Japan

Coincheck wreck

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Perhaps that was Coincheck’s greatest problem. Bragging rights to being the leading crypto exchange in Asia only made it (pardon the pun) a richer target. 58 billion yen ($560mn) was stolen. While bitcoin trading wasn’t halted many other cryptos were, exposing their fatal weakness. CM has been writing constantly that “hacking” was the biggest threat. Regulators will have to step in at some stage and the global trading element of crypto creates all the nasties of global policing against tax evasion and money laundering.

Coincheck claims it will compensate users of the exchange but at the same time is asking for financial support. The question is how the reactive forces within the Financial Services Agency will cope with protecting investors? Seems like cart before the horse.

Why should investors that willingly traded on an unregulated site be compensated?

Where money talks

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If there was one thing that could be transplanted into Japanese business culture it would be the Chinese practice of “there is a price for everything”. So often do we see sensible deals slip thru the cracks involving  Japanese corporates based on petty rigidities which serve no other purpose but to scuttle their own long term fortunes. Just 6 hours in HK and already it smells of business opportunity. Clear skies too.

Japan healthcare ain’t so great as Occupy Dummycrats would have you believe

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Japan’s healthcare system may seem great optically but it is heading for a crisis. Looking through the MHLW’s White Paper it is plain that the economic burden with an aging population is surging. Someone aged 65yo+ costs 12x what a 20yo costs in medical bills. By 2035 40% of Japan’s population will be aged over 65. Current medical costs total 41 trillion yen. Japan raises 97 trillion in revenue. 58% of that is tax. 40 trillion is raised in debt markets to fill the hole. EVERY YEAR.

80% of hospitals and clinics are private so it’s ridiculous to say 95% are not for profit. The current billing system encourages hospitals to keep patients in because they can charge for it. Hospitals don’t want it changed. Hospital clinics serve as gathering places for old people causing needless cost on a shrinking pool of taxpayers.

The MHLW admitted that around 40% of costs are labour related (doctors, nurses) around 25% on building maintenance, 15% on equipment and 10% on utilities. The only place they can conceivably cut is drugs where the push to genetics has been a factor.

Yes Japan’s healthcare system works for now but it can’t be sustained as it is without wholesale change. With a shrinking tax pool and aging population the dam will burst. Note the Ministry of Justice has had to ask for 6bn in extra funding for increased medical costs for an aging population inside its prisons where 65yo+ are the highest demographic.

Liberals are rarely good with numbers.

Trust in Japan? Strangled by sontaku 忖度

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Trust and Japan used to go hand in hand. It was a hard earned reputation.  A mining executive once told me that “when you sign a contract with the Japanese, that is the contract. When you sign a contract with the Chinese that is the beginning of the negotiations.” Hardly a subtle difference. Yet here we are in the last few years where a plethora of scandals from Japanese companies have come to light. Houeshold names too – Olympus, Toshiba, Kobe Steel, Subaru, Toray, Nissan, Mitsubishi Motors, Takata, Mitsubishi Materials, Asahi Kasei, Obayashi, JR Central, Nomura etc etc. It is almost as if there is a coming-out of sorts so the crimes are somewhat diluted in the midst of others. Syndicated scandals? Expect more to come out. Perhaps the worst part about it is the limp wristed approach by the regulators. ‘Sontaku’ (忖度) in Japanese is a word meaning ‘glossing over’ which is exactly what the regulator is doing over scandals involving household names. Hear no evil, see no evil, speak no evil.

In October I was invited to give a lecture to 70 bureaucrats at the Ministry of Finance’s attack dogs – the Financial Services Agency (FSA) and the Securities and Exchange Surveillance Commission (SESC) on foreign perceptions of Japan’s handling of corporate  crime. In the interests of objectivity the first slide pointed to how no corporate governance system is perfect citing the minefield of foreign corporations caught up in bad behaviour – VW, Petrobras, Parmalat, HealthSouth, Lehman Brothers etc etc. I also highlighted the sentencing of executives who commit crimes – many received lengthy jail sentences, personal fines while the corporates faced eye-watering penalties.

Ironically much of the crime committed by corporates here is at a relatively pithy level. Instead of billions being massaged into or from the books, Japanese corporates tend to commit the equivalent of falsely submitting a $20 taxi receipt to your boss as a business related expense. One almost could conjure up a scenario that if Toshiba was ever able to make back the money to cover the accounting fraud they’d have broken into corporate HQ in the dead of night to put it back in the safe.

I touched on Kobe Steel which conveniently broke the news that it had falsified the true contents of its products to customers. While pointing out such behaviour was regrettable a chart which showed a heavy shorting of the stock on the day it announced it to its duped clients displayed the bigger problem. A question was asked directly to the regulator – “do you intend to investigate the heavy short selling of Kobe Steel stock 3 weeks before the company announced this to market?” No answer.  The following slide showed that a person that was able to short the stock 3 weeks before the announcement would have cleaned up a tidy 60% profit. Again no plans to investigate the insider trading. Why bother having the FSA if it is a toothless tiger?

The following slide showed the types of fines dealt to both the broker (Nomura was a regular feature in the leaks) and the investor (at the time Chuo Mitsui Asset). The fines were the equivalent of $500 and no suspension of license was pursued by the regulator, When the following slide that compared it to the types of fines meted out to foreign banks – lengthy jail terms, lifetime suspensions and monster fines in the the millions and billions jaws didn’t so much drop but celebrate the idea “thank God we live in Japan”. Truth be told the FSA did punish one dying asset manager $150mn but that is an exception. That is the problem. It is too conditional where convenient.

Rolling onto the next slide the discussion looked at how ‘sontaku’ was a problem. Whereas the FSA & SESC heavily pushed for license revocation of foreign investment companies that it found to break rules, it let off all the domestic companies that had ‘brand names’ to protect. What message is the regulator sending if local corporations know they can pretty much get away with anything. In what way is that a fair system? If foreigners will be turfed on a whim then why do the locals get special protection?

When looking at agency funding, the FSA was put up against the US SEC and Australia’s ASIC equivalents. The US was there for illustrative purposes. Yet Australia was the market that made the point clearest. Despite having a total market cap 5x the size of Australia and 30% more listed companies, Japan spends 20% less than the antoipodeans. Even worse it had fewer numbers of staff and its budget was shrinking.

When analyzing market surveillance, in 2014 the Aussie market issued 36,000 speeding tickets (alerts to potentially suspicious trading). The sophisticated systems are designed to catch any wrong doing. The Japanese issued around 180 speeding tickets. I suggested the FSA go cap in hand to ASIC and the ASX and ask if they can buy the software off the shelf. Safe markets attract capital because all actors feel adequate protections are in place to prevent crime. Higher liquidity attracts more liquidity. It is a win win.

Several years ago the fanfare of the Corporate Governance Code was thrust into the faces of the intenational investment community that Japan Inc was changing. After visiting multiple staff inside the FSA and the TSE there is absolutely no pulse of proactively to be seen anywhere. Even my slight nudge to get the FSA to tap the shoulder of the TSE to suggest listed corporates provide English language materials to encourage more transparency for foreign investment met with the response, “it might help if you spoke directly to the Deputy PM & Minister of Finance Taro Aso.”Not a word of a lie.

How can the Japanese authorities look to appropriately handle a slew of corporate scandals if the encouragement of English language documents requires someone (a gaijin no less) outside the agency to ask the Deputy PM to suggest it back down to them. It is an embarrassment.

In closing perhaps we can look to these corporate scandals breaking out as endemic of a greater underlying problem. While the knowledge that the regulator is likely to do next to nothing provides mild comfort, the reality is that Japanese companies have been strangling themselves for decades. The corporate fabric is fraying. The world is far more competitive than it was. For Japan to assert its ‘quality and/or engineering gap’ dominance now means profits likely suffer. In order to  get around that hurdle it seems that to maintain profit margins, corporates now lie about specifications hoping a history of ‘trust’ and ‘time honoured’ traditions can keep the bluff going. As mentioned earlier the scale of the ‘cheating’ is pitiful yet the shame it brings is multiples larger.

Japan’s cultural rigidities are on full display. Unfortunately they couldn’t arrive at a worse time. Clumps of companies confessing crimes to soften the collective blow is only the start of many more. I suggested in my speech that the authorities introduce a 3 month amnesty period for companies to fess up to any wrong doing. That way they can clear the decks and make it clear that any wrong doing after that date will be met with harsh repercussions. Of course it won’t happen but expect the list of companies above to have many join them at the table of shame.

Is this another sign of the top of the asset bubble?

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Is this sign of the top? Normally Japanese banks are more risk averse than a politician speaking after a scandal has leaked. So what is the connection of Rolls-Royce using the foyer of the HQ of one of Japan’s megabanks (SMBC)? To promote high net worth banking customers to take out negative interest car loans? To give a luxury element to their brand? Do we need to remind ourselves the last time Japanese corporates shunned conservative values and splashed out on Van Gogh and Monet artworks? It was before the bubble collapsed.

At least the expensive artworks can be theoretically smuggled out of the building in style! We shouldn’t worry about security either as the SMBC foyer has robot security.  They have a “game function” on the touch panels meaning that would be robbers need only distract the robots with video game junky children.

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Sometimes we all need to change the window we look out of to forget politics, work, relationships or finances. Bathe your feet in hot water while you dine. Find your place of peace. This is 東府や(Toofuya) in the Izu Peninsula. 静岡県伊豆市吉奈98 Bakery & Table

#MakeShimaneGreatAgain

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In CM’s Make Japan Great Again report we noted that Shimane Prefecture has had the slowest population growth in almost 100 years. Shimane has seen its population fall 3% since that time. The issue is not just that Japan has a declining population rate, the regions are depopulating at too fast a pace. Without wanting to get too technical Shimane Prefecture is hosting a drive to get people to move there as it provides great childcare facilities and jobs! Half the battle of such drives, as well intentioned as they are, is who jumps first. While available daycare slots in the big smoke of Tokyo are hard to find, the population is still growing giving much better optionality for the long term.

I will be attending the seminar as I’m curious what other bait will be offered. Indeed Shimane, as lovely as it is to visit,  one wonders what excitement awaits with a population in decline. I was there in September – as was the last time I visited – there is nothing to speak of worth setting up a new life. At least Shimane is facing up to its reality and for that they deserve the full accolades of trying to resuscitate a region that is the same as it was 100 years ago.