TT-410 -- Nikko's resurrection

* * * * * * * * T E R R I E 'S T A K E * * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, February 25, 2007 Issue No. 410


- What's new
- News
- Candidate roundup/Vacancies
- Upcoming events
- Corrections/Feedback
- News credits

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In our January 21st editorial giving business predictions
for the year, we commented about Nikko Cordial's JPY18bn
(and rising) window dressing scandal, and in contrasting
it with the Horie-Livedoor scandal, we wondered why the
Nikko guys were getting off with just a fine and a slap on
the wrist?

Well it appears that we spoke too soon. From all accounts,
both the authorities and also the company itself will throw
the book at the 5 or so executives deemed responsible for
the misdeeds, and it is quite possible that some will wind
up doing prison time.

To recap, you may recall that late last year, the
Securities and Exchange Surveillance Commission (SESC)
and Nikko Cordial had a dispute over how Nikko Cordial
and its subsidiary Nikko Principal Investments booked
profits for FY2004 after trading with a Special Purpose
Company (SPC) called NPI Holdings Inc. Basically instead
of being arms length, the trading was found by the SESC
to be internal to the company, using Bell System24 stock
to churn trades and thus pump up the profits at Nikko
Principal. We imagine that as investigations proceed there
may be more allegations to come to light.

The first head to roll has been that of Hirofumi Hirano,
the Chairman of Nikko Principal Investments. As he was
leaving in mid-December, the SESC announced that via the
FSA, they'd be slapping a JPY500m fine on Nikko Cordial.
The President, Junichi Arimura, Chairman, Masashi Kaneko,
and later the Finance Director, Hajime Yamamoto, all
expressed remorse publicly and took 30%~50% pay cuts.

And there it might have ended, but for Arimura and Kaneko's
decision to take on the SESC and giving the watch dog
some serious "attitude". Well, you don't give the finger to
the bureacrats, as Horie learned, and before you could say,
"You're fired," the Finance Minister and even the PM
started weighing in on TV about the problems at Nikko.
Within 10 days, the game was up and Arimura and
Yamamoto were forced to resign.

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The press has been full of Nikko Cordial articles since
then. One new development has been that Nikko Cordial
itself will take legal action against Arimura, Yamamoto,
and Hirano and seek JPY3bn (US$24.59m) in damages. The
company has suffered substantial fall-out because of the
wrong-doings, and is losing clients at a prodigious rate.
The company has also been warned by the Tokyo Stock
Exchange (TSE) that it may be delisted -- a great
humiliation for a once proud firm that is the third largest
securities broker in the nation. The threat of delisting
has sent Japanese shareholders scurrying to sell, as any
major company in Japan with a scandal on its hands is quick
to find out.

Of course, one man's mess is another's meat, and as the
name-brand shareholders have deserted Nikko, savvy foreign
funds have been quickly buying in. One news item we picked
up on in January was that Canadian investment management
firm Mackenzie Financial Corp raised its stake in Nikko to
5.7%, surpassing Citigroup as Nikko's biggest shareholder.
We hope that they bought some more between February 2-3
because someone sure did. On February 1st, the stock
tumbled 27% from JPY1,400 down to less than JPY1,000, then
the overseas buying started. On February 2nd, the volume
of trades jumped from the average 10m shares or so a day
to 80m shares. Clearly there is some smart money out there
saying that Nikko is not damaged, just dented.

One company that probably thinks this is Citibank. Late
this week, the Japanese financial media was busy
speculating if and when Citi would launch a takeover of
Nikko Cordial. Currently Citi owns just 4.9% of Nikko
Cordial, and as of last year, relations between the two
companies appeared to be somewhat frosty as Nikko Cordial
started divesting itself of various joint ventures, in
preparation for a rumored split with Citi.

However, with the current scandal leaving Nikko Cordial
rudderless, the company at least knows that it can trust
Citibank, by virtue of the one co-investment that has
worked for both companies -- the very successful Nikko
Citigroup Ltd investment banking operation. Citibank is
expected to take at least 33.4% of Nikko Cordial's shares,
giving it effective control of its board, and eventually
leading it to take a majority in due course.

At the regulatory level, we expect the authorities to
approve of a merger. Following Citi's own travails in
2004 and 2005, when it lost its private banking business
due to an FSA suspension order, Citi appears to have spent
a lot of time and energy in addressing its corporate
governance. If the deal goes through, Citi will reportedly
send some of its executives to Nikko Cordial, to help get
things back under control again.

If Citibank does manage to take control of Nikko Cordial,
something which will probably cost it about JPY700-800bn
to achieve, it will represent a huge coup for the foreign
bank and create many new opportunities. In particular, it
will bring an order of magnitude more investment leads,
ranging from VC and private equity, through to structured
finance and buy-outs, as well, of course, as a
well-developed retail network.

Nikko Cordial and its various subsidiaries, including Nikko
Principal Investments, is a very busy group and has been
turning reasonable profits despite the scandal. We think
that this is a classic case of market overreaction and
that the fear of tainted reputations is leaving the gates
wide open for someone to swoop in and do a takeover.

We also believe that there will be more of these cases as
the SESC and FSA make it clear that they are getting
serious about proper controls and corporate governance. Now
it's up to Japanese companies to toe the line and start
investing in their corporate governance systems and
processes. Or else, they will have to suffer barbarians
(that's the foreign funds!) at the gates and bureaucrats
(that's the gnomes) in the garden.

*** This week's FEEDBACK section is about our Xenophobia
article last week, where we wondered whether new rules to
regulate foreigners don't have a deeper reason...?

...The information janitors/


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+++ NEWS

- First successful shareholder revolt
- MEXT questions Japan Sumo Association
- Real CHEAP notebooks on the way
- Digital music downloads soar
- 'baby hatch' condemned by PM Abe

-> First successful shareholder revolt

Japan's first successful shareholder revolt to block an M&A
deal occurred last week, when Tokyo Kotetsu shareholders
rejected a management bid to merge the specialty steelmaker
with Osaka Steel, a subsidiary of Nippon Steel. The deal
was rejected because the takeover price was a full 17%
lower than the stock market price for TK's shares. Leading
the revolt, and in the news recently, was Ichigo Asset
Management, headed by Scott Callon, most recently of PCA
Asset Management before starting the fund. ***Ed: Our take
is that either Tokyo Kotetsu's senior management were
blinded by Nippon Steel being a suitor, or they had a side
deal going on. Ichigo is hopefully leading a trend for
other shareholders to turn up the heat and demand
accountability from senior managers.** (Source: TT
commentary from, Feb 22, 2007)

-> MEXT questions Japan Sumo Association

The Education, Culture, Sports, Science and Technology
Ministry (MEXT) is grilling officials of the Japan Sumo
Association over whether or not they were involved in the
fixing of tourney bouts. MEXT took action after the Shukan
Gendai accused Mongolian Yokozuna, Asashoryu, of paying
other wrestlers to lose bouts. In response to the
accusations, the Association and 17 sumo wrestlers,
including Asashoryu, filed a lawsuit against the publisher
seeking JPY480m in damages for defamation. ***Ed: We think
Asashoryu is a geniune wrestling phenomenon, and not being
Japanese-born is certain to stimulate the gutter press.
While one can expect accusations such as this to bubble up
as excuses for the obviously inadequate level of Japanese
wrestlers, we were surprised at the robust response by the
Sumo Association. Obviously they now realize that the
foreigners are here to stay.** (Source: TT commentary from, Feb 20, 2007)

-> Real CHEAP notebooks on the way

US PC maker Everex has announced that it will start selling
its VA7500J notebook here from next week, for just
JPY68,000. The new unit has a 15.4-inch LCD, 1.5GHz C7-M
CPU, 512MB of RAM, 60GB hard disk, DVD player, and Windows
Vista Home Edition. The company says it was able to reduce
the pricing for the unit thanks to its low power CPU and
circuitry, which allows use of a smaller Lithium Ion
battery. (Source: TT commentary from, Feb 22,

-> Digital music downloads soar

The Recording Industry Association of Japan (RIAJ) says
that domestic sales of digital music in 2006 soared 56%
over 2005, to reach JPY53.47bn. Apparently the increase is
gaining momentum even now, with download sales increasing
44% in the last quarter of 2006 alone. 90% of the downloads
were to cell phones and much of the increase in sales was
due to full-length tunes, not partial clips or ring tones.
(Source: TT commentary from, Feb 24, 2007)

-> 'baby hatch' condemned by PM Abe

Expressing concern that it would promote parental
desertions, PM Shinzo Abe has condemned a plan by Jikei
Hospital in Kumamoto, Kyushu, to create a "baby hatch" at
the road frontage of their hospital, where women can
deposit unwanted babies. Apparently the hatch is built
somewhat like a parcel postbox, fitted with an alarm so
that after the child is dropped off, the staff are alerted
to go check. Catholic-funded Jikei's motive is to
discourage abortions and allow unplanned pregnancies to be
dealt with in a humane way. Statistics show that there were
300,000 abortions in Japan last year -- potentially 1/3 of
all the children conceived. The Health Ministry has already
OK'd the project. (Source: TT commentary from, Feb 25, 2007)

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.


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In this section we run comments and corrections submitted
by readers. We encourage you to spot our mistakes and
amplify our points, by email, to

-> TT 409 -- Xenophobia. We discussed how certain rule
changes that make life harder for foreigners living in
Japan may either be a general structuring for a coming
opening of the immigration gates, or the start of some ugly
xenophobia by the nation's authorities.

*** Our reader says: I have lived here now for about 7
years, and will likely be here for many years to come. I
don't always expect things to be smooth, living in a
society as closed as Japan, but that is just part of the
challenge of life anywhere. I don't necessarily mind being
"different", because being different can have its

What do I find most difficult is: I feel that despite
contributing to the growth of society more than the average
Japanese person (by building a business, employing Japanese
people, paying taxes both personally and through my
company), I feel that I have no say in the direction this
society is taking.

Do you know of any forums or organisations that are
actually having some effect and through which I could
regain a sense of contribution?

For the sake of my sanity, I need to feel like I have at
least some control over my life here as a foreigner. I
deserve more than to be treated as a "taxpaying guest" to
use the phrase you coined.

Otherwise, I know what will happen: at the earliest chance
I can get I'll rearrange my interests here and simply move
to a place where I can feel at home, and I'm sure I'm not
the only one who feels this way. An exodus of educated and
qualified foreigners would be unfortunate for this country.

*** We respond: To our knowledge, there are really no
meaningful forums in Japan for foreigners to promote their
own well-being. However, on a business level, the most
powerful forum is the lobbying group at the American
Chamber of Commerce in Japan, and on a residency level,
there are foreigner panel discussions conducted by some of
the ward offices. For education, we have heard that the
heads of a number of Tokyo-based foreign schools have also
been meeting, to both advise and to pressure the government
about schooling needs for non-Japanese.

...The information janitors/

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