Japanese Companies Begin to Diversify Away From the Weak US Dollar

Japan's major exporters are scrambling to initiate stron yen-weak US dollar countermeasures. Mitsubishi Electric and Komatsu are diversifying their export settlement risk by switching to Euros and Rubles. Mitsubishi Electric will be increasing Euro-denominated transactions for its business in Europe. Komatsu will be shifting settlements to the Russian ruble for transactions in Russia, and is already making settlements in Europe in Euros and in Yuan in China.

US dollar-denominated settlements continue to account for just under 50% of all Japanese exports, while the US market accounts for some 20% of total Japanese exports because of the high weight of automobiles. On the other hand, some exporters have been able to largely neutralize their foreign currency exposure. Advantest settles some 80% of their exports in Yen, while Toshiba is purchasing components for note book PCs from overseas in order to neutralize its foreign currency exposure.

Nikkei Sells Off 322 Points, But Is Still Above 25- and 75-Day Moving Averages

A weak US market last week, a spurt in oil prices, a stronger yen and the Memorial Day holiday in the US triggered a 322-point sell-off in the Nikkei 225 on Monday 5.26.08.
Investors are nervous that the S&P 500 will not be able to retake 1,450 and hold, meaning that it will again move to re-confirm March lows. On the other hand, the Nikkei 225, while hobbled by selling in export and bank stocks, is still technically in a medium-term uptrend unless further selling takes the index below its 75-day moving average, only weeks after a bullish golden cross was seen between the Nikkei 225 and its 25-day as well as 75-day moving averages.

So You Want to Stage a Proxy Fight In Japan? Demand to See the Target Company's Shareholder Register

There is a growing movement to relax restrictions on the ability to view a company's shareholder register. According to the new company law, shareholders and debt holders have the write to request to view and record acompany's shareholder register. While the company in principle has to respond to such requests, there is no responsibility to give the party requesting such information a copy of the register. In the case of Ichigo Asset's proxy fight with Tokyo Steel, Ichigo scanned the shareholder register with a hand-held scanner and hand input the shareholder information in a data base which they used in their approach to the company's shareholders encouraging them to vote against management's proposal.

However, there are certain instances where the company has the right to refuse such a request. One of them is if they consider the party requesting to be in a business which competes directly with the company's business. In a recent case, the company making a bid for Nihon Housing was refused to view the target's shareholder register, and the refusal was upheld in the Tokyo regional court, ostensibly because the potential acquirer could already identify some 65% of the targets shareholders through mandatory large holding filings with the FSA and Nihon Housing's half-year financial report. The potential acquirer is currently appealing this ruling.

After the Koizumi reform wave passed, Japanese companies are actually becoming more closed, re-increasing their cross-holdings and successively introducing poison pill anti-takeover measures. If the proxy fight option does not function, it will also be difficult to remove anti-takeover measures. Some within the government recognize such shortcomings in the new Company Law, and are prepared to introduce new amendments once needed amendments reach a certain level.

However, it is clear that MEITI (through comments by the vice minister) is very anti-shareholder rights, while the TSE president has been speaking out of both sides of his mouth in stating that "takeover restrictions exist within every country", while at the same time stating that "cross holdings should be reduced as much as possible". A recent survey of individual investors by the Nikkei revealed that 49% of individual investors believed the government was justified in refusing The Children's Investment Fund's bid to increase their holdings in J-Power from 9.9% to 20%.

Japan's Six Major Bank Groups Report Falling Profits

Consolidated net income for Japan's six major bank groups was down 34% in the fiscal year ending 03/08, while operating profit also fell 3.7%. This is the second year of declinng profits. In addition to significant write-offs for subprime-related losses, commissions from sales of mutual funds, which had been seen as a significant source of new profit growth, have fallen off significantly after the passing of a new financial transactions law and stricter "know your client" rules, as well as the sell-off in Japanese stocks to March of this year. The weak economy is also resulting in higher credit costs because of SME (small and medium-sized enterprise) defaults.

Moreover, the profit rebound in 03/09 should be modest because of continued credit costs, weak loan demand and limited prospects for loan-deposit spread expansion as the BOJ sits on its hands and frets about a slowing Japan economy as well as the risks to global growth.

BOJ's Shirokawa Says Japan's Economy Is "Clearly Slowing"

The BOJ decided to leave rates at 0.5% because Japan's economy is "clearly slowing". Waning corporate profit growth is slowing capital expenditures, production is flat and materials costs are sharply higher, which is also negatively affecting personal consumption. Inflation in consumer staples is particularly noticeable, while companies are finding it difficult to transfer all of higher input costs to final selling prices. In addition, the BOJ sees the risks to the global economy remaining to the downside.

This is quite a different spin than interest rate traders were trying to project, and throws cold water on the conjecture than inflation in Japan will somehow stimulate domestic consumption, as well as lead to higher loan-deposit spreads for the banks, thereby boosting their profits.

Softbank Drops Plan to Issue Preferred Shares with No Voting Rights

Softbank, a favorite among individual Japanese investors, has dropped a plan to issue preferred shares with no voting rights because its individual investors think they should instead increased dividends or offer a stock dividend.

The decision puts a crimp in the Tokyo Stock Exchange's plans for listed companies to take advantage of the Company Law changes that allow the issuance of various types of shares.

Who's Right About US Inflation: Consumers or TIPS?

The University of Michigan survey shows that consumers are expecting inflation as high as 5.2%, while the inflation premium in the TIPs (treasury inflation protected securities) is 2.9%, which is still lower than the 20-year average for inflation of over 3%. So who is right, US consumers or the TIPs?
The answer is that TIPS have chronically underestimated inflation. Traders keep talking about the massive move in commodities being a "bubble" that will burst and bring commodity prices back to earth, while consumers are seeing their take home pay being eroded daily by higher prices of consumer staples like gas, milk, etc. and their net worth in terms of the value of their house slip-sliding away. Prices of consumer durables are falling, but prices of consumer staples are rising--even though a Bloomberg survey shows that US economic growth in the next quarter is expected to be "zero" and the worst since the 2001 recession.

US Recession Buy Indicator?

Mark Hulbert of the Hulbert Financial digest is talking about a recessino buy indicator that may indicate the next big move in US stocks is UP, not DOWN. The recession indicator uses industrial production, manufacturing and trade sales, nonfarm payrolls and personal income as the main indicators. The recession indicator is triggered when each of these is below 6-month earlier levels. Historically, this indicator is a good contrarian call. The S&P 500 has returned an average of 37%, while the gains look more like 106% three years after the signal.

Are the Kiwi's Days as a Favorite Currency Numbered?

The big money (BlackRock and DWS Investment) is now betting against the New Zealand Kiwi, ostensibly because poor economic conditions could trigger the central bank to lower NZ rates (where passbook savings rates are 8.30%~8.50%) as aggressively as they had previously raised them. Currency strategists see the possibility for a two-digit correction, and are suggesting that investors shift to the Auzzie dollar instead.

Both the NZ Kiwi and Auzzie Dollar have been favorite trades Japanese individual currency traders, and Japanese investors own a large chunk of the 70%-plus of NZ bonds that are held by foreigners. These investors were not shaken out as the JPY surged past JPY100/USD and probably won't be shaken into repatriating their money back into yen now. They are more likely, as recommended, to shift into the Auzzie dollar, as overseas yields are simply too attractive versus miniscule yields on Japanese passbook savings.

Shipping Rates Come Roaring Back: How About Japanese Shipping Stocks?

As pointed out in FT Alphaville (The Little and Large of Soaring Shipping Costs), the January plunge in large dry bulk carrier rates was temporary, as shipping rates are now back to record levels. The rise in Capesize rates is sharper, ostensibly due to continued strong demand for coal/iron ore shipping on resurgent demand from steel makers.

While many ships are on order, they are still some time away from being delivered, and thus current supply of ships remains tight, with the dry bulk fleet capacity totalling 132.5 million dead weight tons as of April 1, 2008.

Japan's shipping stocks appear to be lagging this rebound, ostensibly because of fears that soaring energy costs and a stronger yen will squeeze profits. However, we believe that management forecasts may be too conservative, and that continued high shipping rates will continue to support earnings growth.

Japan's Stocks Rise to 4-Month High

Soaring oil prices historically have been bad news for Japanese stocks because high oil prices are bad news for corporate profit. This time, however, the Japanese market has been down for so long that any catalyst (surging oil prices) looks like up. The hope in Tokyo this time is that the US economy will not be as bad as feared.

At the same time, bond prices are weaker because higher oil prices = inflation, which Japan has not seen for nearly a decade. Higher inflation ostensibly means room for BOJ to raise rates at some point this year = widening loan/deposit spreads for the banks = better profits, and thus the banks are reacting positively.

The Yen is also comfortably back below the JPY100/USD "danger" line, easing investor fears that a sub JPY100 yen rate would decimate exporter profit margins.

As for the other items in the usual case against Japan (i.e., a) inept political leadership, b) lack of capital discipline, c) poor demographics, and d) ongoing deflation), "ongoing" deflation is gone, and has turned into undeniable inflation. Most foreign investors agree that inflation is an unequivocal positive for Japanese equities and property. In addition, according to data compiled by Platinum Asset in Australia, growth in adjusted (dividends + share buybacks - capital raising) has outpaced the world and US average since 2002 (at over two-fold increase versus a world average of less than 1.9X and a US average of 1.8X).

So...it looks like the recovery in Japan could continue for the foreseeable future.

(Non) Selection of the Next BOJ Governor: "Rope-a-Dope" Japanese Politics

Rope-a-dope is boxing style used most famously by Muhammand Ali against bruiser George Foreman in their famous "rumble in the jungle". The idea is for the boxer to lie on the ropes of the boxing ring, conserve energy and allow the opponent to strike him repeatedly in hopes of making him tire and open up weaknesses to exploit for an eventual counter-attack.

BOJ watchers began talking about the possibility of selection of the next BOJ governor becoming political football between the ruling LDP (Liberal Democratic Party) and the DPJ (Democratic Party of Japan) a couple of months before the DPJ voted down a succession of two ex-Ministry of Finance candidates for the job. In public, the LDP appeared mystified as to why the DPJ would vote down two apparently qualified candidates (BOJ board member and former MOF official Toshihiro Muto , and Koji Tanami, head of the Japan Bank for International Cooperation and also ex-MOF bureaucrat). Ironically, the two candidates proposed by the DPJ--Haruhiko Kuroda, head of the Asian Development Bank, and Hiroshi Watanabe, head of the Japan Center for International Finance, are also ex-MOF bureaucrates.

The ostensible issue that the DJP has with Mssrs Muto and Tanami is that they are ex-MOF, to which the LDP publicly appears mystified as to why the DJP would unecessarily block the BOJ governor succession process. We believe it is merely "rope-a-dope" politics by both the LDP and the DPJ, hoping that the impasse will have greater political damage to the other party, thereby better positioning them for the July elections. The LDP is hoping the impasse will be perceived by the voting public as an unecessarily obstructionist ploy by the DJP to make the LDP look bad, while the DJP seems to think that the LDP-led Fukuda Administration will lose more points for lack of leadership.

While the lack of a BOJ governor may make foreign investors nervous, the BOJ is now effectively being run by deputy governor Mr. Shirokawa. If Japan really wanted change and an independent BOJ, they would elect former Koizumi Administration reformer Heizo Takenaka. But Mr. Takenaka himself admits he would be unacceptable to both the LDP and the DPJ, as he made a lot of political enemies as Financial Services ministry in trying to clean up Japan's banking system.

Why The BOJ May Not Intervene To Brake the Yen's Surge

The yen hasn't been this strong since 1995, and the sharp upward movement in JPY versus USD of late is cause for concern in Japan, as expressed by Finance Minister Fukushiro Nukaga's concern that recent JPY forex movements are "excessive and Prime Minister Fukuda's warning that the JPY surge against the USD is "not desireable".

Yet Finance vice-minister Shinohara said earlier that current circumstances are different than in 1995 and during past interventions in 2003/2004. Regarding what is different than in 1995, this time the JPY is weak only against the USD, and is actually still near 20-year lows in terms of real effective rates against a basket of currencies. Consequently, we agree with Eisuke Sakakibara, ex-"Mr. Yen" of Japan's finance ministry, when he says that;

1) intervention by the BOJ on behalf of the MOF is unlikely at current levels, because even JPY85/USD equates to JPY110/USD a decade ago. To get to similar inflation-adjusted levels of a decade ago, JPY would have to move to the JPY70/USD range.
2) He does not believe that the US would approve such an intervention.

There may be another fiscal reason. The Bank of Japan (at the direction of the Finance Ministry) creates yen funds for US dollar buying/yen selling by issuing special Finance Bills that are counted as part of Japan's government debt. For example, Japan now has some JPY838 trillion of bonds and borrowings outstanding, or roughly 1.7X GDP. Outstanding Financing Bills(mainly for forex intervention) account for roughly 12% of this. In addition, Japan has been generating consistent gains on its holdings of mainly US treasuries, to the point they are able to transfer several trillions of yen back into the general budget account from gains made on foreign exchange holdings, thereby helping to fund a chronic fiscal deficit.

Thus while Japan has massive foreign exchange reserves of USD979 billion, these are mainly in USD whereas they need to issue new FBs (debt) to intervene by selling yen to brake a very rapid rise.

US Fed Still Struggling with a US Credit Crisis

Investors are bracing for another volatile week in the markets as US bankers and policy makers deal with the fallout from their bid to rescue Bear Stearns. On Friday, its stock plunged 47% , closing at $30. At that price, its shares were trading at a gaping 62% discount to the $80 book value that the firm has reported--i.e., Bear Stearns was being priced for bankruptcy.

A 3.17.08 NYT article also mentioned Lehman Brothers and Merrill Lynch as examples of other brokers/investment banks that have relied too much on leverage and have done a poor job managing the risks they took on during the boom.
http://www.nytimes.com/2008/03/17/business/17econ.html?_r=1&ref=business&oref=slogin

Over the weekend, the ex-"Mr. Yen" Eisuke Sakakibara mentioned in comments on a popular Sunday business and politics show that regulators and market participants fear that there are two more large financial institutions that could experience the same fate as Bear Stearns.

Credit Default Swap Toxic Waste Will Almost Guarantee More Bank Losses

An article in the IHT (Monday, February 18, 2008, "New Pitfall in Path of a Troubled Economy") which gives a brief overview of the credit default swaps market, which had ballooned from $900 billion in 2000 to $45.5 trillion--or roughly 2X the entire market capitalization of the stock market. This market is entirely OTC, completely unregulated, dwarfs the total value of US treasuries outstanding, and is 8X larger than the $5.7 trillion of corporate bonds these swaps are supposed to ensure investors from default. In October 2005 when Delphi went bankrupt, the credit default swaps on the company's debt exceeded the value of the underlying bonds by 10-fold. Buyers of the credit insurance then scrambled to buy the underlying bonds, driving the value of the defaulted bonds to around 70 cents on the dollar in a sort of mass short cover like that seen before a bankrupt company's stock is delisted. In the end, buyers of the default insurance received $366 for every $1,000 of coverage they had purchased--meaning they had to write off $634 of every $1,000 in bonds they held, or some 63% of face value. According to Moody's, the last peak in default rates was in July 1990, when overall default rates reached 4.1% after rising from a trough of 0.85% in June 1988--versus a default ratio on junk bonds of only 0.9% as of December. Assuming a similar spurt in default rates, some $230 billion of the $5.7 trillion bond market could default. In addition, banks/holders of credit default swaps would lose another $146 billion judging from the Delphi bond experience. If the default rate rises to 8%, the loss on the bonds would be $456 billion and the losses on the credit default swaps would be $289 billion. According to the Comptroller of the Currency, the top 25 banks held both insured and un-insured credit default swaps worth $14 trillion as of Q3 2007. The losers are the usual suspects. JP Morgan has the biggest exposure at $7.8 trillion, while Citibank and Bank of America follow with #3 trillion apiece. During the market upheaval in August last year, 14% of the credit default swap trades were unconfirmed, meaning one of the parties in the trade remained unknown 30 days later. In other words, it is a giant chunk of the total US credit market that is under-regulated and not very well reserved for, with poor accounting standards to boot. Some 16% of this debt ($7.3 trillion) was created to protect holders of CDOs. These swaps are merely valued on the basis of computer models as their is no publicly quoted price. Since a bank/investor bought the swap to cover its corporate bond risk, it thinks it is hedged and therefore does not write off paper losses. But if the party who sold the insurance cannot pay its claim in the event of a default, the bank's losses have to be reflected on its books. Losses here remain a big black hole.

This is in addition to the $330 billion market for auction-rate securities used for funding by Municipalities that has essentially dried up as banks/investors fail to show up for the auctions, thereby substantially raising funding costs for the Municipalities.

US unborrowed reserves of depository institutions have declined for the first time since the data began, suggesting that US banks are fobbing off their garbage collateral to the Fed after the Fed set up the TAF (Term Auction Facility) established on 12.12.07 to allow banks to borrow against all sorts of collateral (good or bad) without going through the discount window. In effect, the Fed is already bailing out these banks by providing them with funds based on dodgy collateral.

It is in light of such stark credit crisis realities that the G7 Financial Stability Forum gave a very somber assessment and could promise no quick fix, as did Fed Chairman Bernanke and Treasury's Hank Paulson.

U.S.-Generated Global Credit Crisis: How Bad Could It Get? Very Bad

Virtually every Wall Street analyst and economist missed the severity of the credit crisis as it developed, as did the U.S. Federal Reserve. In fact, Ben Bernanke and the Fed didn't get it until some very large hedge fund managers and top Wall Street bond traders educated Fed officials on the severity of the situation.

1. Bond insurers like MBIA and Ambac have insured some $2.4 trillion of bonds. MBIA's total exposure to bonds backed by toxic mortgages and CDO (credit derivative obligations) is said to be around $30 billion, and it even has $8 billion of "CDO Squared", which are investment pools of CDOs that invest in other CDOs. MBIA had to raise money by selling bonds at a junk rating of CCC and with a 14% coupon. Is this the kind of issuance conditions that a AAA-rated firm can command. So far major US banks have written off $130 billion of CDO and relative derivative losses, but these losses could rise to well over $500 billion.
2. The rating agencies like S&P and Moody's have a problem. These bond insurers should be downgraded. If they did, however, all of the bonds they insured would lose their AAA rating. A downward notch to AA would force the banks holding the paper to realize another $40 billion or so of losses, and a downgrade to A would mean more like $150 billion of write-downs. Heaven forbid if one of the major bond insurers actually goes bankrupt itself.
3. CDS (credit default swaps) may be an even larger problem. These were sold by hedge funds at handy profits as insurance against defaults on CDOs. The nominal value outstanding CDS is an incredible $46 trillion, compared to the total value of US GDP which is "only" $14 trillion. Estimates of the losses on a notional value of $46trillion CDS against a bond base of $5 trillion are varied--from $20 billion to $250 billion.
4. Further, the total notational value of derivatives outstanding worldwide is in excess of $700 trillion, of which maybe half is properly hedged, for a net exposure of $350 trillion. If the value of these declines just 10%, the potential loss would be $35 trillion.

The realization of the true extent of the credit crisis is what we believe prompted the Fed to cut rates twice in January by an unprecedented 125bps. Perception is everything, and the Fed and US Treasury are trying their best to keep up the perception that they have everything under control, which of course they do not.

Nouriel Roubini of the New York University's Stern School of Business has been an early and consistent bear on the US subprime-generated credit crisis. In his recent paper "The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster", he points out that,

1. We are seeing the worst housing recession in history, where US home prices could fall 20%~30%. Falling housing prices could erase $4~$6 trillion of wealth from households. A 30% fall would result in 10 million households having net negativ equity on their homes, severely crimping personal consumption, which is over 70% of US GDP.
2. Commercial real estate could also crack, causing non-performing commercial real estate loans. The CMBX index is already discounting a massive increase in commercial loan spreads. 200-plus already bankrupt subprime lenders could be joined by a national bank with high exposure to residential and commercial property loans.
3. LBOs would be next, leaving them stuck on the balance sheets of the banks and becoming NPLs if the LBO firms fail. Default rates in 2006~2007 were 0.6%, but have historically risen to 10% in historical recessions.
4. The "shadow banking system", i.e., (special investment vehicles (SIVs), conduits, money market funds, monolines, investment banks, hedge funds and other non-bank financial institutions, could soon come under serious financial duress. They are outside the control of the FED, whose mandate covers the formal banking system.
5. Stock markets in the US and abroad could start re-pricing a very severe US recession and a sharp global economic slowdown. According to global stock market capitalization as compiled by the World Federation of Stock Exchanges, $2.4 trillion of stock value was already lost between October and December 2007, while Standard & Poor's estimates that world stock markets lost another $5.2 trillion in value in January 2008 alone. With all stock markets now essentially in bear market territory (i.e., having fallen +/-20% from their recent peaks), this bear market is just getting started, and will continue until investors begin to "smell" a recovery. Stock prices alway fall first and farthest in the early stages of a recession, but also begin to recover well before it is confirmed that the recession is over.
6. Financial losses mean an equivalent 10X contraction of credit. Based on estimates by Goldman Sachs, $200 billion of losses in the financial system lead to a contraction of credit of $2 trillion given that institutions hold about $10 of assets per dollar of capital. The recapitalization of banks sovereign wealth funds - about $80 billion so far - will be unable to stop this.

Can the Fed and other monetary and treasury officials around the world avoid this nightmare scenario? At this point, the only answer is "maybe", but it will be a long and drawn-out battle to turn the credit contraction tide. The response will have to involve, monetary, fiscal, regulatory and financial countermeasures that are coordinated and timely. Failing that, these same officials also need to avoid implementing measures that actually exacerbate the downturn, such as were implemented in the 1920s and 1930s that actually worsened the "Great Depression".

What Companies Really Think About Their Shareholders

In a recent speech, the second-in-command at the Research Institute of Economy, Trade and Industry state that companies should choose their shareholders, and that regulators should make it easy for Japanese companies to list stock with no voting rights, or with multiple voting rights for stock held by insiders. He also said that investors should only get tax relief on capital gains if they hold the stock for over five years.

The TSE has cleared the way for listings of stock with no voting rights. For example, Ito En listed stock with no voting rights last September. However, if companies think that these stocks will trade essentially the same as stocks with full voting rights, they are badly mistaken.

In Ito En's case, stocks with voting rights are now trading at a 57% premium to stocks with no voting rights, while dividend yield is 1.68% versus a yield of 3.07% on the stocks with no voting rights. In other words, if Ito En chose to procure capital by issuing stocks with voting rights, they could get 57% more money with the same number of shares compared to the stocks with no voting rights. In other words, their cost of capital for shares without rights is significantly higher.

This was the same phenomenon seen in South Korea in the early 1990s, where two classes of ADR were available, i.e., those with and without rights. If I remember correctly, those without rights were trading at a significant discount of some 50% at the time.

Japan Stocks Badly in Need of a Catalyst: How About Elections?

With the Nikkei 225 threatening to break down to the 10,000 area, Japanese stocks as measured by the TSE 1 simple average and its P/E ratio are at the lowest level in some 30 years.

Although a group led by former FSA minister Yuji Yamamoto is to submit proposals to Chief Cabinet Minister Nobutaka Machimura to revive Japan's stock market, the LDP remains bogged down in parlimentary sword fights (chambara) with the DPJ, which has control of the upper house of the Diet. The LDP has already forced through approval to continue the controversial Japan "Self-Defense" Forces mission to support US operations in Afghanistan, and is again butting heads with the DPJ over "temporary" fuel taxes that have been in existence since the Kakuei Tanaka days.

Continued legislative deadlocks could force PM Fukuda (as it is his perogative) to call lower house elections this year--ostensibly after the national budget is passed in late March or after the Group of Eight Summit in July--although lower house elections are not required until September 2009.

The LDP leadership (and rightly so) feeling as if it is facing the worst crisis in its 50-year history.
Support for the LDP continues to be battered by a litany of scandals, the latest of which is a defence scandal, and the mis-handling of millions of premiums paid into the public pensions system that were lost or pilfered by local officials. The LDP is also being criticized for not doing more made-in-China gyoza scandal .

Polls show that Japan's voters are more concerned about pocket book issues, such as the economic divide between cities and rural areas. But ruling PMs, aside from the former carismatic Koizumi, have historically paid little more than lip service to voters, as they are not directly chosen by voters, but by the LDP party machine.

Ironically, forcing the LDP to call an election when public support is at its weakest could be a positive catalyst for the stock market, as significant losses by the LDP in the lower house, while increasing short-term uncertainty, could usher in a new age of two party politics in Japan that would be more sensitive to the needs of the voting public and give Japanese voters a choice between ruling parties (i.e., the LDP as the republicans and the DPJ as the democrats) for the first time in post war history.

Bargain Basement Prices in Tokyo: Another Record Year for Takeovers in 2008?

Takeover bids for Japanese firms hit record in 2007. The number of takeover bids for Japanese companies topped 100 last year for the first time, even though hostile bids are still rare. A total of 102 takeover bids (TOBs) for Japanese firms were reported to financial authorities in 2007, up from 65 cases the previous year, according to RECOF.

Even though activist US hedge fund Steel Partners has suffered a series of setbacks in the courts in its attempts to buy Japanese companies, and a renewed increase in Japanese corporate xenophobia notwithstanding, the shrinkage of M&A activity overseas given the subprime mess and a widening credit crunch means that financing/fund allocations for possible M&A in Japan in 2008 has increased significantly. According to a Nikkei survey of major Japanese banks and foreign securities firms, the planned amount of funding available for M&A in 2008 will be over three times 2007 levels at over JPY2 trillion, or approaching the peak of nearly JPY2.5 trillion in 2006.

Japan Preparing to Accept More Foreign Workers? With a Possible Catch

Movement in Japan's Foreign Ministry suggests Japan is making preparations to in principle accept--rather than reject--more immigrants. Japan's labor force will shrink to 55.8 million in 2030 from 66.6 million in 2006 if more women and the elderly aren't allowed to work, or policies are not implemented to encourage more immigration.

The catch is that Japan may also require long-term resident foreigners to have some as yet undefined local language ability. Officials realize that Japan's aging society and pending labor shortages will require them to boost immigration, but Japan as a whole is very adverse to having Japanese society disrupted by all those "foreigners", including second-generation workers coming from Brazil and other countries, immigrants from Asian countries as well as the Middle East that already account for a significant amount of the labor-intensive work force.

On Nov. 20 Japan began fingerprinting and photographing foreigners entering the country to prevent terrorism. We also basically agree that anyone planning to live in Japan as a permanent resident needs to know about the language and the customs. What is most asinine to us is large groups of immigrants in countries like the US, UK and France that form their own sub-societies in that country and then demand social services like public medical care without, a) legally immigrating and b) bothering to become literate in the host country language.

What results is what is being seen in the US, UK and France--significant portions of the population disconnected from mainstream society, unable to get more that the lowest-paying menial jobs, and often becoming wards of the state--which means they have to be effectively supported by tax-payer citizens, which in our view is a totally ridiculous state of affairs.