WEBVTT - It’s Time to Buy Japan 0:00:00.560 --> 0:00:02.240 John, Hello him. 0:00:02.680 --> 0:00:06.320 You know, John, you and I have done something that 0:00:06.480 --> 0:00:08.000 is increasingly unusual. 0:00:10.520 --> 0:00:12.840 It's not recording a podcast. I could tell you half 0:00:12.880 --> 0:00:13.040 or not. 0:00:13.680 --> 0:00:14.360 No, I'll tell you what. 0:00:14.480 --> 0:00:16.360 It's not that. And just to be clear, recording a 0:00:16.360 --> 0:00:18.560 podcast is something we do together, and the thing I'm 0:00:18.560 --> 0:00:20.480 mentioning is not something we do together. 0:00:21.200 --> 0:00:23.800 We have replaced ourselves. 0:00:24.360 --> 0:00:24.880 I like that. 0:00:25.000 --> 0:00:28.920 We that we are looking at it. Yes, we have 0:00:29.120 --> 0:00:30.400 spawned new people. 0:00:31.320 --> 0:00:32.920 We have we will when. 0:00:32.720 --> 0:00:35.320 We leave this earth, all fingers crossed, we will leave 0:00:35.400 --> 0:00:37.280 behind us a replacement. 0:00:38.600 --> 0:00:41.640 Carry on our good work. 0:00:42.120 --> 0:00:45.199 I'm not sure my children are going to want to 0:00:45.240 --> 0:00:47.280 take over the podcast, but maybe one of yours. 0:00:47.280 --> 0:00:51.199 Well. The point being that we've been talking. 0:00:51.000 --> 0:00:54.760 About this for years, Ear and me about the fall 0:00:55.280 --> 0:00:57.240 in the global fertility rate. You know, done to what 0:00:57.320 --> 0:00:59.440 is it now? I can't remember, but it was thirty 0:00:59.520 --> 0:01:02.080 years ago, was pushing pushing three and now we're down 0:01:02.080 --> 0:01:04.880 to only just over two. And there are an awful 0:01:04.920 --> 0:01:07.880 lot of countries where where fertility rate is well below 0:01:07.920 --> 0:01:11.480 replacement rates. So you know, the US, China, India the 0:01:11.480 --> 0:01:13.440 most recent one to see it. For quite a lot 0:01:13.440 --> 0:01:15.360 of countries, particularly in Europe, I have already seen their 0:01:15.400 --> 0:01:18.520 population's peak. If we put immigration potential to one side, 0:01:18.560 --> 0:01:21.720 the Japan, Italy, Germany, Spain, etcter. As far as we 0:01:21.760 --> 0:01:24.840 can see, all of those populations of peak and fertility 0:01:24.880 --> 0:01:27.280 rates in Africa that is supposed to be the big 0:01:27.400 --> 0:01:31.080 driver of global population are falling much faster than people 0:01:31.120 --> 0:01:35.000 expected as well. So if ten years ago the main 0:01:35.080 --> 0:01:39.280 worry was population explosion, today we're actually thinking more empty planet. 0:01:40.120 --> 0:01:46.960 Yeah. I think this is really fascinating, persibly for slightly 0:01:47.000 --> 0:01:50.240 different reasons, because I just find it amazing that we 0:01:50.280 --> 0:01:53.360 can have turned around so quickly. And I bet you, 0:01:53.480 --> 0:01:55.680 I bet a lot of your listeners podcasts still think 0:01:55.760 --> 0:02:00.360 that overpopulation is the biggest problem, and this will actually 0:02:00.400 --> 0:02:02.360 still come as a surprise them, despite the fact was 0:02:02.360 --> 0:02:04.480 on the cover of The Economists. 0:02:03.880 --> 0:02:04.480 The other day. 0:02:04.680 --> 0:02:08.600 Finally, well, usually if. 0:02:08.480 --> 0:02:10.359 Something's in the front cover of the Economists, that's kind 0:02:10.360 --> 0:02:11.639 of it's in the place. 0:02:13.280 --> 0:02:16.440 Actually, we shouldn't go down this road of criticizing you 0:02:16.480 --> 0:02:17.799 and I have formed job. 0:02:17.880 --> 0:02:21.160 Absolutely absolutely. Yeah, we did put back coin on the 0:02:21.160 --> 0:02:23.360 cover in December twenty seventeen at Money Week. I do 0:02:23.400 --> 0:02:24.080 rememb about that, but. 0:02:25.000 --> 0:02:27.520 I'm pretty sure that was your decision. 0:02:26.720 --> 0:02:28.600 That was my fault. 0:02:29.200 --> 0:02:33.040 Absolutely, But listen, so when we think about this, when 0:02:33.080 --> 0:02:35.880 we think about this, you don't think that we should 0:02:35.880 --> 0:02:37.920 really think about this much in terms of investment, but 0:02:38.000 --> 0:02:41.240 it does have a big impact on the inflationary slash 0:02:41.280 --> 0:02:45.400 deflationary environment. And there's an ongoing conversation about whether aging 0:02:45.440 --> 0:02:49.680 populations and falling populations are inflationary or deflationary, and I 0:02:49.720 --> 0:02:52.440 think you and I both veered towards thinking that it's 0:02:52.520 --> 0:02:55.480 one of the drivers behind the inflation rey environment because 0:02:55.520 --> 0:02:59.959 you have a well off, older population demanding all sorts 0:02:59.960 --> 0:03:02.639 of things and a much more limited supply. 0:03:02.400 --> 0:03:04.560 Of labor to provide those things. So obviously the cost 0:03:04.600 --> 0:03:05.680 of stuff is going to go up. 0:03:06.400 --> 0:03:08.960 Yeah, I actually I agree with that. I think that's 0:03:09.120 --> 0:03:12.880 that's true. I think that's fair. But the point you 0:03:13.000 --> 0:03:15.320 just made it about a there's a debate about it, 0:03:15.440 --> 0:03:17.880 so you know, economists have been tossing it back and 0:03:17.919 --> 0:03:21.080 forth for years. But the other thing I suppose is 0:03:21.080 --> 0:03:24.560 that I think the demographics is one of those things 0:03:24.600 --> 0:03:27.560 that can change so quickly because the forecast are so 0:03:27.720 --> 0:03:31.360 long term and they're based on a certain number of assumptions, 0:03:31.960 --> 0:03:35.880 and the very fact that for most of my adult life. 0:03:35.960 --> 0:03:38.600 People have been carping about how there's too many people, 0:03:39.000 --> 0:03:41.800 and lots of people still believe that Malthusian crap put 0:03:41.880 --> 0:03:46.560 forward by Airlick in the population bomb that I guess 0:03:46.600 --> 0:03:49.320 I don't see the point of investors worrying their heads 0:03:49.360 --> 0:03:56.400 about it simply because it's it's such a it's way 0:03:56.440 --> 0:03:58.680 out in the future, and there are so many more 0:03:58.720 --> 0:04:03.400 things that affect affect individual investments before that. I just 0:04:03.440 --> 0:04:05.839 don't think, and I certainly don't see it as a theme. 0:04:06.440 --> 0:04:08.960 It's like I don't think. I mean, yes, okay, you 0:04:09.000 --> 0:04:11.960 can invest in agent populations in that they'll need more 0:04:12.480 --> 0:04:16.040 medical care, but in and of itself, that's not a 0:04:16.080 --> 0:04:21.480 recently by a specific farmer company. You should other things. 0:04:21.760 --> 0:04:23.400 I'll give you all that. I mean, it could drive 0:04:23.480 --> 0:04:24.320 healthcare innovation. 0:04:25.200 --> 0:04:27.920 It's one reason to be interested in AI because that's 0:04:27.960 --> 0:04:30.160 the kind of thing that could really eventually help us 0:04:30.200 --> 0:04:32.440 manage our healthcare and the care of our elderly. It 0:04:32.520 --> 0:04:35.560 might drive innovation. And I don't know the life insurance 0:04:35.640 --> 0:04:37.360 industry that sort of things. So there's a lot of 0:04:37.360 --> 0:04:39.200 stuff going on with the aging population. 0:04:39.279 --> 0:04:40.839 But I'll give you that. 0:04:41.760 --> 0:04:44.480 The much longer term demographics might not make much difference 0:04:44.480 --> 0:04:46.760 to one's investments over a five or TENNYAR period, But 0:04:47.160 --> 0:04:49.560 I did want to say one thing I prefer what 0:04:49.560 --> 0:04:52.320 we're talking about in the podcast today, which is Japan, 0:04:52.960 --> 0:04:57.200 which is that there's a general view that declining populations 0:04:57.279 --> 0:05:00.880 or even static populations are a bad thing for economies, 0:05:00.960 --> 0:05:03.600 and that an aging population is also a bad. 0:05:03.360 --> 0:05:04.200 Thing for an economy. 0:05:04.200 --> 0:05:06.279 And people look at Japan and they go look at 0:05:06.320 --> 0:05:09.839 that flatlining GDP, Look at that, you know, Japanese GDP 0:05:09.960 --> 0:05:13.360 barely grows, etcetera, etcetera, and they forget to look at 0:05:13.360 --> 0:05:17.400 the really important thing, which is GDP per capita, And 0:05:17.560 --> 0:05:20.240 particularly if a population is shrinking, you don't want to 0:05:20.240 --> 0:05:22.240 look at the main GDP numbers. You want to look 0:05:22.279 --> 0:05:26.520 at every individual's every individual person's purchasing pair. And I've 0:05:26.520 --> 0:05:28.640 just been looking up on the World Bank website to 0:05:28.720 --> 0:05:32.160 see what's happening to Japanese GDP per head in terms 0:05:32.200 --> 0:05:36.400 of purchasing power, and it's been incredibly. 0:05:35.600 --> 0:05:38.200 Healthy over the last few decades. You're seeing real growth there. 0:05:38.240 --> 0:05:40.920 Interestingly, as an aside, I looked up the UK as well, 0:05:41.360 --> 0:05:45.479 and in terms of absolute purchasing power GDP per head 0:05:45.520 --> 0:05:48.040 in the UK has actually been growing rather substantially as well, 0:05:48.320 --> 0:05:50.080 and is above pre COVID levels. 0:05:50.200 --> 0:05:51.400 So that's something interesting. 0:05:51.520 --> 0:05:55.360 That's really interesting, especially Kevin that imignation has were sitting 0:05:55.360 --> 0:05:58.040 in the last couple of years, it's rocketed and it's 0:05:58.040 --> 0:05:59.880 always been very high compared to Japan. 0:06:00.400 --> 0:06:01.160 That is interesting. 0:06:01.240 --> 0:06:03.200 If you asked me a bit, I would have thought 0:06:03.279 --> 0:06:06.119 that gdpeople ahead in the UK would have been weak 0:06:06.240 --> 0:06:07.760 at best, if not negative. 0:06:08.160 --> 0:06:12.360 Well, this isn't purchasing power parity measurement as opposed to 0:06:12.400 --> 0:06:14.240 in absolute pound terms. 0:06:14.560 --> 0:06:16.280 Yeah, right, we'll come. 0:06:16.160 --> 0:06:16.640 Back to living. 0:06:17.040 --> 0:06:20.719 It's really interesting and it's exactly the opposite to what 0:06:20.800 --> 0:06:22.560 I expected as well, because I having looked at the 0:06:22.640 --> 0:06:25.960 Japanese data. One of our listeners actually suggested that I 0:06:26.000 --> 0:06:28.159 looked at the UK data as well and said, you know, 0:06:28.200 --> 0:06:31.080 you're going to be surprised, and he was absolutely right. 0:06:31.160 --> 0:06:32.960 I was surprised at you. That doesn't happen now. 0:06:34.040 --> 0:06:36.120 That is really interesting. We should come back to that 0:06:36.160 --> 0:06:39.880 at some point, I think, or in Japan. The other 0:06:39.920 --> 0:06:42.520 thing that I actually do find interesting is that I 0:06:42.640 --> 0:06:45.280 always again remember Japan being held up is the kind 0:06:45.320 --> 0:06:48.680 of archetype of the declining population, but when you know, 0:06:48.960 --> 0:06:52.000 look at Japan and relationship to the rest of Asia. 0:06:52.160 --> 0:06:55.880 It's not even in the bottom five anymore. I don't 0:06:55.880 --> 0:06:58.320 think I think you get like South Korea is by 0:06:58.400 --> 0:07:01.200 far the worst I think on the planet, which makes 0:07:01.200 --> 0:07:04.960 you wonderful. Why is that specifically? But there's a lot 0:07:05.000 --> 0:07:06.560 of other interesting. 0:07:06.240 --> 0:07:08.720 And look at the way that you're framing that the worst. 0:07:09.360 --> 0:07:11.040 Oh yeah, John is. 0:07:11.080 --> 0:07:14.160 Judging your career. John is judging. 0:07:13.760 --> 0:07:18.440 You well, all traditional patriarch at the end of the day, 0:07:18.640 --> 0:07:19.120 Look up. 0:07:19.080 --> 0:07:21.600 Look up the way he's replaced. 0:07:21.200 --> 0:07:26.000 Himself exactly, growing a great big beal as we speak. 0:07:28.320 --> 0:07:33.960 Right. Moving on, Welcome to Meren Dogs Money, the podcast 0:07:33.960 --> 0:07:36.760 in which the people who know the markets explain the markets. 0:07:36.840 --> 0:07:40.240 I'm Maren Sunset Web this week of conversation with David Mitchison, 0:07:40.320 --> 0:07:43.080 fund manager at Xeno Asset Management. It's got more than 0:07:43.080 --> 0:07:46.680 twenty years investment experience. He's an antholute expert on Japan. 0:07:46.920 --> 0:07:49.320 He speaks Japanese. You know, so it says on the website, 0:07:49.360 --> 0:07:51.040 but I did touch him with a couple of words. 0:07:52.400 --> 0:07:56.080 Has youmaged it? We're not actually going to do it 0:07:56.080 --> 0:07:56.640 in Japanese. 0:07:56.640 --> 0:07:58.240 I was just a true because that's the only word 0:07:58.280 --> 0:08:00.400 I can remember from my ten years in Japan as well, 0:08:00.520 --> 0:08:01.800 seven years whatever it. 0:08:01.680 --> 0:08:05.720 Was this sight, Sinara, I'm sure this more. 0:08:05.960 --> 0:08:10.520 Oh, thank you discard so David. Exciting times right. 0:08:11.280 --> 0:08:14.120 The Japanese markets are the thirty three year high, the 0:08:14.200 --> 0:08:16.960 topics up thirteen percent already year to date. 0:08:18.480 --> 0:08:20.400 Now, I started my career. 0:08:20.120 --> 0:08:22.239 In Japan in the nineteen nineties and this is about 0:08:22.280 --> 0:08:24.360 exciting as it's been since since then. 0:08:25.360 --> 0:08:27.120 So what I want to do. I want to talk 0:08:27.120 --> 0:08:29.120 about Japan obviously the whole way through. 0:08:28.960 --> 0:08:32.120 This podcast, but I want to start off by talking 0:08:32.120 --> 0:08:35.120 about why it is that investing in Japan has been 0:08:35.720 --> 0:08:38.640 such a difficult one for the last couple of decades, 0:08:38.679 --> 0:08:41.000 you know. I mean I've looked at it with John together. 0:08:41.080 --> 0:08:43.080 We've been working together for years, and we've looked at 0:08:43.160 --> 0:08:45.720 Japan a year after year after year and said, this 0:08:45.840 --> 0:08:48.600 is getting better, this is kind of cheap, people should 0:08:48.600 --> 0:08:52.160 buy that, and we've been wrong over and over and 0:08:52.200 --> 0:08:55.320 over again. So let's talk first about why it is 0:08:55.360 --> 0:08:56.920 that John and I have been in this is unusual, 0:08:56.960 --> 0:08:59.200 by the way, completely wrong for so long. 0:09:00.760 --> 0:09:02.880 I think it's not just you that's been completely wrong 0:09:02.920 --> 0:09:04.400 for so long. I mean a lot of people have 0:09:04.480 --> 0:09:08.199 been completely wrong for so long, frankly, including you know, 0:09:08.480 --> 0:09:11.280 my business partner James, who I think started investing in 0:09:11.360 --> 0:09:14.199 Japan in nineteen eighty nine. I sort of started to 0:09:14.200 --> 0:09:16.480 look in Japan perhaps in the year two thousand and 0:09:16.800 --> 0:09:19.840 you know, since then, the market has had some bigger 0:09:19.920 --> 0:09:22.840 ups and downs, but it's really only the lasts of perhaps 0:09:23.040 --> 0:09:26.119 ten years that the market has begun to move up steadily. 0:09:26.800 --> 0:09:28.480 And I think we have to kind of go back 0:09:28.480 --> 0:09:31.040 to where Japan was in you know, the end of 0:09:31.080 --> 0:09:34.160 the bubble, which was basic Christmas Day in nineteen eighty 0:09:34.240 --> 0:09:39.000 nine when they raised interest rates over the previous nearly 0:09:39.120 --> 0:09:42.080 forty years after Second World War, Japan had gone through 0:09:42.080 --> 0:09:46.840 this of huge economic boom and it was obviously reindustrialized. 0:09:46.880 --> 0:09:49.760 You had amazing companies like Sony, You've had, you know, 0:09:49.800 --> 0:09:54.800 the rise of video recorders, of consumer electronics, and you're 0:09:54.840 --> 0:09:58.480 also at the same time saw this massive domestic property 0:09:58.520 --> 0:10:01.440 bubble where you know, the end of that bubble in Japan, 0:10:01.480 --> 0:10:03.560 the price of kind of a meter of land in 0:10:04.120 --> 0:10:07.200 you know, or apartment in Tokyo was three hundred and 0:10:07.280 --> 0:10:10.480 fifty times higher than it was in Manhattan. I mean, 0:10:10.520 --> 0:10:15.640 this is absolutely bonkers level of bubble. And so but obviously, 0:10:15.679 --> 0:10:18.560 if you're sitting in an apartment, you know, worth fifty 0:10:18.640 --> 0:10:21.719 million dollars in nineteen eighty nine, that's a lot of 0:10:21.800 --> 0:10:25.640 money today. In nineteen nine, that was huge, and you know, 0:10:25.720 --> 0:10:28.319 so the spending was out of control, The amount of 0:10:28.440 --> 0:10:30.960 leverage people took was out of control, and a bit 0:10:31.040 --> 0:10:35.200 like America before the GFC, the belief was almost that 0:10:35.240 --> 0:10:38.120 the real estate prices could only go up. And for 0:10:38.160 --> 0:10:41.880 fifty years they had so the belief that, you know, 0:10:41.920 --> 0:10:44.439 you could lever up, and you know, from the bank's 0:10:44.480 --> 0:10:47.280 point of view, you know, well if they couldn't pay 0:10:47.320 --> 0:10:49.679 you for some reason, well the land price would have 0:10:49.720 --> 0:10:51.240 gone up so much that you could always just sell 0:10:51.280 --> 0:10:53.840 the asset and you'll be fine. And so you ended 0:10:53.880 --> 0:10:57.880 up with these sort of interlayered companies who had basically 0:10:57.960 --> 0:11:01.560 borrowed money against their collateral weather as stocks or land. 0:11:02.240 --> 0:11:05.600 They then invested in not only other companies, but also 0:11:05.679 --> 0:11:09.360 in projects that maybe not caught their business because of 0:11:09.400 --> 0:11:12.200 everything you did seem to work during the bubble. And 0:11:12.240 --> 0:11:15.000 it was only once the capital starts stopped flowing when 0:11:15.000 --> 0:11:18.080 the bubble burst and people suddenly realized that the land 0:11:18.120 --> 0:11:22.920 prices were extraordinarily high, their stock prices were extraordinarily high, 0:11:23.400 --> 0:11:26.319 and as everything went into reverse, you had to repay 0:11:26.360 --> 0:11:29.160 this debt. But suddenly the assets weren't there, the cash 0:11:29.200 --> 0:11:33.600 flowers weren't there. And Japan, unlike most countries, chose to 0:11:33.679 --> 0:11:36.599 save its way out of a bubble, which is, I 0:11:36.600 --> 0:11:38.680 guess is the opposite of what we've seen in the West, 0:11:39.600 --> 0:11:42.000 you know, after GFC. But it's really, I think probably 0:11:42.000 --> 0:11:44.040 the only country in history that I can think of 0:11:44.080 --> 0:11:46.920 that has actively chosen to save its way out of 0:11:46.920 --> 0:11:47.320 a bubble. 0:11:47.400 --> 0:11:49.199 And it's slightly too early to tell whether that was 0:11:49.240 --> 0:11:50.800 the right or the wrong approach, isn't it. 0:11:51.280 --> 0:11:53.440 So if we were to look at as sort of 0:11:53.480 --> 0:11:57.120 senior Japanese business leader today, he probably I feel lucky, 0:11:57.440 --> 0:12:00.280 just caught the tail end of the bubble, but then 0:12:00.320 --> 0:12:05.440 has spent the next thirty odd years trying to work 0:12:05.480 --> 0:12:10.160 through a debt deflation. And those sort of business executives 0:12:10.160 --> 0:12:12.560 who are the most aggressive at the end of the 0:12:12.559 --> 0:12:16.160 bubble are likely not to be here anymore because their 0:12:16.160 --> 0:12:20.200 companies went bust, and so there's been an enormous survivorship 0:12:20.240 --> 0:12:24.560 bias amongst those executives who are still here, companies who 0:12:24.600 --> 0:12:26.880 are still here, and you can see that and perhaps 0:12:26.960 --> 0:12:28.800 in some of the banks. You know, the biggest bank 0:12:28.840 --> 0:12:33.240 in Japan is Mitsubishi UFJ, but that's a combination of Mitsubishi, 0:12:33.520 --> 0:12:37.640 Cocasai UFJ and you know, and so many other banks. 0:12:38.760 --> 0:12:41.439 And the same thing is true for you know, SMBC. 0:12:41.679 --> 0:12:43.920 The same thing is true for Misoho, which is you know, 0:12:43.960 --> 0:12:47.760 at least made of three very large banks. They used 0:12:47.800 --> 0:12:50.080 to be many, many different companies have been forced to 0:12:50.120 --> 0:12:53.480 merge and consolidate and rationalize, and in the process, obviously 0:12:53.559 --> 0:12:56.840 that's created a lot of managers, the aggressive ones have 0:12:56.960 --> 0:12:59.600 lost their jobs. And that's I think something that people, 0:12:59.640 --> 0:13:02.400 perhaps I don't understand is that there's been this very 0:13:02.400 --> 0:13:05.640 strong survivorship buyas. So for a long time, Japanese companies 0:13:05.679 --> 0:13:08.920 were really just focused on surviving, being very very risk 0:13:08.960 --> 0:13:12.840 averse and not taking any risks. And to some extent, 0:13:12.880 --> 0:13:15.199 it meant that wasn't maybe the best and the most 0:13:15.240 --> 0:13:17.960 aggressive managers who have thrived like they might maybe in 0:13:18.000 --> 0:13:21.600 the US, but the dullest and the safest. And I 0:13:21.640 --> 0:13:23.679 think what perhaps we're finally begin you see is that 0:13:23.679 --> 0:13:28.040 that's changing, and that there are new companies coming through, 0:13:28.080 --> 0:13:31.680 whether it's an internet or services in retail. You know 0:13:31.720 --> 0:13:34.000 that you are seeing a newer generation of managers who 0:13:34.000 --> 0:13:36.600 are coming through, who are perhaps a bit more attuned 0:13:36.640 --> 0:13:39.200 to what's happened in the rest of the world. But 0:13:39.280 --> 0:13:42.000 it means that a lot of Japanese companies have used 0:13:42.040 --> 0:13:45.680 those that last of thirty years as an opportunity basically 0:13:45.760 --> 0:13:48.040 to just hoard assets and hoard cash. 0:13:48.320 --> 0:13:50.960 So this sounds like an absolutely brilliant combination. 0:13:51.120 --> 0:13:56.800 We've got companies that are solid, high quality, conservatively but 0:13:57.080 --> 0:14:02.720 reasonably run, perhaps low debt, and they're sitting there just waiting. 0:14:03.240 --> 0:14:04.640 Making up a story for you. By the way, I 0:14:04.640 --> 0:14:05.280 hope this is true. 0:14:05.840 --> 0:14:08.199 They're just sitting there waiting these high quality, load debck 0:14:08.240 --> 0:14:10.640 companies for a new generation of managers to come in 0:14:10.720 --> 0:14:11.640 and leverage what they have. 0:14:12.400 --> 0:14:15.600 Yeah, and it's not just that they're load debt. Most 0:14:15.600 --> 0:14:19.520 companies in Japan are net cash. About forty percent of 0:14:19.520 --> 0:14:22.520 companies have a quarter of their shareholder equity in net cash. 0:14:22.840 --> 0:14:25.200 So we're not talking about real estate. We're not saying 0:14:25.240 --> 0:14:28.920 about investment securities and things like that. This is just cash. 0:14:29.120 --> 0:14:31.640 And in a deflation re environment or a very low 0:14:31.680 --> 0:14:32.600 inflation environment. 0:14:32.640 --> 0:14:34.880 That's fine, it makes sense to keep pilecast sitting around 0:14:34.920 --> 0:14:36.560 on your balance set to agree. 0:14:36.840 --> 0:14:39.600 Yeah, it means the return on cash is in real terms, 0:14:39.840 --> 0:14:42.360 is pretty good. But it also means that if your 0:14:42.440 --> 0:14:45.960 banking system is failing, and you know, you go to 0:14:46.000 --> 0:14:47.480 the bank and you say, peace, can I borrow a 0:14:47.520 --> 0:14:51.440 billion dollars? They say, actually, we were really rather hoping 0:14:51.480 --> 0:14:55.320 you could lend us some money to recapitalize ourselves again. 0:14:55.800 --> 0:14:58.120 So I mean during this debt deflation, the Japanese banking 0:14:58.160 --> 0:15:02.560 system probably recapitalize itself about three times over. So that's 0:15:02.600 --> 0:15:05.080 the kind of extent of the kind of debt wipeout 0:15:05.080 --> 0:15:08.800 that you've seen in Japan. So companies weren't able to 0:15:08.840 --> 0:15:13.200 rely upon the banks to finance them, and to some 0:15:13.280 --> 0:15:15.360 extent they've had to build up, you know, or either 0:15:15.440 --> 0:15:18.960 generate their own cash flow to pay for things, or 0:15:19.440 --> 0:15:21.680 they've had to sort of save up effectively build their 0:15:21.680 --> 0:15:24.120 own cash pile. And then you then go out and 0:15:24.360 --> 0:15:26.720 you know, run their businesses they wanted to. But it 0:15:26.720 --> 0:15:30.160 does mean that this incredible conservatism, as perhaps we move 0:15:30.200 --> 0:15:33.760 engineer where inflation is let's say more than zero, is 0:15:33.800 --> 0:15:36.640 something that begins to weigh on them. And the second 0:15:36.680 --> 0:15:38.920 point about it is it's not just the cash the 0:15:39.000 --> 0:15:41.800 return on the cash is, you know, positive or negative. 0:15:42.040 --> 0:15:44.040 Is that if you start think about the cost of capital, 0:15:44.520 --> 0:15:46.760 which is something that Tokyo Stock Exchange is beginning to 0:15:46.800 --> 0:15:49.760 ask companies to do, suddenly realize that actually, for your 0:15:49.800 --> 0:15:52.400 cost of capital or equity in Japan is say ten 0:15:52.480 --> 0:15:56.720 percent roughly, then actually your cash is not returning you zero, 0:15:56.800 --> 0:15:59.520 it's actually earning you minus ten once you're adjust for 0:15:59.560 --> 0:16:02.200 the carrying cost. So if you think about companies with 0:16:02.760 --> 0:16:07.280 twenty five thirty forty percent of their equity is basically 0:16:07.360 --> 0:16:10.200 net cash, then actually it means you know that they're 0:16:10.480 --> 0:16:13.000 overall the return you have to generate from your core 0:16:13.040 --> 0:16:17.720 business to get a good roe is actually incredibly high. 0:16:17.800 --> 0:16:19.600 And that's one of the things that you know, the 0:16:19.720 --> 0:16:22.080 say Tokyo Socket Change right now is the new president 0:16:22.200 --> 0:16:25.200 is particularly focused on and he's saying, we don't think 0:16:25.280 --> 0:16:28.720 Japanese companies understand what their cost of capital is properly, 0:16:29.040 --> 0:16:30.640 and we would like them really to look at this 0:16:30.760 --> 0:16:35.000 and to understand more about what the cost of holding 0:16:35.040 --> 0:16:37.640 the assets they use to run and operate their businesses. 0:16:37.640 --> 0:16:41.880 Are and maybe some companies have actually got far too 0:16:41.880 --> 0:16:45.040 many assets. And I think that this is really part 0:16:45.080 --> 0:16:47.680 of this big change in kind of corporate governance that 0:16:47.760 --> 0:16:49.960 has been going on since the days of you know, 0:16:50.320 --> 0:16:54.240 O shinzo Abe, which you know was perhaps kicked off 0:16:54.360 --> 0:16:57.560 kicked it all off with the shareholder governance and corporate 0:16:57.600 --> 0:17:00.040 governance codes. And we think that you know, the this 0:17:00.240 --> 0:17:03.840 is just taking time to gather and gather momentum and 0:17:03.880 --> 0:17:06.639 to bear fruit. But we're now moving into a phase 0:17:06.640 --> 0:17:08.960 where this is actually becoming much more real and the 0:17:09.000 --> 0:17:13.320 conversations you have with companies are becoming much more meaningful. 0:17:13.400 --> 0:17:13.879 It's interesting. 0:17:13.880 --> 0:17:17.080 It's another example of people expecting things to happen too fast, 0:17:17.160 --> 0:17:20.560 isn't it. And when abbe In produced all his reforms, 0:17:20.600 --> 0:17:24.040 everyone got temporarily very excited and rushed into Japan and 0:17:24.040 --> 0:17:26.120 then was disappointed a year or too later when really 0:17:26.119 --> 0:17:30.480 nothing particular had happened, not noticing that under the surface. 0:17:30.440 --> 0:17:31.960 All this was beginning to happen. 0:17:32.000 --> 0:17:34.199 And now we're starting to see that the fruits of 0:17:34.280 --> 0:17:37.240 that renewed focus on shareholder value for example. 0:17:37.880 --> 0:17:39.879 Yeah, and I mean I think the key tempersise is 0:17:39.880 --> 0:17:42.919 you're starting off from a very very low base and 0:17:42.960 --> 0:17:45.560 the kinds of you know, you know, But also that 0:17:45.600 --> 0:17:48.679 means the scope for improvement from that low base and 0:17:48.720 --> 0:17:51.920 those very low valuations is quite big. So's I think 0:17:51.920 --> 0:17:55.240 it's about the direction of travel and hopefully the pace 0:17:55.320 --> 0:17:58.920 of that journey as opposed to the current level being 0:17:59.280 --> 0:17:59.960 being very good. 0:18:00.520 --> 0:18:02.960 And if you look at Japan in absolute valuation in terms, 0:18:03.000 --> 0:18:05.199 it's still pretty cheap, isn't it. If you look at 0:18:05.240 --> 0:18:06.919 relative the rest of the world is one of the 0:18:06.960 --> 0:18:10.800 few markets that outside the UK that actually doesn't look 0:18:10.840 --> 0:18:11.840 relatively inexpensive. 0:18:11.960 --> 0:18:15.880 Yeah, it's very cheap. Companies have a lot of physical 0:18:16.200 --> 0:18:19.280 and financial assets, so when you look at say shareholder equity, 0:18:19.640 --> 0:18:22.840 it's almost all sort of tangible book value. And there 0:18:22.840 --> 0:18:25.600 are aspects of Japanese accounting because of the deflation that 0:18:25.720 --> 0:18:29.160 means that effectively assets are carried at either book cost 0:18:29.640 --> 0:18:33.080 or market price, whichever is lower, so that there's kind 0:18:33.080 --> 0:18:37.159 of an inherent downside bias in some of that accounting, 0:18:37.520 --> 0:18:40.120 which kind of probably even understates some of the valuation 0:18:40.240 --> 0:18:42.359 that you can see out there. But you also have 0:18:42.440 --> 0:18:44.520 a number of perhaps some of the very large cap 0:18:44.560 --> 0:18:48.360 global companies have been perhaps operating a more global fashion 0:18:48.440 --> 0:18:51.199 have been more competitive, So you know, I think the 0:18:51.240 --> 0:18:55.639 real opportunities more in the medium and smaller sized companies, 0:18:55.680 --> 0:18:58.280 and perhaps more in the domestic companies than is in 0:18:58.320 --> 0:19:00.880 some of the global companies. There there are some very 0:19:00.920 --> 0:19:06.560 big names like Panasonic or Kaserah, for example, where focus 0:19:06.600 --> 0:19:09.080 on shareholders has certainly not been a priority, and where 0:19:09.160 --> 0:19:12.679 companies have not been very disciplined, and where there's a 0:19:12.680 --> 0:19:14.040 lot of potential for change. 0:19:14.560 --> 0:19:16.920 Let's talk a little bit about Warren Buffett, right, because 0:19:16.920 --> 0:19:19.040 you're not the only one who sees value in Japan. 0:19:19.960 --> 0:19:23.040 Buffett sees it too, and he's been investing. When did 0:19:23.040 --> 0:19:24.920 he first invest in the big trading company's a couple 0:19:24.920 --> 0:19:27.679 of years back. He's done extremely well out of that, 0:19:28.440 --> 0:19:31.040 and he says that he says, we're not done investing 0:19:31.040 --> 0:19:33.600 in Japan yet. He's in for the long term. What 0:19:33.760 --> 0:19:36.479 is it that he's seeing in it? Is this purely value? 0:19:36.560 --> 0:19:40.600 There's been some talk about him seeing Japan as a 0:19:40.640 --> 0:19:43.560 beacon of stability in a geopolitically difficult world. 0:19:43.920 --> 0:19:45.680 Is it that as well? Or are we just talking 0:19:45.680 --> 0:19:46.800 about valuations with him? 0:19:46.840 --> 0:19:49.960 Do you think I think it's it's there is some 0:19:50.080 --> 0:19:52.520 very well Rund the trading comes in Japan, it generally 0:19:52.720 --> 0:19:54.160