Japan: lasting change starts from within
In 1989, at the height of the Japanese Bubble, the Texas financier, T. Boone Pickens, took a stake in an auto parts company in Japan called Koito Manufacturing. It was a family run business with one very large customer. That customer was Toyota.
Pickens hoped to repeat the playbook he had used many times in the US with great success. He would take a big enough stake in the company to get a seat on Koito’s board so he could influence the direction of the business. Part of his plan involved, controversially, improving Koito’s existing contracts with Toyota. Using the PR pitch he had used countless times before, he claimed he would improve shareholder returns for everyone! Unfortunately, that pitch fell on deaf ears in Japan.
For the Japanese press, he was a reincarnation of Commodore Matthew Perry, who had opened up Japan in the 19th Century from its period of isolation, by entering Tokyo Bay in his black ships by force. Koito Manufacturing refused to grant him a board seat. Toyota remained reticent and bided its time.
Pickens complained to his friend, Ronald Reagan, that he was getting a raw deal. The issue was even discussed in Congress. It didn’t matter. Eventually, Pickens gave up and sold his stake two years later in 1991.
Last week, over 40 years later, Koito Manufacturing announced a mid-term plan that would have made Pickens smile like a Cheshire cat (if he owned the name still). It aims to achieve shareholder returns of 200 billion yen or more (cumulative total for the five-year period from FY2025 to FY2029). It announced it would buy back 11.4% of its shares, double ROE to 10% and it said it would maintain a 40% dividend payout ratio. That’s simply huge.
The stock responded well on Friday after the announcement. It went up over 24%. And why not? Before the announcement, it was trading at a decent discount to book like so many stocks are in Japan.
Gaiatsu vs Gyouseishidou
There are two concepts any student of Japan’s political economy has to learn: Gaiatsu (outside pressure) and Gyouseishidou (administrative guidance). Both concepts have had a significant impact on how Japan has developed since at least the late 19th Century, if not before.
Gaiatsu can be translated as “outside pressure” but it commonly refers to the pressure on Japan from the US to alter its domestic and international policies. Think Commodore Perry forcing Japan to open itself up to trade in 1853. Think the Yoshida Doctrine of the 1950s, which came about because the US wanted a strong ally in East Asia. Think the Plaza Accord in 1985, when Japan agreed to allow the US Dollar to devalue against its currency.
In university courses, Gaiatsu provides an easy framework to understand the history of U.S.-Japan relations but, like most academic ideas, it doesn’t tell the full story. With the exception of the Plaza Accord, which in some ways was an act of financial sabotage by the West on Japan, the Japanese administration have only really responded to Gaiatsu when it has worked for them. (The Japanese official in the photo knows he got screwed!)
For instance, the Japanese really had no choice but to embrace industrialization after the Black Ships arrived. They still remembered how disruptive the Jesuit missionaries had been in the 17th Century. And they had presumably heard how ruthless the East India Company was in China. Similarly, the Yoshida Doctrine meant they didn’t have to worry too much about Chairman Mao. They could instead focus on building their economy.
And even when their arm has been twisted, they have defended their position admirably. Even Trump didn’t manage to impose auto tariffs on Japan and the agricultural concessions were capped at those offered under the Trans-Pacific Partnership talks.
But it is in the corporate space where things have been most frustrating for the foreign investment community. T Boone Pickens might have been the first foreign financier to try and challenge the status quo in Japan but he was not the last. Foreign hedge funds and buyout firms have tried on countless occasions to change the way Japanese companies were run. They were ignored even if a significant amount of capital was put up. Sony, for example, famously rejected the breakup proposal it received from the activist investor Dan Loeb, after he had taken a $1.5 billion position in the company.
Abenomics: Home grown policy.
Ignoring advice from US Ambassadors and floppy haired hedge fund managers (Kyle Bass) has been a smart move for the most part. The Japanese were right to ignore them in the 1990s. The economy sat on a deflationary cliff. Japan had no choice but to invest in public works to fill the demand vacuum caused by the slump in the over levered corporate sector. And it had no other option but to recapitalize the banks after the GFC. Above all else, they were right to focus on keeping their bond market strong and ignoring their equity market for almost 20 years. A strong bond market was vital as was a strong banking system. If that meant low share prices, so be it.
It is telling that it was two brave Japanese people, Shinzo Abe and Haruhiko Kuroda, who came up with Abenomics, which has brought Japan back to life. The author has no doubt Kuroda consulted with Janet Yellen and Ben Bernanke often, but the plan was very much home grown.
Effective Bureaucrats
Top-down policy like Abenomics can only work if a country’s ministries have the best and brightest to implement it. Singapore is what it is because of the high caliber of people it has in its ministries. On the flip side, the UK is falling apart because Whitehall has been outsourced to management consultants, who might not even be British. Thankfully, Japan has never lost sight of the importance of effective bureaucrats.
And this is where Gyouseishidou (administrative guidance) comes in. Administrative guidance is non-binding advice given by an administrative agency to the public regarding how best to comply with a particular law or regulation. It is a form of coercion, or an invisible hand, if you like, that has proven to be very successful in steering Japan to become one of the wealthiest countries in the world today. And it is at play now in the corporate space. And that fact alone makes all the difference!
Japanese corporates are under intense pressure from within Japan to change and become more shareholder friendly to drive equity returns. A healthy equity market, one in which there is widespread participation by the public, is key to the anti-deflation policies of Abenomics. And the Japanese must make every effort to avoid slipping back into an environment of falling prices.
The Japanese often take a long time to make a decision but once they commit, they mean business. The author believes we are still in the early innings of what might turn out to be a very long bull run. And none of it involves Kyle Bass!
Let’s go!
Homebuilding
Ed Hyman said housing would be the Nasdaq of the 2000s. He was right. Since the inception of this newsletter, the author has argued homebuilding would be one of the best non-tech areas of growth this decade. The market is kindly rewarding the author’s vote of confidence in the sector. Homebuilding stocks in Japan and in the US printed new highs last week. The charts on Lennar in the US and Sumitomo Forestry in Japan are a thing of beauty.
This newsletter has argued we are blessed with great tech leaders. Compare Satya or Khosrowshahi (Uber) with Jack Welch. They are in a different league. But we can easily forget how talented non-tech company management can be. For the author, Lennar’s management are nailing it while dealing with supply and labor issues. And to be fair, the Japanese homebuilders showed great insight in picking up the US assets they did in 2018, especially as they focused on the growing Southeast and not California.
The investment narrative for the homebuilders is simple. And it works in every country as the housing crisis is a global issue. In the US, there is a shortage of 3,000,000 homes. And no affordable housing has been built on any real scale since the late 1990s there (this is why the mobile home parks were such a good investment in 2012!).
It’s not just the US of course. The Japanese Nikkei newspaper last week noted the apartment stock in Japan was getting very old and would need replacing. Is that why 1766 Token is starting to move? And of course, the UK housing crisis is a disaster.
Perhaps, the catalyst for the move higher in some of the shares was the falling US mortgage rate in the US. The 30 year Fixed Rate Mortgage Average dropped to 6.79% from 6.87%. That might seem small, but shouldn’t we extrapolate the trend? People pay mortgage payments; they don’t pay house prices. What happens to demand if the Fed does start cutting?
Of course, the bears will say, as they have since Lennar was a $70 stock, that homebuilding can be a rubbish, low margin business, which is susceptible to supply shocks. This is true. There is a serious need to change how we build houses. (The author is working with a modular housing business with 40% margins vs the usual 10% margins common in the industry).
We are also seeing the lagged effects of COVID. Many construction companies are going bust finally after struggling for years to recover from the issues caused by the outbreak. But won’t that play well for the larger names? Why won’t Lennar and the like just pick up strategic smaller companies at rock bottom prices? We live in a winner-take-most economy for technology companies. Why can’t the big homebuilders just get bigger?
Uranium
John Kerry used to hate uranium. In the 1990s, he was dead set against it. It’s amazing what money can do. As soon as he became employed by the lobby, he saw the light. The lobby has probably funded his new house in Martha’s Vineyard.
It would appear his lobbying has worked, to be fair. The US administration seems keen on the energy source. But perhaps the next leg up might come from, you guessed it, Japan. The Japanese government is revising its energy plan at the moment. As part of its strategic onshoring policy, semiconductor factories are being built, which require 1GW of power. Nuclear would be a cost-effective solution.
This newsletter has been bullish uranium for a very long time, but the author recently sold his Australian uranium names and bought more CCJ, URNM and NXE. He also bought 5631 JP Japan Steel Works - happy to explain that trade offline.
Goldman Sachs bullish commodities
Goldman Sachs re-affirmed their bull stance on commodities the week before last. It was a timely move. The stocks have since bolted. ANTO LN Antofagasta is at a 5-year high.
As discussed, a few weeks ago, it was newsworthy that Elliott, the US activist investor, was setting up a company to hunt for mining assets worth more than $1 billion. When a hedge fund announces a new fund strategy, the author tends to worry. It’s often a way to hide poor performance from its core fund but Elliott is different. Elliott has moved into different asset classes with ease in the past and nailed it. Is it therefore time to think through what an infrastructure boom globally could mean for some of the explorers around the world? If China is going through what Japan went through in the 1990s, will it have to build, build and then build? What will the tragic bridge collapse in Baltimore mean for infrastructure spending?
Stocks like Freeport Moran presumably have upside but it’s the smaller end of town where the multi-baggers might be. It’s been brutal to be an explorer for the last few years but some have great assets. In a different environment, they might get a significant re-rating. Oz has a lot of such names.
As always, thank you for reading. I wish all the Christians a belated Happy Easter. For me, who is not religious at all, it’s a better family occasion than Christmas! The Polish celebrate it well!
Until next week.
Best regards
Mateen
Always a good read