling meals to customers who would be eating alone. “In the past, I think the word ‘lonely’ had a negative meaning. Now the sense of the word is different. It depends on the person, but there are more people who actively like solitude. Eating alone. Coming to convenience stores alone . . . many of the central roles in my novels are suffering from adapting to a changing world. They are cornered and hunted by the eyes of society and treated as strange. They would be perfectly happy living alone, but society hounds them for wanting that.” (NYT and Financial Times._
Have a great summer – next edition by August 4.
Radboud Molijn
Global Bridges BV for DUJAT / Dutch & Japanese Trade Federation
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