Booting of JAL President Sign of the Times

(Bloomberg) Japan Airlines Corp. ousted President Toshiyuki Shinmachi, ending a boardroom feud that was started by a major shareholder. Shinmachi had been in his post only since April, and will be replaced by the finance director, Haruka Nishimatsu, while the Board of Directors will expand to accomodate 12 new directors, and 5 current directors will leave.


Shinmachi's replacement must win union support to cut wages by 10 percent while regaining customers lost to rival All Nippon Airways Co. JAL's shares were up on the news, indicating that investors welcomed the change.

In typical fashion, Shinmachi will be "kicked upstairs to Chairman". But unless JAL restructures thoroughly under new management, the future is uncertain. JAL is among global carriers that have been hurt by surging fuel prices in an industry that may report a combined 2006 loss of $4 billion, according to the International Air Transport Association. The company's third-quarter loss widened to JPY11.1 billion as its fuel bill rose 28%.

JAL was established by a bunch of bankers in 1951, and merged with the country's 3rd-largest Japan Air Systems in 2002. It is the flag carrier for "Japan Inc.", but what do a bunch of bankers know?

What is clear from the experience is that Japan is beginning to recognize and react to the fact that consensus choices for management are not always the best choices. In JAL's case, the movement against Shinmachi began with a major shareholder, but then spread to other senior managers within the group. In baseball terms, its as if one of the team's owners expressed displeasure with the head coach, and the opinion was backed by other coaches that supposedly were there to support the head coach, and even the players. Yet corporate governance by shareholders, senior managers and employees within the company is still rare in Japan, it has been a fact of life for baseball teams in Japan for years. In other words, if a head coach were unable to produce a championship team within a couple of years, he was replaced by another coach.

TJI believes this will increasingly occur in Japan's corporate world, i.e., if a CEO is unable to deliver the goods in the terms of major shareholders and other stakeholders, he has a real risk of being replaced. While detractors claim that this will lead to more short-term management strategies, TJI suspects it will produce an increasing number of managers with a "hot hand" that can produce a few years of good results, only to be eventually overtaken by other, more dynamic competitors. This is a classic symptom of a mature market. In other words, as the "pie" is no longer growing, Japanese companies increasingly have to be able and willing to take share from their competitors to produce growth.

Worst Is Behind for Japan's Economy

(AP) U.S. Undersecretary of Treasury Tim Adams has commented that the "worst is behind" for Japan's once moribund economy. The U.S. Treasury's assessment is that Asia's two biggest economies (Japan and China) are shouldering a larger portion of global economic growth, together serving as a "twin engine" with the United States, Adams said.Japan's fundamentals are "stronger than they have been for some time" and the country seems to be staging "a very strong and sustainable" recovery, Adams said. The "worst is behind" for deflation, the crippling decline in prices that have undercut corporate profits and workers' wages for several years, he added.

The rest of the Treasury Undersecretary's quoted comments were aimed at lecturing China about their currency.

Another Japanese Investor Makes a "Tsunami" Bid

Record-Breaking Bid for California Wine

A Japanese bidder made a record-breaking bid at a California wine auction, paying an "over the top" $75,000 for five cases of Shafer Vineyards cabernet saugignon. The Japanese wine dealer's bid was 50% higher than the next highest bid to date at the 10-year old auction, although a wine dealer from Oklahoma paid $85,000 for five cases of 2004 Rombauer cabernet saugignon later in the auction. The wines are made specially for the auction.

Japanese investors have a colored past of making "over the top" bids, i.e., buying at the very top of the market. Consequently, when TJI hears of massive buying of anything by Japanese investors, our first reaction is to believe that whatever market they are investing in is near the top.

Was the "Bogus" Horie E Mail an LDP Sting?

Opposition "Bombshell" Backfires

The Democratic Party of Japan thought they had secretary general of the LDP Tsutomu Takebe by the short hairs when the dropped a bombshell during Diet deliberations last week, when Hisayasu Nagata, a younger opposition Diet member, went for blood in demanding to know if former Livedoor CEO Takafumi Horie actaully sent a clandestine email with instructions to pay JPY30 million to Takebe's son, ostensibly as a reward for the LDP and Takebe in particular's support in Horie's failed bid for a Diet seat.

The problem is that Nagata couldn't come up with the goods in validating that the email allegedly sent by Horie was genuine, and the charge was vehemently denied by both Takebe and Horie (who is now cooling his heels in jail) through his lawyer.

Thus was began as a potential bombshell for the LDP turned into a disaster for the Democratic party, who now look like a bunch of amateurs that can't shoot straight. Nagata has been holed up in a hospital, ostensibly because of stress caused by the incident, which has prompted PM Koizumi to snidely comment that he faces much more intense pressure as PM daily, and implied that Nagata is some sort of woos for crumbling when he could no prove his allegations.

Democratic honchos are also rapidly backpeddling and trying to spin the disaster in order to save some semblence of credibility. Strike two for the Democratic party, and a smug look of superiority for the LDP.

Could this have been an LDP dirty tricks "sting" operation to snare gullible opposition politicians? Considering how confident the LDP was when faced with the charges, one would suspect so. However, there may be a bit of fire in all this smoke.

Diet politician Katsuei Hirasawa of the LDP claimed to Mainichi on Monday of this week that he has a copy of the now infamous e-mail.

FSA Preparing New Consumer Lending BIll

(Bloomberg)

Masazumi Gotoda (parlimentary vice minister for financial services), Japan's point man on consumer borrowing, said regulators may cut the maximum interest that the nation's biggest consumer lenders can charge, butallow banks to increase their rates. ``We need more clear-cut, black-and-white regulation.'', he said. The FSA is expected to draft a bill by April that will consolidate/standardize consumer lending rates for submission to the Diet's financial committees.

TJI believes this is part of an ongoing restructuring of the entire consumer finance industry. Banks and foreign firms are on the hunt for consumer finance companies to gain control of their credit analysis. The higher interest rates charegeable by the banks (which now can only charge 20% versus as much as 29.2% for non-banks)is victory for the banks, although smaller consumer lenders may still be allowed to charge somewhat higher rates.

Koizumi Hints He WIll Tolerate an Early Shift in Monetary Policy

Kyodo news reported that Prime Minister Junichiro Koizumi hinted on Monday that the government would tolerate the Bank of Japan lifting its ultra-easy monetary policy as early as in March. Koizumi made the comment when asked if the government, which was previously cautious about an early policy shift by the central bank, would tolerate it even if the quantitative monetary easing is terminated in March. On Sunday, economic and fiscal policy minister Kaoru Yosano suggested that conditions are getting set for ending the "abnormal" credit easing policy, fueling speculation the BOJ might make such a decision at its Policy Board meeting in March.

In other words, both the BOJ and the Japanese government are preparing the public and the markets for an end to quantitative easing. But the banks aren't waiting for an official announcement. Instead, they are unloading JGB holdings and making other preparations for rising interest rates, while bank stock prices have yet to fully react to the prospect.

Japan's Debt "Straigt Jacket" is Self-Imposed

Feb. 27 (Bloomberg, William Pesek) "Japan's Debt Straight Jacket"

"For all the concern about the U.S. budget deficit, it's just 2.4 percent of gross domestic product, while Japan's is 6.9 percent." The debt-to-GDP ratio is pushing 151 percent, by far the worst among industrialized nations.

"The clubby nature of Japan's market keeps interest rates low; about 95 percent of government securities are held domestically. It explains how Japan manages to keep borrowing costs negligible even as it sells mountains of debt."

``Unless Japan moves to reduce its fiscal deficit sharply -- in the fat years of this business cycle -- its public sector debt-to-GDP ratio will rise without limit,'' (Carl Weinberg, High Frequency Economics).

``If the current birthrate, which is the lowest in the major developed countries, continues, there will be no Japanese,'' ``Who will pay the enormous debt?'' (Jim Rodgers)

``The longer Japan waits to start acting, the more fiscal tightening will have to be implemented overall,'' ``While everyone wants to stand around and cheer the strong GDP report, we believe that economic growth will be significantly muted as fiscal restructuring is implemented in the 2007-2008 fiscal year.'' (Carl Weinberg)

"Banks are major holders of government bonds. Such securities are also the main financial asset held by Japanese pension funds, insurance companies, government-run institutions, the postal savings system and individuals. If bond yields shoot higher, just about every sector of the economy will feel the pain."

"Koizumi has promised to step down in September, and whoever replaces him would be wise to act immediately to trim debt. Doing so would soothe markets, avoid higher yields and perhaps lead rating companies to raise Japan's credit standing."

We beg to differ with these gentlemen about Japan's debt.

a) For one, Japan's interest rates are not being kept low by "the clubby nature" of Japan's market, but by the weight of excess savings.

b) Secondly, Japanese banks are busily reducing their exposure to JGBs and shortening maturities in anticipation of rising interest rates.

c) Thirdly, Japan's debt net of the surplus in the social security system looks much less onerous. In addition, all assumptions for potential GDP are too low as Japan emerges from its Heisei Malaise. Growth potential is more like 3%~4% than the 1%~1.5% assumed.

d) Fourthly, such demands for quick action on the debt issue are music to the ears of the government tax hawks, whereas Japan (as Koizumi has insisted all along) needs to wring out a lot more pork from the "socialist" system that has been built up over the post war period.

e) Fifthly, as pointed out, Japan's debt is a "family thing", i.e., there is very little dependence on foreigners to fund Japan's debt.

TJI will also observe that Carl Weinberg has always been a bear on Japan.