Posted by: Kenji Hall on April 17, 2008
It was a blow to good corporate governance or a victory for national security, depending on which side you’re rooting for. Either way, Japan’s April 16 decision to block The Children’s Investment, a British fund, from raising its 9.9% stake in electricity wholesaler Electric Power Development (J-Power) appeared to send a strong message to global investors: Shareholder activism won’t work in Japan.
Now is not the time for Tokyo to lower expectations. The government is eager to persuade investors that it wants to become Asia’s financial hub. How it aims to do so will become clearer in the coming weeks, when a government economic advisory panel issues its final recommendations to further deregulate Japan’s financial markets.
Few details have emerged so far. But the panel is widely expected to unveil a to-do list that includes relaxing tax laws, loosening restrictions separating banks and brokerages, and freeing trillions of dollars in public pension money into the market. The objective: Make Japan a less hostile place for overseas banks, funds and other big investors. “One way to keep Japan’s economy first-rate is to make Japan more open,” says Takatoshi Ito, a University of Tokyo professor and member of the government panel.
The panel’s recommendations will be a good place to start. The problem is, they need Prime Minister Yasuo Fukuda’s endorsement and the legislature’s blessing before being rolled out over 12 months. That’s looking doubtful, given the political logjam over the selection of a new central bank chief and the renewal of a gas tax. What’s more, the panel’s influence in recent years has been waning.
If anything, TCI’s thwarted $590-million attempt to double its stake in J-Power suggests that Japan’s policymakers aren’t ready to make the hard choices to restore investors’ faith in Tokyo. "It could create a very negative impression among both domestic and overseas investors who are already irritated by the poor performance of their Japanese equity holdings," Credit Suisse's Shinichi Ichikawa wrote in an April 17 note to investors.
Some observers aren’t optimistic Japanese policymakers will ever get their act together. "They’ve lost a lot of time,” says one official at a bank lobby group, who spoke on condition of anonymity. “I don’t think it’s going to happen.”
What might get global investors to shift more of their business to Tokyo? Unleashing the $15 trillion of household savings, for starters. At least half of the total amount is still stashed away in bank accounts earning next-to-nothing rather than flowing into Tokyo’s market where it can help the country's businesses. And the bulk of the $1.5 trillion in public pensions is languishing in ultraconservative investments such as government bonds instead of being in a more balanced portfolio with medium-risk-medium-return securities. Wealth “is just sitting there and not being mobilized to the extent of other countries with much smaller assets than Japan,” says Ito. Reining in Japan’s regulators, regarded by some as too nitpicky and by-the-book, would help, too, he adds.
But that’s not likely to be enough for global investors to move their regional headquarters from tax-friendly locales such as Singapore and Hong Kong any time soon. And recently the trend has been in the opposite direction: A number of fund managers have closed their offices in Tokyo to be elsewhere in Asia, for fear of getting slammed by Tokyo’s hefty capital gains taxes.
How TCI’s crusade goes could make more of an impact than any financial-market reforms. That's because the reforms would mean little if the government could step in and overrule them at any time. Another high-profile fund, New York-based Steel Partners, run by Warren Lichtenstein, failed in its attempt to take over Bulldog Sauce, a Japanese condiments maker, and has yet to make much progress in getting a handful of other companies in which it owns stakes to boost shareholder value.
Even so, TCI, J-Power's largest shareholder, doesn't seem ready to give up the fight. At a press conference on April 17, TCI Asia director, John Ho, outlined a five-point proposal that would have J-Power raise shareholders’ dividends; conduct a $690 million share buyback; add outside directors to the board; and sell the shares it owns in its Japanese business partners (known as cross-shareholdings).
Ho attacked the government’s assertion that dividends and share buybacks would weaken J-Power's finances and threaten the nation’s electricity infrastructure, calling it "totally ridiculous.” He said the fund, which has until next week to drop its bid, will take some time to consider its response to the trade and finance ministries’ ruling.