By Stefano Casertano
"Hurdles and Rewards: Navigating Japan’s Financial Services Market" was the title of the symposium held January 23 at Japan Society as part of their Corporate Program meant to create networking opportunities for executives, policy makers, journalists, academics, and students interested in Japan related topics. About two hundred people attended the symposium. The event was cosponsored by the Center on Japanese Economy and Business of Columbia Business School, Nomura Holdings America, Inc., and The Women's Bond Club of New York.
The opening of the Japanese economy to foreign talents and investments was expertly explained by Mr. Brian Kelly, managing director of Asian Century Quest Capital, LLC. Based on his experience as the only foreign trader on the Tokyo Stock Exchange in the late eighties and as a witness to the internationalization of that market, he explained why the Japanese equity market may seem undervalued in comparison to the multiples of other countries. It is a matter of trust by the investors. The legacy of strictly hierarchic corporate structures affected transparency, and equity holders would need precise guarantees that investments within the company find the most effective allocations. The influence of the old relationship between large companies and banks is the root cause of the current situation. As Japanese companies needed to recover after the war, the keiretsu structure was put into place, in order to create a financial environment to foster growth. In the last decade, companies have started paying back their loans. Before, managers told bankers all that they needed to know; now, this informational flow is being restructured to fulfill the needs of the new stakeholders. Yet, “internationalization” is still a driving force in the Japanese market.
Ms. Leslie Norton, foreign editor, Asia, Barron’s, reported how some current issues may be affecting the situation. The “decoupling” theory of Japanese stocks being largely independent from the US ones is far to be proven; and nationals increasingly prefer to invest their capital abroad. However, these specifics are not enough to alter the promising shape of general financials. If there is a crisis, the situation is certainly better than what it used to be in the nineties.
Ms. Alicia Ogawa, director of the Program on Alternative Investments of the Center on Japanese Economy and Business, elucidated the central question concerning the competitiveness of Tokyo as a world financial center: Does Japan have a consensus to maximize profit and maximize shareholder values? As she noted, “no where does that become more apparent than in the financial services industry, which is all about entrepreneurialism and taking risk.”
The topic of Japanese foreign investing was raised specifically during question and answer time by the audience. The performance of equity flowing out of Japan has historically varied. In the opinion of Ms. Ogawa, the experience in the financial sector has not been a great one for the Japanese institutions, although there are some significant exceptions. Nevertheless, on the manufacturing side, the Japanese experience has become a textbook example of great success. On the side of sovereign investment, Mr. Kelly’s opinion was that the Japanese government does not seem particularly interested in the topic, and a direct intervention can be reasonably excluded.
Mr. Masatomo Harigaya, director of International Equity Sales, Nomura Securities International, Inc., suggested that some changes are required to spur the interest of foreign investors in the Japanese market. Among them he cited the need for Japanese corporations to improve their attitudes towards shareholders and the need for the financial service industry to focus on mid-risk and mid-return investment. Some actions could also be undertaken in order to increase the competitiveness of Japanese trading markets. One suggestion is modifying the operations of The Tokyo Commodity Exchange (TOCOM), in order to better serve international investors; in July 2007, the TOCOM announced that it was planning to introduce a 24 hour electronic trading system, on the model of the Chicago Mercantile Exchange. With respect to the overall performance of Japanese companies, another explanation was provided on the side of equity undervaluation: ROE has been constantly increasing in the last five years, but capital efficiency has been deteriorating. This is a sign that there are great opportunities to introduce advanced financial instruments to serve the needs of companies.