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Darrel Whitten on relationship investing in Japan

Today, Darrell Whitten of the The Japan Investor published an interesting piece entitled “Relationship Investing Pays in Japan,” both on his own site and in the Japan section at seekingalpha.com. Mr Whitten, in this observer’s humble opinion, is one of the best independent commentators on the Japanese economy and related issues.

As he points out, back in the 1980s, those individuals involved with leveraged buyout (LBO) funds were labeled “greenmailers,” “corporate raiders” or “asset strippers.” As time has passed, they have succumbed to the power of branding, and now prefer to call themselves “relationship investors,” “shareholder activists,” “buy-out funds,” “corporate governance funds” or “restructuring funds.” The industry has certainly changed since the Big Bad 1980s, but often the image of such firms (and private equity) has not, especially in Japan, where management has remained very hostile to the idea of LBOs.

Mr Whitten correctly points out that “relationship investors” are hardly the barbarians at the gates that the senior management of targeted Japanese corporations would have us believe. As he points out:

Due to pressure from relationship investors, the mindset of Japanese senior management has undergone a sea change. Concepts such as return on equity [ROE], return on assets [ROA] and return on investment capital [ROIC] are now at the forefront of managers’ minds.

Very true. We reported on recent shareholder’s revolt led by Scott Callon at Ichigo Asset Management. Mr Whitten’s piece does not mention this event, but this may be due to the fact that it was just happening as he drafted his article (which was published at the Japan Investor on February 26, four days after the shareholder revolt).

For the rest of the article, in which Mr Whitten discusses his tracking of the performance of 16 companies that Steel Partners has invested in, see the source linked above. Steel Partners, of course, has recently been in the news as they’ve made a move to take over Sapporo Breweries; a move which has caused the Japan Times to ask: “Steel Partners — foreign raider or catalyst for shakeup?”

Despite what anyone calls the “relationship investors” these days, perceptions and attitudes in Japan are slow to change. Last Tuesday, Minister of Economy, Trade and Industry Akira Amari offered this comment on the proposed takeover:

The world does not want to see someone who simply sells off (stocks at higher prices) and makes money regardless of whether a target’s corporate value has been raised or not.

Should this deal go through, we’ll find out which side of the fence Steel Partners sits on. I wonder which side Mr Amari is hoping to see…

JETRO’s business sentiment in East Asia survey

JETRO posted their latest survey on business sentiment in East Asia yesterday, with some interesting finds:

JETRO’s monthly survey of Japanese companies and affiliates operating in 12 countries/regions of East Asia revealed that overall current sentiment fell into negative territory in the ASEAN region, due to stagnation in the region’s electric/electronics equipment sector.

I read this and it strikes me how much more important electronics are than cars.� According to the report, “Overall current business sentiment for the five ASEAN countries included in the survey declined dramatically in February, plunging 7.3 points to move the index into negative territory.”

Those five countries would be Indonesia, Malaysia, the Philippines, Singapore and Thailand. Thailand’s sentiment score dropped to its lowest figure since the survey began in June 2001.

Despite the drop in the figures for the ASEAN nations, not all is lost. JETRO’s conclusion:

Business sentiment in February among Japanese companies operating in Asia went into the negative range for ASEAN as a whole, influenced by overall unfavorable conditions in electric and electronic machinery, combined with the decline of business sentiment in Thailand to its lowest point ever. In China and North Asia, there was continuing sluggishness in Taiwan and the Republic of Korea, but China and Hong Kong held steady. As a result, figures rose somewhat for the region as a whole.

Why is all this important? Well, with the lack in domestic demand continuing, exports have surged to make up 16% of Japan’s GDP. Any setbacks in Asia could turn out to be quite painful for Japan. At any rate, since the report is in English and on JETRO’s website, it might be worth a look.

Japan January supermarket sales: Down for 13th straight month

Yes, we’re a bit late with this, but we figure better late than never. This weekend brought some major server upgrades and the inevitable headaches, so we’re a bit behind. Let’s play catchup:

On Thursday, the Japan Chain Stores Association announced its monthly report on Japan’s supermarket sales. As you can see from the headline, they weren’t so good. The survey takes into account those supermarkets that have been open for at least one year, which adds up to 8846 shops owned by 84 companies. The report shows that sales declined 2.4 percent in January when compared to January of 2006.

Sales have dropped in 37 of the past 38 months. Last month, we posted that Japan’s December supermarket sales had fallen 3.8% against the figures from a year earlier.

January 2007 supermarket sales broken down by categories:

• Food: -0.2% (+1.0% change from last month), 58.8% of total revenue (+0.6% change from last month)

• Household Products: -2.9% (-2.1% change from last month), 20.4% of revenue (-1.6% change from last month)

• Clothing: -4.3% (+5.6% change from last month), 14.2% of revenue (+1.1% change from last month)

• Miscellaneous Items: -10.6% (+6.8% change from last month), 6.3% of revenue (no change from last month)

• Services: -48.4% (-3.9% change from last month), 0.4% of revenue (no change from last month)

In the ‘news’ section at the bottom of the report, we learn that Summit has begun charging for plastic bags at one of its shops in Suginami, Tokyo, as has Aeon at one of its shops in Kyoto. This is a move I support 100%, since both of my local ‘OK’ supermarkets charge for bags, and what’s fair is fair.

Shiozaki: The end of deflation in sight; History: Yeah, right

Earlier today, at a regular press conference, Chief Cabinet Secretary Yasuhisa Shiozaki said, “end to deflation is in sight,” and “the economy has recovered.”

That’s funny - the Federal Reserve Bank of San Fransisco basically said the same as Shiozaki’s former statement on November 19, 2004, in a paper called “Easing Out of the Bank of Japan’s Monetary Easing Policy.” We’ve heard it from others as well: Tanigaki, Omi, Ota - the list could go on forever.

For history’s sake, though, it’s worth looking back at what the FRBSF had to say fifteen months ago, in the conclusion to its paper:

The monetary policy challenges raised by the beginning of the end of the Japanese deflation era are less difficult than those previously faced, but they are challenging nonetheless. Moving from an extremely accommodative monetary policy stance to one that is proper for more conventional circumstances at a time when expectations concerning positive inflation have yet to be firmly established raises the concern that an adverse shock may lead to a reversion back to deflationary expectations.

Because the BOJ is aware of the risks involved, it has taken great efforts to convey to the public a policy rule under which quantitative easing will not be ended until there is evidence that the Japanese economy has safely emerged from deflation. Nevertheless, the approaching end of quantitative easing demonstrates the tension between transparency and flexibility in monetary policy. As discussed above, some have criticized the BOJ’s stated policy, arguing that ambiguities could still arise under the stated rule that could be eliminated through the adoption of a formal policy rule. However, the BOJ has chosen a compromise solution, under which the criteria for moving away from the quantitative easing policy is relatively transparent, but retains some degree of flexibility to allow policymakers to respond to unforeseen circumstances.

More on Shiozaki, the yen, Henry Paulson and Vice Finance Minister Hideto Fukuii in a bit…

Lost and Found: The shoe outside the Ministry of Finance

This post itself was lost, which seems fitting.

At any rate, I found this shoe outside the Ministry of Finance Saturday morning at about 10am, before a meeting. It’s a mens size 27. Looks pretty cheap, so must belong to someone high up. I know they have some great karaoke machines in there, but Friday night must have been a mad one…

Japan, oil and Venezuela: Wait until Cheney goes home!

In an article published today that originally appeared in the Asia Times on February 21, Hisane Masaki reports that Japan decreased its oil imports from the Middle East last year by 2% compared with 2005. She goes on to say:

Does this herald a lasting change in the nation’s oil-import structure or represent just a statistical quirk?

I had the same question. I haven’t heard much about intentional efforts to reduce dependency on Middle Eastern oil, and Masaki reports that more oil has been coming in from Russia, Central Asia and the Caspian Sea area, but does not mention South America.

Then, today we find out yesterday that Japan’s Marubeni and Mitsui announced that they had signed deals with Venezuela’s PDVSA to buy crude oil and petroleum products for 15 years, the first long term contracts between Japanese oil companies and a supplier in South America. The deal is expected to bring in 20,000 to 30,000 barrels per day.

I think we can forgive Masaki for not being tipped off on this. It was announced, after all, the day after US Vice President Dick Cheney left town.

Scott Callon, Ichigo, Tokyo Kotetsu and the Shareholder’s Revolt of 2007

How will Scott Callon go down in history? The CEO of Ichigo Asset Management in Tokyo led Japan’s first successful shareholder revolt yesterday, by forcing a vote blocking the takeover of Tokyo Kotetsu by Osaka Steel, a subsidiary of Nippon Steel, after arguing that it offered no incentive to investors. Mr Callon, who is also the author of 1995’s “Divided Sun: MITI and the Breakdown of Japanese High-Tech Industrial Power,” used his firm’s position as a 12.6 percent owner of Tokyo Kotetsu to argue that the takeover, which had been approved by the board of directors of both firms, involved an unfair share swap ratio.

This sounds esoteric, but it is a landmark. It has been reported that Callon’s actions led to the first time ever for shareholders in Japan to reject a merger plan already approved by the board of directors of both companies. Following the vote, Mr Callon said, “This is shareholder democracy in action. Shareholders were left out of the room originally.”

Very true. There’s no doubt that this was bound to happen at some time, and Mr Callon happened to not only be in the right place at the right time, but had the fortitude to see the vote through to the end while having a goal in mind: he is not attempting to simply block the takeover. He does want to see the transaction happen, but at terms that are fair for shareholders.

So, what effect will this have on future decisions by boards of directors and their relationship with shareholders? For one thing, management will have to consider whether or not such a revolt could happen. Does this depend on whether or not a significant number of shareholders happen to be foreigners, foreign funds or funds managed by foreigners? This observer thinks that will be significant for now, as we go through a transition period and the native-born shareholders get used to being a voice to be reckoned with.

Hopefully that won’t take long.

Bank of Japan: Damned if you do…

Bloomberg’s headline: Yen Trades Near Record Low as Japan’s Rates Promote Carry Trade

A short bit:

The yen traded near a record low against the euro after Bank of Japan Governor Toshihiko Fukui said his board will hold interest rates ‘as low as possible.’

So, Fukui (or the BOJ) is to blame for the carry trade? Talk about being caught between a rock and a hard place. The people who write these articles must know that the highest projected raise in Japan’s interest rates for 2007 is up to 1%, and even that is pushing it, given the absence of a pickup in consumer spending. I mean, seriously - they must know that.

A quote from Osao Iizuka, head of foreign exchange trading at Sumitomo Trust & Banking:

The yen will be sold. The BOJ didn’t give a clear picture of when the next rate hike will be. The time is right to get back into the yen carry trade.

Back into? Who the hell pulled out? The rate was going to either stay at 0.25% or go from 0.25% to 0.50% - either way it’s good for the carry trade. Either way the yen would continue to get sold. As we pointed out on February 13th, another test of the 122 level is to be expected, as it hit that resistance level on January 29 and February 13. Guess where the yen is right now? 121.41, up from 119.10 two days ago.

Bank of Japan raises rates to 0.5%

By an 8-1 vote, the Bank of Japan decided today to raise the overnight monthly call rate from 0.25% to 0.50%. Deputy Governor Kazumasu Iwata cast the lone dissenting vote to the bank’s decision.

The BOJ’s actions are outlined in its “Change in the Guideline for Money Market Operations,” The full report, entitled “The Bank’s View” will be released in Japanese tomorrow and in English on February 23. Meeting minutes are set to be released on Monday, March 26.

At any rate (and no matter what the BOJ would have done), this means the “carry trade” can continue without much hindrance. Actually, my favorite misleading headline for this story (which we’re sure to see somewhere) would be: “BOJ votes to continue carry trade; interest rates up 0.25%”

Japan’s January department store sales: ‘Plus’ 0.0%

The Japan Department Stores Association is reporting a ‘plus’ in nationwide department store sales for the first time in four months, with sales +0.0% on a year earlier, at 688.6 billion yen. Yes, you read that right: sales are +0.0% against January 2006. The nationwide survey includes 276 stores owned by 95 companies.

Last December had seen a 2.3% fall against the same month in the previous year.

Clothing sales, which makes up the highest proportion of total department store revenues, was at 315.5 billion yen, down 1.0% from the January of the previous year. Unseasonably warm weather was again to blame for the low numbers in this category.

Sales in Tokyo, which included 28 stores operated by 13 companies, were down 0.1% on the previous year, decreasing for the fourth month in a row. Tokyo sales totalled 164.4 billion yen.

Hopefully by saying “４か月ぶりの+0.0％となった。” (The first plus result (at 0.0%) in four months), the JDSA means that the result was finally not negative. They did also say “４か月ぶりにプラス” in the headline, which basically lays out their math skills right there: “The first plus result in four months.”

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