However, in Japan, while the Topix index fell 14% in late July it has since just moved sideways through a narrow ±3.5% range. Furthermore, volumes have been so low that on one day in October, Tokyo saw the lowest value traded since 2003 (bar the annual New Year lull).
And yet, were one to look at market reports one might have been convinced that since July the Japanese market has been whipped violently up and down, driven by sentiment on the European financial debacle.
This has not been the case and neither has Europe been the driving force.
Japan in Asian context
While Japan is still often seen as a geared play on the developed world’s industrial cycle, today Japan needs to be considered in relation to Asia, particularly China, not the West. Chinese monetary policy, fears over its real estate and the shadow banking sectors and the slow¬down in fixed asset investment – these have been the important issues for the Japanese market. Lower inflationary pressures in China and signs of an easing of monetary policy suggest that a hard landing and recession in China appear less likely, which is also positive for Japan.
Having seen significant improvement in Japanese corporate governance in recent years, the Olympus scandal has proved a disappointment. This tale of corporate malfeasance is however an interesting illustration of the murkier side of Japanese corporate life.
What is now of greatest interest is the response from the Tokyo Stock Exchange and FSA.
The broadcaster NHK, generally reluctant to antagonise the authorities, has called very publicly for heavy sanctions against the company and has strongly criticised the FSA that it says intends merely to slap the company’s wrist. NHK correctly points out that without a strong sanction, investors’ views on Japanese corporate governance will be negative.
However, events at Daio Paper, the other current corporate scandal, are more laudable.
At the end of September, the board of Daio Paper forced out the chairman after it transpired that he had been demanding that subsidiaries transfer money into his personal account, a substantial portion of which went to the Las Vegas Sands casino and that which did not was apparently lost in stock market speculation.
Outside reaction
It is a credit to the board of Daio Paper that the chairman was then sacked, a civil suit to recover the funds launched and a criminal complaint registered.
The public and market reactions to Olympus have shown that this is not acceptable and Daio Paper has shown what should be the norm.
In price and valuations, the market has fallen to levels similar to those after the Lehman collapse. Yet the situation really is different.
Japan Inc. has seen a substantial improvement in efficiency and profitability since late 2008. Even had sales fallen in Q2 this year to the very low levels seen at the worst of the economic crisis in Q2 2009, recurring profit would have been nearly 2.5x greater than was recorded in 2009. Corporate free cash flow is at record levels as is the cash balance in Japanese corporations.
Consensus estimates have earnings growth of over 20% for the next couple of years and the dividend yield is higher than that of the S&P 500. Plaintive cries from Japanese fund managers of the value in the market may sound like a broken record – but sometimes the record isn’t broken, it’s just déjà vu all over again.
