Commentary: The Japanese economy, live and unplugged
http://www.iht.com/articles/2006/01/24/bloomberg/sxpesek.php
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Japan Arrives Naked for Livedoor: William Pesek Jr. (Correct)
(Corrects spelling of Toyota chairman Okuda's name in sixth, seventh and 10th paragraphs. Commentary. William Pesek Jr. is a Bloomberg News columnist. The opinions expressed are his own.)
By William Pesek Jr.
Jan. 24 (Bloomberg) -- Imagine planning a celebration years in the making, and with the entire world watching you make your grand entrance and -- horrors, you're naked!
That's Japan today.
Exhibit A: The Tokyo Stock Exchange's latest meltdown. While change-resistant Japan Inc. points the finger at Internet company Livedoor Co. and its founder Takafumi Horie for last week's trading halt, a lack of long-term perspective was really to blame.
Now, Hiroshi Okuda is clearly a bright man. After all, his Toyota Motor Corp. is about to eclipse General Motors Corp. as the world's biggest automaker.
Yet in a Jan. 12 speech the 73-year-old Toyota chairman expressed a stunning naivete about corporate Japan, which became abundantly clear a week later when Asia's biggest stock exchange broke down for the second time in three months.
Japan overcame 15 years of stagnation thanks to management practices focused on ``long-term perspective'' and ``respect for people,'' Okuda said. His point was that executives had protected the nation's fabled research and development efforts and avoided mass layoffs.
However debatable the merits of Japan's preference for socialist employment practices, Okuda's view that its executives strategize for the long term smacks of, at best hubris, at worst delusion.
Blaming Livedoor
Alleged shenanigans at Livedoor -- allegations that got Horie, 33, arrested yesterday on charges he violated securities laws -- sent a wave of sell orders to Japan's stock market. That the world's No. 2 exchange wasn't equipped to handle a sudden spike in trading volume has made Japan a laughing stock.
Last year's 40 percent surge in the Nikkei 225 Stock Average was the financial equivalent of announcing the nation's long- awaited emergence was set to begin. And begin it did.
On Jan. 16, four days after Okuda's comments, the Nikkei reached a five-year high. Speculation has increased that Japan's seven-year-plus bout with deflation is ending. So solid does the rebound look that the Bank of Japan is setting the stage for an end to its zero interest rate policy.
Suddenly, the focus isn't whether Japan's economy is back, but whether it's ready for its moment in the spotlight.
What if allegations that Livedoor pumped up profits are the tip of the iceberg? It's ridiculous to compare Livedoor with Enron Corp.; its market value is a fraction of the now defunct energy trader's. The point is how Wall Street quickly dismissed Enron's deceits as an isolated case. Five years and myriad book- cooking scandals later, we know it was anything but.
Let's say, for the sake of argument, this year will bring something similar to Japan -- with prosecutors and regulators uncovering a series of dodgy earnings reports. Is the Tokyo exchange ready for a surge in trading? What if markets experience another crisis like the blow-up of the huge, highly-leveraged hedge fund Long-Term Capital Management?
What if crude oil prices approach $80 per barrel, or even $100? Or if China's economy -- on which Japan has become highly reliant -- suddenly slows? A massive terrorist attack that boosts global bond yields and slams equities? How about the dollar crash that Bill Gates, George Soros and various pundits have been predicting?
Old Versus New
Economies are only as strong as their weakest links. While employment and incomes are rising in Japan, the financial infrastructure is proving underdeveloped. That could undermine Japan at a time when stock markets are playing an unprecedented role in economies.
It's a microcosm of the risks Japan faces. At the heart of the Tokyo exchange's woes is tension between Old Japan and New Japan -- status quo versus willingness to modernize and become more international. While the old guard blames Horie, the real problem is the kind of complacency that has stymied previous recoveries.
For years, Japan has struggled to attract more foreign investors, and to get more individuals to buy stocks. Most of the buying that propelled stocks last year came from abroad. Much of the domestic buying came from day traders, many of them housewives, working online. Japan's markets weren't ready.
That Japan stands at a fork in the road is encapsulated in the Livedoor case. Whether Horie broke securities laws is an open question. What's not is that Japan Inc. is out in force to discredit a scrappy, unconventional entrepreneur who called on the establishment to change.
For decades, Japan's lax corporate governance protected corporate executives and bankers who had been swimming naked, so to speak, and assuming they'd never be caught suitless. If global markets remain volatile this year, and the tide of capital ebbs, financial shortcomings will be exposed.
Tokyo's business establishment should stop patting itself on the back just because economic growth has returned. It also should stop blaming Livedoor for the fact that it showed up naked at the party.
To contact the writer of this column:
William Pesek Jr. in Tokyo at wpesek@bloomberg.netLast Updated: January 24, 2006 08:45 EST
