Economist magazine Japan survey
The Economist magazine's current issue has a survey of Japan that you may be interested in. Here's an article called "Capitalism with Japanese characteristics" ($, requires paid subscription... send me an email if you want a copy of the whole article): TAKAFUMI HORIE is proof of the rewards of failure—and of “Livin' on the edge”, which is what he called his company until he bought an internet portal called livedoor and adopted its name. This 32-year-old's daring takeover bid earlier this year for the venerable media group Fujisankei Communications, via its radio subsidiary Nippon Broadcasting System, ended in defeat: Fuji found a white knight to hold a blocking slab of its shares and forced Mr Horie to retreat with only a small profit and a modest business deal between Fuji and livedoor. In July 2004 his bid for a baseball team, the Osaka Kintetsu Buffaloes, also failed. Yet the attendant publicity helped livedoor hugely: page views at its portal in June this year were more than six times higher than a year earlier, and the company has raised its advertising rates twice in less than six months. It remains a distant third in the internet portal business behind Yahoo! Japan and Rakuten, but its share price has stayed high despite stock dilution and the Fuji bid's failure, and its earnings multiple is higher than that of Yahoo! Japan. “The nail that sticks up”, runs a hoary Japanese saying, “gets hammered down.” Yet Mr Horie is an upstanding nail who has become famous as well as much admired, according to opinion polls, for his willingness to challenge old ways of doing things . He even ran (unsuccessfully) for the Diet in September's elections. And he is not alone in breaking taboos. Hot on the heels of his bid, in July a young construction design firm, Yumeshin Holdings, launched a hostile tender offer for an older firm, Japan Engineering Consultants. And last year Sumitomo-Mitsui Financial Group, one of Japan's biggest banks, barged its way into a friendly merger deal between two other mega-banks, Mitsubishi-Tokyo Financial Group (MTFG) and UFJ Holdings, offering to buy UFJ for a specified price. That may sound mundane, but to Japanese sensibilities it was shocking, because UFJ's board had already accepted the merger proposal, even though no price had been set. Advertisement ... The livedoor-Fuji battle, the Yumeshin bid and the mega-bank sumo-wrestling match illustrate three important developments. The first is a new willingness to use the courts as arbiters in corporate disputes, which reflects both changes in attitudes and changes in the law. Livedoor managed to get several of Fuji's attempted defence manoeuvres struck down by the courts before Fuji's white knight came along. Yumeshin failed to block Japan Engineering's defences of a stock split and an equity warrant issue, but the Tokyo District Court laid down reassuring criteria for their use: that they must not simply be in the board's self-interest, and that they are subject to shareholders' approval. Secondly, a change in the ownership pattern of publicly traded shares is making transactions and challenges easier. In 1992, according to the Ministry of Economy, Trade and Industry, 46% of all listed equities were held as cross-shareholdings by related companies, and only 6% by foreign investors. In 2004, cross-shareholdings accounted for merely 24% of shares whereas foreign ownership had risen to 22% of the total. However, that foreign slice is volatile, moving up and down along with investing institutions' perception of the Japanese market. Cross-shareholdings first became prominent during a fright about hostile takeovers in the 1960s, so there is a chance that scared managements may now seek to rebuild them. Against that, though, new capital-adequacy rules due to take effect in 2006-07 will force Japanese banks to sell more of their holdings. The third development is still small but is emerging steadily. It is the arrival on the scene of funds and partnerships willing to use their investments to challenge existing managements or to act as intermediaries to facilitate mergers and disposals... Alongside these new Japanese species there are the larger and more familiar foreign funds... By and large, though, it is the Japanese upstarts that are acting most aggressively, whereas the foreign funds try to stress how socially responsible they are . Both make up only a small slice of market activity. But no matter: in any business, pressure on the margin can influence the rest. To some degree, indeed, these ginger groups have been encouraged by people in the Japanese establishment with just that thought in mind. Mr Horie may be an outsider, but plenty of the activist funds are run and staffed by well-connected former bureaucrats and by people in their 30s and 40s who lost their jobs or their loyalty during the banking meltdown of the 1990s. M&A Consulting, for example, is run by three partners, two of whom are former bureaucrats and the third used to work for Nomura Securities. An early investor in the firm, and a crucial provider of introductions, was Toshihiko Fukui, before he became governor of the Bank of Japan. Similarly, Ripplewood managed to recruit several senior Japanese to its board, including Minoru Makihara, then chairman of Mitsubishi Corporation, the trading and investment firm that epitomises the Japanese establishment. The livedoor bid for Fuji illustrated another point about Japanese capitalism : that for a seemingly cosseted, conformist activity, it is strikingly unregulated. When almost everyone obeys unwritten rules, little attention needs to be paid to the written ones. So the supposedly heroic Mr Horie was able to mount his bid in ways that would be considered outrageous in London or New York: he built up his 35% stake in NBS in off-market trading, diluted his own investors' shareholdings without consulting them and never offered a standard price to all NBS shareholders. The wild west goes east Part of the problem is that takeovers and other pressures from shareholders were long considered taboo or irrelevant. The protective role of main banks and cross-shareholdings was enough to regulate matters. Now that both of those protections are weakening, there is a fairly broad consensus that the law and the regulatory system need to be changed. But that change is happening slowly. An optimistic view is that the process is at roughly the halfway stage. Still, some important progress has already been made. One of the worst corporate sins of the 1980s was the use of subsidiaries to hide problems, park surplus staff or disguise adventures... ... with politicians afraid of instability and especially foreign takeovers, and under pressure from big employers, many ... reforms so far have been as helpful to corporate defence as offence. Laws already passed have permitted companies to offer shares with differential voting rights, to grant stock acquisition rights through options and warrants, and to set up such provisions as a “poison pill” to be deployed in the event of a takeover bid. ... The role of shareholders has been boosted too: at the spate of annual meetings on June 29th shareholders rejected poison-pill proposals at several big firms, including Tokyo Electron, Fanuc and Yokogawa Electric. Many other similar proposals passed, but significantly even some Japanese institutional investors took part in anti-management votes. Previously they had been quiescent. ... For all the fuss over hostile takeovers, however, such battles are rare even in America, which sees barely one each year. Even the theoretical possibility of such an event, though, helps put pressure on managements to improve their profits as well as to pay dividends to shareholders. Japanese corporate profits are at a record high mainly for other reasons, but market pressure has literally paid dividends: in the past seven years the dividend yield for firms listed in Tokyo has almost doubled (see chart 3). Even so, the most important sort of transaction, in Japan as in America, is the friendly sort, whether involving whole firms or divisions of them. In the first eight months of this year, according to the Nihon Keizai financial daily, 1,735 M&A deals were completed, 28% up on a year earlier. As James Abegglen, a veteran consultant and scholar in Tokyo, observes in his recent book, “Redesigning the Kaisha”, the consolidation of whole industries during the past decade has been impressive: from 14 oil companies to four; from seven big cement firms to three; from 14 pulp and paper companies to three; from seven industrial gas firms to three; from five big steel firms to four; from 15 big banks to just three. And big companies have traded or closed thousands of subsidiaries. ... Do you think Mr. Horie is praised in Japan for acting modern, western or Japanese? He, after all, is a rebel, going against some of the tenants of Nihonjinron. Hostel takeovers aren't harmonious. Or is he praised for being "a man of action"? Are written rules a western vs. a Japanese requirement of modernity? If so, is this evidence that Japan is converging with the West (i.e. becoming more Western)?