"Bears $#!+ in woods!" warns TCI chief...

Despite one or two misgivings (see below) I actually rather like John Ho - the increasingly desperate- sounding Asia director of the Children's Fund and star of one of Japan's most entertaining market farces in years.

Mr Ho is exceptionally bright, unerringly passionate and angry about all the right things. He is also, to his undoubted stress and misery, a man who has ended-up shouldering all the dirty-work that hundreds of other foreign funds should have done themselves. In one very compelling sense, Mr Ho is a reedy voice of sanity in a market which far too many have allowed to be far too eccentric for far, far too long.

And I mean that. There are clear flaws in Mr Ho's spiralling pleas for better governance and fatter dividends, but (numbers aside) the basic thesis is spot-on: Japanese listed companies look like listed companies, smell like listed companies, and are nominally set up to behave like listed companies - it's just that none of them think of themselves as listed companies.

Mr Ho, bless him, has probably lost a great deal of money making this discovery. His anger is righteous. His excuses for not realising all this sooner, however, are embarrassingly slim.

So at the end of last week, Mr Ho's ultimate boss, the Children's Fund (TCI) head honcho Chris Hohn, gave an interview in which he warned investors to keep clear of Japan. He did so at the end of a tough couple of weeks, which, to put in a nutshell, did not go well for Mr Ho.

The bare bones of the case are that on Mr Ho's advice, TCI bought a large position in J-Power - a formerly state-run electricity wholesaler without whom the lights would go out in Tokyo. A clear candidate, if ever there was one, for being branded a "strategic asset" and thus worthy of special treatment. (The question of why it was ever privatised could be put to more than half the constituents of the Tokyo Stock Exchange. The answer is that the presidents of TSE listed companies get escorted to their aeroplane seats by a Japan Airlines stewardess).

J-Power was privatised a couple of years ago, and Mr Ho appears to have swallowed all the company's nonsense about how it was going to be terribly shareholder-friendly. They all say that. It's always cobblers. As the years have rolled on, J-Power has done as every other listed Japanese company before it and conveniently forgotten that it is listed. It has invested in meaningless cross-shareholdings in other companies and run crying to the government when nasty foreigners demand that western capitalist norms operate in a nominally capitalist system here. Seriously. A four-year old child could have seen disappointment looming. TCI wanted more dividends, J-Power refused. TCI wanted better management, bolder plans and outside directors, J-Power refused. TCI wanted to raise its stake in J-Power, the government refused. 

But back to Mr Hohn. Japan, he said, "is a bad place to invest if they don't allow activist shareholders to ensure corporate governance". Or, to translate slightly from the language of breathtaking arrogance into English, "Japan is a bad place to invest if your due diligence on a country is cack-handed and Tokyo-listed companies continue to behave the way they have done for 50 years". Oh, and Darth Vader looks good in black.

You see, Mr Hohn's "warning" to investors in Japan is a little like a first-time golfer telling Tiger Woods that the greens are "a bit greasy this morning". He knows. Believe me. He knew last Thursday when he checked the long-range weather forecast and phoned the previous day's caddies to ask how the course was playing.

And investors in Japan - long-term experts, rather than whinging greenhorns like TCI - have known for a long time that the Japanese market is not just a tricky green, but a gore-spattered minefield. And its a minefield littered liberally with the cadavers of a) people who thought Japan would change b) people who tried to change Japan and c) people who thought Japan "got" the concept of capitalism in the first place.

But even minefields have a showering of sign-posts. Scary black and yellow flags with skulls and  crossbones. Bright banners that inform the unwary of ugliness and the risk of injury. The fact that over 1,000 shareholder AGMs are held on the same day is a big clue. When Atsushi Saito, the president of the Tokyo Stock Exchange recently told a room full of foreign investors that "the Tokyo Stock Exchange is not available for a money game", that was another. When a Japanese court recently determined that an "abusive bidder" was effectively anyone bidding for a listed company , that was another. When 400 companies introduced poison-pills at their shareholder meetings, that was yet another.

Mr Hohn, in his interview, also made the point that TCI's herculean struggles with J-Power, the Japanese bureaucracy and the intransigence of the world's richest communist country were "a microcosm of how foreign investors see Japan."

He's right, of course, except for the part where he's wrong. TCI is, unfortunately, a microcosm of all the people who have ever charged into Japan believing it to be one thing only to discover furiously that it is another. Japan, Mr Hohn seems to forget, has always, always been worthy of mockery and despair. Nobody in their right minds would invest here, except for all those who have made gigantic fortunes from doing so. Mr Ho's efforts to change Japan are to be applauded wholeheartedly. The flawed assumptions that underpin those efforts are, sadly, to be pitied. 

Comments

[aragoto]

Well said.

One part I'm having trouble parsing -- where you say "The question of why it was ever privatised could be put to more than half the constituents of the Tokyo Stock Exchange. The answer is that the presidents of TSE listed companies get escorted to their aeroplane seats by a Japan Airlines stewardess."

Are you saying management's main motivation for listing is the glamour that goes with it?

[OBM]

Big time... For most companies its a rite of passage, nothing more.

[Ash]

I am having trouble with the idea that being escorted to one's seat by a JAL stewardess could be considered glamorous, even Virgin has gone off these days. It is hardly surprising that IPOs are mispriced and ill considered if these errors of judgement are the norm in Japan.

[TANTRA]

Rule #1 - Don't hold your breath... Collolary #1 - Japanese companies don't really change, only perceptions of foreigners change.... Lemma #1 - The majority of foreign/hedge fund investors in Japan have lost money in both 2006 and 2007 (the most liquid market environment of history of mankind... check Eurekahedge for proof)... Conclusion -> The market and the media collectively should be more critical of the gaijin who's not necessarily qualified to comment on Japan...

[Acrid]

I work in finance in Japan. The industry here would work a lot better with less Japanese people in it, a conclusion that some of the Japanese securities houses have come to themselves.

Tanaka-san is fine trading domestic equities with the guys he graduated Waseda with, but put him up against a Gaijin in Hong Kong and he gets cut off at the knees. Result? They are hiring Gaijin traders.

Japan is a fixed game. FACT!

[Wakarimasen]

Quite right, all of the above. Like so many things in Japan the appearance and reality diverge widely. And even as someone who manages a large department of locals, I still feel like i am being coddled along half the time.