Three reasons why the banking crisis of 2003 was so good for Japan

A little rushed this post, as I am heading off to Kashiwazaki tomorrow to don a lead-lined cod-piece and venture into the nuclear power plant that started popping and fizzing after the massive Niigata earthquake three weeks ago. You know...the one that has left the Japanese nuclear industry in a bit of a state and  allowed some very learned professors to tell us that we are all doomed if the plant at Hamaoka gets caught in a moderate quake.

Anyway. Seems strange that the market is giving the banks such a pasting on the back of the sub-prime  panic in the US.The brains at CLSA have been giving us some very grim numbers to justify the J-banks selloff, while a somewhat calmer report by David Threadgold of Fox-Pitt Kelton suggests the exposure is actually well within the bounds of what both the megabanks and the regionals can handle.

It has caused me to wonder whether the Japanese banks might very well be spared the worst of the sub-prime fallout precisely because they were so terribly, terribly screwed four years ago. Here are three reasons why the banks crisis may, in retrospect, have been a boon.

1) As mentioned above, the crisis insulated the Japanese banks from the US nightmare. In 2004/5/6, when sub-prime and all its concomitant horrors were brewing, the Japanese banks were on their way out of a white-knuckle crisis that took most of them to the brink of oblivion and did emphatically not produce dealing-floors full of cigar-chomping bulls ready to pounce on any scrap of high-yield tush. The banks were, to summarise a) not flush enough of throwaway cash to chuck it abroad with any great enthusiasm b) cripplingly conservative c) heavily scrutinised by the regulators d) domestically focused e) petrified by the very concept of debt.

2) Heizo Takenaka was allowed to get stuck into the problem. He had his critics, and he had his moments of cack-handedness, but Takenaka cleared up a stinking mess far more quickly than anyone would have guessed and did so under a constant salvo of poisonous Nikkei and Yomiuri editorials. What Takenaka represented for Japan, though, was far, far more important. It was among the first times that both the LDP and the bureaucracy were forced, at metaphorical gunpoint, to admit that there was not a single person in their ranks capable of sorting out a private-sector problem as dire as the banks crisis. It was a turning-point for the command economy mentality of Japan. Takenaka's career may eventually have taken him (grudgingly) into the Upper House, but for a while he was pretty much the most powerful non-bureaucrat, non-politician that Japan had produced. Inadvertently, the banks crisis offered a glimmer of hope - that, sometimes, the government might turn to the best person for the job, rather than choosing from a talentless cast of superannuated  punch-clockers.

3) Japan Inc collectively remembered its traditional  "Rainy Day" attitude to cash reserves. Given the Japanese government's ability to create rainy days from nowhere (eg consumer credit market), it was an attitude that resurfaced in Japanese boardrooms in what may now be thought of as being "in the nick of sodding time". From the foreign raider standpoint, the cash-hoarding makes Japan a frustrating string of opportunities slavered-over and then lost. Look at all those companies, say the likes of the Children's Fund and Steel Partners, with all those hideously inefficient balance sheets. Let's force these people to return some of that lovely and currently useless lolly to shareholders, they say.  They can say it all they like, but suddenly, with global credit markets giving investors a strange tingling feeling in their loins, Japanese companies don't look quite so loony for hoarding their hard-earned and resisting greater levels of leverage.

Comments

[COVIX LORE]

Yes, perhaps Japanese companies don't look quite so loony. But let's be honest, the chance of them suddenly returning this cash to shareholders en masse is still minimal. Imagine US corporates hoarding cash and then the only shareholders asking them to do something about it being Japanese. I think we can then imagine the response. If anything, a global stockmarket turndown only increases the likelihood of Japanese companies foreseeing even more rainy days ahead and thus hoarding even more cash...

I feel that Steel Partners and The Children's Fund, for all their investment acumen and background reading on Japanese culture, are still likely to end up as brave failures. Rather, I await the day when major domestic investors Nomura Asset Management, Sumitomo Life et al break from the herd and start backing aggressive takeovers and pushing for higher returns. Then we can really open the champagne...

as long as I am not on a drip in an old person's home. I am under 30, and remain dubious. Japanese corporations are likely to continue being run for the managers, not the shareholders. The survival of the corporation, regardless of cost, will continue to take precedence over profitability.