TT-495 -- The Recession, What's Ahead? ebiz news from Japan

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A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, November 23, 2008 Issue No. 495


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

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The Japanese stock market is bouncing around like a yo-yo
and investors are getting dizzy. As many market bears have
been saying, it's starting to look like this is no ordinary
recession and perhaps it's time for us all to start
thinking further ahead about what else might happen.

Just to quickly review, on October 27th, just four weeks
ago, the Nikkei 225 Average dropped to its lowest point in
26 years, when it temporarily hit 7,141.27. Since then, the
Nikkei has been up as high as 9,521 two weeks ago, and down
to a new low of 7,406 last Friday -- although investors
recovered confidence later in the day and the Average ended
up at 7,910. With extremes like this, including 6.4% from
peak-to-trough in just one day, it is no wonder that most
people are sitting on the sidelines, waiting for the storm
to pass. But will it pass any time soon?

The seesawing action of the Nikkei isn't just happening in
Japan. If you overlay the Nikkei 225 chart on the Dow Jones
Industrials Average, you'll see that almost every move of
the DJI is tracked a day later by a similar but even more
pessimistic reaction in the Nikkei. Clearly Japanese
investors look to the USA for leadership and market
direction, and respond accordingly. There is a strong
belief that the U.S. is still the world's financial engine,
and what is bad for the U.S. can only be worse for Japan.

With this going on day after day, and with little change likely
until Barak Obama is sworn in and his new government has a
few weeks to settle the markets with new legislation and
programs, what is an investor to do? Is this a chance of a
lifetime to get into Japanese stocks cheaply? Or is it
better to keep your powder dry in case the markets slump
even further?

Further, if this recession develops into a global
depression, then what are some of the more extreme
possibilities in regards to Japan?

[Continued below...]

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[...Article continues]

We are not stock trading professionals, but being in
business requires us to steer our companies and teams
through the rocky shoals. Doing this requires a certain
awareness of global economics and market fundamentals.
These "fundamentals" are of course all about human
confidence, and in the current environment they have
almost nothing to do with actual financial results. If
people lose confidence, then the trust which is so
important for companies to trade with each other also
evaporates, and everyone sits on their own pile of cash
waiting for that trust to magically reappear again. We think
it will be a while before the thaw happens, and indeed,
there is likely to be further freezing first. After all,
some big Japanese companies are still out there buying up
assets as if there will be no recession.

We've been following the commentary on three of our
favorite websites to get a feel for where investors will turn
and what the likely direction of this downturn will be. The
three sites are The Daily Reckoning
(, Seeking Alpha
( and of course the Nikkei
(, subscription required). Over the
last few weeks, commentators and editors have been
opining that the smart money is picking "basic living"
industries to be in, since these businesses will still
continue to trade even if the downturn becomes a lot
worse. By "basic living" we mean food and toiletries
companies, and public utilities and transportation

In Japan at least, food and utilities will always be the
safest stocks, because it's not possible for the populace
flee to the countryside and grow their own vegetables.
Certainly Japan's biggest punters think this, and it is
probably no coincidence that Itochu, one of the largest and
most successful of Japan's trading companies, has just
announced an investment of US$700m to buy a 20% stake of
China's biggest food processing company Ting Hsin. Amongst
other things, Ting Hsin controls that country's biggest
instant noodles maker, Tingyi Holding. Whether Itochu is
just thinking about the China market (unlikely) or plans to
somehow migrate their investment back to the Japanese
market is unclear at this stage. However, what is clear is
that company is diversifying to supplement recession-
sensitive minerals with more immediately sellable food
and other consumables.

Apart from food and toiletries, other sectors that we
expect to grow as the recession bites harder are: tobacco,
alcohol, and perhaps surprisingly, home entertainment. We
choose this last sector because we feel that as people get
more depressed with their situation, they will look to
escape reality. And while being drunk can be fun for a
while, entertainment for the mind is much better value.
Internet and mobile phone websites and games are cheap to
use once you've made the initial investments, and in a
manner of speaking are the "utilities" of the mind.
Hook in, and you're addicted for life.

For this reason we'd be looking at some of the Internet
entertainment stocks where companies have proven money
making ability but which have been badly hit by the exodus
from what are perceived as risky investments. One company
which meets this criteria is Axel Mark, whose market
valuation has to just 0.68 of its price-to-book-value
ratio. Yes, this company will probably suffer further
near-term earnings falls, but as the recession takes hold
and people need more mental escape, this and other
businesses like it will come surging back on the basis of
increasing earnings.

Just a note on "book value". Many investor sites are now
talking about Japanese companies becoming interesting as
investments again, due to their share prices falling below
their book value. On the face of it, this is a compelling
argument to enter the markets and take a punt. But before
doing so, we encourage investors to remember that the
actual book value in Japanese companies isn't always what
you think it should be. We've seen witnessed first-hand
listed companies which have reported their subsidiaries (in
particular) at unrealistic valuations. No one challenges
the assumptions made, and only trying to sell off such
assets would reveal that their real value is but a
fraction of the reported asset value. So, our take is that
investors need to stay focused on future earnings as well
as the apparent cheapness of the stock.

Looking out further than the next year or so, one
interesting comment made on Seeking Alpha was that Barack
Obama's government would necessarily become protectionist,
as it sought to limit the hurt being done to wage earners
(voters). Protectionism is a bad direction for the global
flow of goods and services, and for U.S. economic health in
general, but since Obama was voted in as a man of the
people, we suspect that further into his term he will find
it difficult to move away from this expectation and will
need to bash the foreigners for taking U.S. jobs.

Thus, America is likely to start hitting China in
particular. Initially we guess the demands will be for a
revaluation of the Yuan, much as was done with the Japanese
through the Plaza Accord in the mid-80's, then move later
to punitive trade tariffs. The commentator on Seeking Alpha
made the point that this type of action will likely cause a
nationalistic reaction in China, and that they will seek to
punish U.S. corporations operating there, in turn. If this
happens, in a couple of years time we could wind up with
another cold war or at very least a trade war between the
West and China.

What would Japan's role be if this happened? Firstly, trade
protection actions against China might not necessarily
spill over onto Japanese companies, since the Japanese are
way ahead in transplanting factories, etc., into the U.S.
market and are now major employers. Therefore, so long so
long as none of the major Japanese auto firms makes the
mistake of shutting down U.S. plants in preference to
Japan-based ones, so as to preserve domestic employment,
they will be allowed to continue operating as best they
can. Indeed, if the U.S. auto industry gets government
handouts, the Obama government will want the Japanese to
stick around to make sure that they keep the U.S. firms
competitive and thus ensure the public of a chance of
getting its money back.

Looking further forward, though, it is inevitable that if
the U.S. slides into protectionism, then Japan will be
forced to stand by itself, or to pay a lot more for its
U.S. defense relationship. Given that the U.S. has been
giving Japan investment, military aid, and markets for
half a century, this would be an unfamiliar and unsettling
turn of events for the Japanese and could open the way to
a backlash against pro-U.S. feelings and thus a rise in

True, China, would be there to keep any military ambitions
in check, but domestically things may become more difficult
for non-Japanese. This would be particularly unfortunate,
because thanks to the aging of Japanese society, attitudes
to foreigners have been slowly changing, especially at
government level. There have been a number of hopeful
developments such as dual nationality for kids of
international marriages (and their parents), opening of
health and other sectors to foreign workers, and greater
opening of commerce and finance. These moves would likely
stop dead if there was a negative backlash.


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+++ NEWS

- Nokia to launch MVNO
- Nikko Cordial employees offered early retirement
- School violence gets worse
- New voice extraction technology
- Uh-oh, ShinGinko belly flops even worse

-> Nokia to launch MVNO

The Yomiuri Shimbun has broken a story that Nokia, the
world's largest cellphone producer, will launch a Mobile
Virtual Network Operator (MVNO) business in Japan in 2009.
The company is apparently going to rent bandwidth and
infrastructure off DoCoMo. The company will sell its
handsets as part of the user solution, and they will
reportedly be starting with their high-end Vertu units.
***Ed: The problem for Nokia has been that their globalized
handsets are not what the Japanese want. The functionality
and shape are not particularly popular and Nokia has
gained a also-ran image in the market as a result.
Releasing the Virtu brand is a good idea, but what would be
better is if Nokia created something to properly compete
with the iPhone -- which the Japanese makers are surely
doing for their next generation of products. Ideally Nokia
should embrace Google's Android operating system, but Nokia
HQ said back in May that it doesn't have any interest in
the OS. Time for a change of heart?** (Source: TT
commentary from afp on, Nov 21, 2008)

-> Nikko Cordial employees offered early retirement

The Nikkei is reporting that Citigroup-owned Nikko Cordial
has offered all employees over the age of 40 an early
retirement package of two year's salary. Nikko Cordial has
7,000 employees in Japan and apparently the offer is being
made until December 8th. ***Ed: This is a difficult choice
for those employees with kids and mortgages to support and
we imagine that only the best and most mobile of 40-year
olds will be taking up the offer. For those who elect to
stay, which going on Citi's experience where only 35% of
employees took up a similar offer upon the June closure of
the consumer finance business (as reported by, there will be a series of difficult
negotiations and the surplus staff will probably take
another 2-3 years to release.** (Source: TT commentary from, Nov 21, 2008)

-> School violence gets worse

The Ministry of Education has released statistics that show
that student violence at school is increasing. Apparently
there were 53,000 reported incidents, an increase of 18%
over last year. Cases amongst younger children increased
dramatically, jumping 37% to 5,214 reports. Bullying was
the most common complaint, with 101,000 cases at Japan's
40,000 elementary, junior high, and senior high schools.
***Ed: Experts say that children are experiencing
increasing pressure to study and succeed -- however, this
has been a trait of Japanese education for a long time.
More likely, it is a function of the spread of technology
and access to information, and thus both children and their
parents are becoming more sophisticated and more willing
to complain. This is a good thing.** (Source: TT commentary
from, Nov 21, 2008)

-> New voice extraction technology

Researchers from Waseda University and Oki Electric have
developed new technology which separates a particular
individual's voice from background noise and other
speakers. It's unclear as to how effective the new system
is over existing voice separation systems, however, the
team does say that they expect the new software/hardware
solution to appear in voice-operated remote controllers for
electronic devices such as TVs -- so it can't be too bad.
***Ed: If the new system does work as well as indicated,
then we imagine that industrial espionage will have a new
lease of life, as well!** (Source: TT commentary from, Nov 17, 2008)

-> Uh-oh, ShinGinko belly flops even worse

Tokyo governor Shintaro Ishihara should be falling on his
sword collection right now, as it has been revealed that
his love child, Tokyo government-sponsored bank ShinGinko,
has a ratio of bad loans to overall lending of an
unsustainable 17%! This is seven times higher than the
national bank average and to us is a clear indication that
something fishy has been going on. ***Ed: The bank says
it will still have a full fiscal year loss of JPY12.6bn, as
projected, but given that the recession is going to get worse,
we think this number will blow out dramatically.** (Source:
TT commentary from, Nov 22, 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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