I ’ve never written about Japan’s capital markets, because they are so marginal to my vision of Japan (as they are to Japan too, despite their size).
Of course, I am a massive bear on Western capital markets. The latest LIBOR scandal is one I have been following closely. Right from the beginning (I think the Financial Times wrote the first article at least one year ago), I could not understand why more people weren’t taking it seriously.
People say it’s technical. Well, let me put this way: LIBOR is the clock that regulates the financial universe. A clock is not important in itself, only insofar as it measures TIME. And time is the most precious substance in the universe, at least for living organisms.
Similarly, LIBOR is a simple indicator. But the decisions which investors make based on that figure help them understand risk. Based on the data given to them by LIBOR, they make far-reaching and high-volume decisions.
As a former financial journalist, to hear that this clock has been tampered with filled me with the kind of anger a pilot would feel on finding that his altimeter had been fiddled with, perhaps because of some trivial bet by a mechanic. What he had thought was a device of unimpeachable reliability turned out to be bogus. That’s quite a shock.
The difference between Western bankers and Japanese bankers is that the former believe their own fairytales. I have always found Japanese bankers to be far more unassuming and modest. Perhaps the fact that their incomes were far lower than those of Western bankers kept them much more grounded.
Japanese capital markets are also rigged, to a greater or lesser extent. But what’s interesting to me is that everyone knows about it. There is no pretence about the wisdom of markets. My mother-in-law keeps her money in ¥10,000 notes. Thanks to deflation, her little hoard keeps going up in value – without the hassle of determining which asset class to put them in.
It’s a litany of familiar problems (insider trading, excessive dilution, shareholder-unfriendliness) that keeps Japanese capital markets so cheap. But even at that level of cheapness, most Japanese don’t buy. They leave that to foreigners, who historically have owned 20–30% of the market. And we are talking really cheap: many companies are trading at less than their break-up value.
I would like the Japanese capital markets to be more honest, transparent and high-yield. But I don’t think it is systemically possible. And in the meantime, Japan has far more alternatives than, say, the UK in a world where capital markets are becoming so discredited. Indeed, Westerners should start thinking seriously about their post-bubble world. Japan is the ultimate lesson: The stock market has never come anywhere near its peak of almost 40,000 points just before the bubble burst (1990s). The Nikkei is now trading at well under 10,000.
Western investors should start wondering about how their social and work model will look if the same fate befalls them. Already, global ageing is causing huge asset shifts into bonds and out of equities. Retail investors (the “dumb money” from which the bankers made their money) are staying away in droves. Many of the promises made by our bankers are proving utterly false: from paying out pensions to selling products that meet the very minimum standards of decency and honesty. The UK is ablaze with mis-selling scandals at the retail level, as well as fraud at the most senior level.
Socially, Japan adapted fairly well post-bubble. Traditional strengths such as loyalty, solidarity and cohesiveness emerged that helped tide the country through – at least until the catastrophic legislation under prime minister Junichiro Koizumi (2001–2006) turned Japan Inc into a cruelly unfair two-tier labour market. But Japan still has moved far less down that road than have capital markets-driven economies. People still remember how a real economy, and a real community, works. For once, Japan should understand it is the sensei here in teaching naive Western economies how to live after an appalling bubble.