TT-489 -- Nothing to Fear But Fear Itself, ebiz news from Japan

* * * * * * * * * T E R R I E 'S T A K E * * * * * * *

A weekly roundup of news & information from Terrie Lloyd.

General Edition Monday, October 13, 2008 Issue No. 489


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

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The Sky is Falling.

Until Friday, we weren't going to write about the market
meltdown, really. There has been so much analysis on the
subject already. But we're now that we're still in the
midst of one of the biggest financial corrections to be
seen in our lifetimes we thought that at least we could
comment on the Japanese side of things and speculate on
what is going to happen next. Certainly if you own shares
we commiserate with you, and if you don't, perhaps you
should be considering getting an online trading account.
Buying at the bottom doesn't get much better than this.

As pretty much every media vehicle known to man has
reported, this last week was a terrible one for
shareholders. In Japan, the Nikkei had it's worst weekly
fall since the index was created 50 years ago, and lost
24.33% of its market cap. That's about JPY65trn (US$650bn)
gone up in smoke. Stocks of just about every major company
are down. In fact on Friday, when the Nikkei fell 9.6% in
just one day, there were 1,649 losers and only 44 gainers
on the TSE's First Section. An extraordinary situation.

The problem of course is global fear. Banks are wondering
whom amongst them will be the next to default on their
obligations, and thus no one is lending to anyone else.
This is why governments, including the Japanese, are having
to pump so much liquidity into the money markets. At the
same time, the fear is coming from people worrying about
what the true scope of the financial mess really is. Our
guess is that it's a lot, lot more than just US$700bn. The
U.S. doing currency swaps and extra borrowing, along with
the U.S.-style bail-outs in other countries makes us think
of a final number in the multi trillions.

Then of course there is the fear of the ordinary man in the
street and their employers. With the media having a frenzy
about the fall, people are thinking for the first time in 2
decades that their jobs may be in danger. This correction
is no longer just about stock markets and spectator sport,
now the fear is spreading out into regular commerce. The
September Tankan survey, a measure of the confidence of
companies, took its biggest dive in 5 years, from +5 in
June to -3 last month. In the USA, some companies are
taking covering action already. Several weeks ago eBay
announced that it was firing about 10% of its workforce.
Our expectation is that it won't be long before Japanese
companies start having to do the same.

Indeed, we think the only reason such lay-offs haven't
already happened is that many companies, like their
governments are still dazed by the freefall. They haven't
been back to the bank to ask for more credit yet, or had a
customer go bankrupt on them. Instead, they're still hoping
to ride the storm out. But, just as people caught in the
eye of the hurricane can't do much more than hunker down
until it passes, you can be sure there is going to be a lot
of cleaning up to do afterwards. This is omninous for
Japanese firms which make things, because we still have 9
weeks before Christmas -- lots of time for jobs to get cut,
bonuses withheld, and shopping lists to be trimmed.

[Continued below...]

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[...Article continues]

The level of fear among investors in Tokyo is palpable, and
is of course impacting not just investors but also the
regular Taro in the street. Toyota, Sony, Nintendo,
Tokyu... just about any company that services the consumer
markets either overseas or in Japan is now looking at a
very bleak 2009, and their stock prices reflect this. While
Toyota may have enough cash to tough things out, many other
firms are riding closer to the edge and are going to have
to start cutting back. Most owners and managers have sensed
the downturn well ahead of last week, and industrial
production in Japan dropped 6.9% in August, year on year,
unemployment has crept up to 4.2%, and capital spending
forecasts are for a gain of just 1.5% for next year.

Non-professional investors, the ones that the
"professionals" make money off through their inertia,
typically listen to the advice of "ride it out". And so
they have and their stock has got hammered. But there is
a pain threshold, and once you have taken 1/3 off the value
of your stocks, unless you're very liquid, you have to be
thinking to yourself, better losing a 1/3 than a 1/2. This
is leading to a mass of sell orders, not just in stocks,
but also in those other two favorite haunts of Japanese
housewives: foreign exchange and mutual investment funds.

An interesting point we noticed in this latest drop in the
Nikkei is how much more badly the Japanese investors and
businesses have reacted to negative news and imagined
threats than do other countries. For example, on Friday,
the Dow dropped 6% at one point, which was bad enough,
but it actually bounced back slightly in the last half hour of
trading. On the other hand, the Nikkei on Friday took a
course straight down, and hit 9.67% below the start of the
day. Monday is a holiday, so we'll have to wait til tomorrow
to find out if the plunge is to continue.

This made us wonder why the Japanese have gone so negative
so drastically. Some reasons we could come up with are:

1. Japan's consumers have not really recovered from the
bitter lessons of the 1990's and so the domestic GDP has
had very little fat in it. People are fearful of a return
to that period and even a slight change of sentiment can
have a huge negative result.

2. The mini-boom of the last 4 years has essentially been
driven by a 1,000 or so companies and the export earnings
they have been able to pump back into the local economy,
and trickle-down spending from there. Now that those
companies' best markets are in crisis mode, everyone
realizes that the export ride is over at least

3. The part of the mini-boom which has been domestically
driven, land and buildings, has largely been a speculative
bubble. As we wrote almost two years ago, we knew of very
few companies even back then who could afford the
exhorbitant rent increases and flash new buildings that
were going up. Instead, the boom was boosted by a few
REITs, private owners, and most importantly by large
amounts of foreign surplus cash from funds who adjudged
Japanese real estate as being undervalued. In fact,
compared to the rest of the world, it was. But for Japanese
consumers stuck on pre-1991 wages the land values were
appropriate and since 2005, they have become too expensive

4. Lastly, and also importantly, the Japanese themselves
are born pessimists. We recall an old Dentsu study done
back in 2000, that found that the Japanese were twice
(about 65% of those surveyed) as pessimistic about the
future of their country and their lives than other Asians.
Another more scientific study done last year posits that
many Japanese students are practicing "defensive
pessimism" as a way of emotionally limiting any downside in
their high-pressure lives. But because the behavior is
defensive, they apparently can continue working and
participating in society, rather than getting consumed by
their emotions.

So will Japanese pessimism cause the the Nikkei retrace its
famous low of 7,699 reached in 2003? Or is the pessimism
overdone? Our guess is that the coordinated actions of the
G7 Economic Ministers, coupled with the U.S. Secretary of
Treasury's soon-to-be-publicized bank and corporate
rescues, will stem the tide some time by November. Given
that this is a fear-driven meltdown, the approach of the G7
countries to share the pain around means that we're all in
this together. We certainly don't like the idea of
tax-payers, including Japanese ones, have to shell out for
American banker's mistakes, but it's a better solution than
having a second great global depression.

However, until confidence does return to the market, we
believe there will be further extreme gyrations of the
stock market, in both directions, and it is quite possible
that the Nikkei will drop another 10% in the short-term.

Despite the panic, what goes down will come back at some
point, thanks to certain longer term fundamentals that will
keep Japanese companies and their products in favor.
Alternative energy, transport, clean water, nuclear power
stations, manufacturing equipment and spare parts,
electronics, plastics, and many other essentials will sooner or
later come back into demand and this means that some stocks
which look very cheap today could come roaring back in the near

One stock that we're not invested in, but are certainly
tempted by is Mitsubishi Motors (MM). This company's shares
are now just 111 yen, half that of a year ago and only 30%
more than the firm's 1999 historic low. Yes, the PE is
still quite high, at 17.62, compared to Nissan's very
reasonable 3l94. However, what MM has going for it is that
its early electric car strategy coupled with its very deep
pocketed parent company mean that it can last the distance.

In fact, MM will lead the electric vehicle pack. The
company recently entered into a major auto battery venture
with GS Yuasa, and between them they are building a JPY4bn
(US$40m) factory in Shiga-ken which will turn out a million
Lithium-ion auto battery modules a year, apparently enough
for 10,000 vehicles. The batteries will start rolling off
the production line next April. Even if oil comes back down
to US$70 a barrel, global consumer interest in electric
vehicles has now passed the acceptance threshold and city
dwellers the world over will be clamoring for one of these
cars. We think Mitsubishi Motors will be in the news for
months over their i-MiEV debut, and we can only imagine
that this will have a hugely palliative effect on the

Further, MM is also getting substantial help from its
parent company Mitsubishi (trading). The battery factory
will get its rare metal ores through the trading giant, as
well as already receiving a large cash investment in the
facilities. Elsewhere, Mitsubishi trading has also helped
MM get into Russia and other new markets, and this has been
credited with having helped save the MM company.

The moral of this story is that even though the sky is
falling, new opportunities are popping up all the time and
those Japanese companies who have practiced the national
trait of frugality and supply chain control will emerge in
good condition. The fundamentals haven't really changed,
and while its hard to think about tomorrow when there is
blood in the streets today, but that's how fortunes are


It's that time of year again, all those of you who are
budding entrepreneurs or representatives of foreign
companies wishing to incorporate, and wanting to hear in
one succinct session what it takes to start, run, and sell
a successful company in Japan, our next Entrepreneur's
Handbook Seminar will be held on October 25th, 2008 --
that's 2 weeks from now. The seminar will be conducted by
Terrie Lloyd and comes with notes, lunch, and a free-format
Q&A session for those who have ideas already fleshed out.
The location for the seminar is yet to be decided, but will
be in the Shibuya-ku, Minato-ku area. Other details are on
the Japan Inc. website at

...The information janitors/


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+++ NEWS

- KVH goes international with data
- Yamato Insurance goes under
- Nichirei buys into Chinese food processor
- New City Residence goes bankrupt
- Bankruptcies rise by greatest rate since 2000

-> KVH goes international with data

Fideltiy-owned telecomms firm KVH, is ramping up its game
by investing into international communications bandwidth,
so as to offer competitively priced data connectivity to
corporate customers. Apparently the company has directly
purchased bandwidth off international cable owners and
will build its own communications facility in Hong Kong.
KVH says it will be offering data connections at a 30%-40%
discount to pricing currently offered by KDDI. (Source: TT
commentary from, Oct 11, 2008)

-> Yamato Insurance goes under

Japan's 33rd largest insurance company, Yamato Life
Insurance, has become the first Japanese financial firm to
go bankrupt due to the US subprime crisis. The company,
which was privately owned, found itself bankrupt after
marketing to market its holdings in investment securities.
The company leaves behind debts of JPY269.5bn (US$2.7bn),
but has sufficient assets to redeem about 90% of its
customer base's policies and investments. Government
officials are saying that this is not the start of a trend,
and that Yamato is not a major player and was lax in its
investment strategy. ***Ed: So what do they know? Those
same officials have never been involved in a global
financial crisis like this before. No doubt some more "lax"
companies will be purged before this is over.** (Source: TT
commentary from, Oct 10, 2008)

-> Nichirei buys into Chinese food processor

Reinforcing an article we ran recently on how Japanese
companies are trying to maintain the advantage of Chinese
production costs and yet still protect their food safety,
frozen-food leader Nichirei has said that it will buy 5% of
Yantai Beihai Foodstuff, a Shandong-based frozen food
company which is one of Nichirei's main suppliers. Most of
Nichirei's frozen veges are grown in China (in case you
didn't know and like buying frozen). ***Ed: We expect
Nichirei to be investing in other supplies, and for similar
announcements from its competitors. It appears that while
the percentage of stock held is not major, a good risk
reduction strategy by Nichirei, there is sufficient money
being earmarked to improved the target firm's equipment,
training, and process management to make produce safe for
Japanese consumption.** (Source: TT commentary from, Oct 10, 2008)

-> New City Residence goes bankrupt

We were sad to see the bankruptcy of New City Residence, a
foreign-owned and run REIT which has short-stay apartment
buildings in inner Tokyo. The 4-year old REIT went under
leaving debts of JPY112bn (US$1.12bn). No word yet on who
will buy the assets. ***Ed: As with so many companies in
trouble these days, we knew something was up when we
started seeing resumes from New City employees -- a
surprising thing at the time because they were known as a
good employer.** (Source: TT commentary from,
Oct 9, 2008)

-> Bankruptcies rise by greatest rate since 2000

Following the September collapse of Lehman Brothers Japan,
which was the second largest bankruptcy in Japan since the
war, the volume of companies going under has gathered pace
and is now rising at the highest rate for the last 8 years.
There were 34% more bankruptcies in September, with 1,408
cases. Real estate company failures increased by 31% and
construction company failures by 41% -- underlining the
severe shortage of capital and the fact that there is now
an economic contraction underway. But faring even worse
were the manufacturing, finance/insurance, and
transportation sectors, in which failures rose at a rate of
44%, 56% and 133% respectively! (Source: TT commentary from, Oct 8, 2008)

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

*** No corrections or comments this week, although we did
get some nice compliments about the Nomura-Lehman analysis.
Thank you.


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