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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. How's Hong Kong?

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Speaker 2: It's okay, we're uh, we're perking along here. It's uh.

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Speaker 2: It's feeling a little bit better, you know, the last

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Speaker 2: week or two here than it did for much of

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Speaker 2: the second half of last year. Have you.

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Speaker 1: Have you watched the ex Pats? No, I'm debating.

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Speaker 2: Categorically, I categorically refuse to do so.

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Speaker 1: I think I'm gonna watch it once all the episodes

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Speaker 1: are out, just for nostalgia value. But yeah, I have

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Speaker 1: heard mixed reviews.

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Speaker 2: Yeah, it's it's it's uh. I objected to the way

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Speaker 2: they you know, they did it, and I objected to

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Speaker 2: I was sure I was going to object to certain

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Speaker 2: portrayals and the I bet I'm not going to be surprised.

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Speaker 1: Joe, did you did you know about that?

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Speaker 3: What is the expert?

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Speaker 2: So this was a.

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Speaker 1: Huge thing in Hong Kong where during the pandemic they

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Speaker 1: let Nicole Kidman in like without having to go through

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Speaker 1: quarantine in order to film scenes for the show, which

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Speaker 1: is all about expats living in Hong Kong. It was

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Speaker 1: like a huge controversy. Everyone was so annoyed about it

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Speaker 1: because it was it was just such an obvious double standard.

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Speaker 3: I did a deadlift one.

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Speaker 1: Okay, so many uh barges.

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Speaker 3: This isn't after school special, except.

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Speaker 1: I've decided I'm going to base my entire personality going

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Speaker 1: forward on campaigning for a strategic pork reserve in the US.

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Speaker 3: Where's the best posta? These are the important question.

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Speaker 1: Is it robots taking over the world? No.

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Speaker 3: I think that like in a couple of years, the

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Speaker 3: AI will do a really good job of making the

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Speaker 3: odd launch podcast, And people say, I don't really need

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Speaker 3: to listen to Joe and Tracy anymore. We do have touching,

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Speaker 3: the perfect welcome to lots More, where we catch up

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Speaker 3: with friends about what's going on.

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Speaker 1: Right now, because even when add Loots is over, there's

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Speaker 1: always lots more.

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Speaker 3: And we really do have the perfect guest.

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Speaker 1: It seems like it's fun to be an investor in

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Speaker 1: the Japanese market again.

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Speaker 3: But after like thirty five years, Yeah, you had to

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Speaker 3: wait a while. I think stocks for the long run,

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Speaker 3: right the nie K I think recently on some measure

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Speaker 3: broke it's nineteen eighty nine. The infamous nineteen eighty nine

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Speaker 3: peak is back, so yeah, there it is. There's the chart.

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Speaker 3: I just pulled it up on my terminal. Pretty impressive.

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Speaker 1: Travis, isn't fun? Has it been enjoyable?

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Speaker 2: Uh? Yeh yes, and no, partly, you know, being in Japan,

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Speaker 2: you're you're constantly and I'm not in Japan, I'm in

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Speaker 2: Hong Kong, but being you know, involved in the Japanese market,

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Speaker 2: you're constantly told, well, you know, the Magnificent seven, they

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Speaker 2: were up, like, you know, seventy three percent last year,

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Speaker 2: how about you? And then okay, well Japan's up forty

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Speaker 2: percent and the S and p's up less. Okay, but yeah,

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Speaker 2: but that's in yen and you know, the dollars strengthened

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Speaker 2: against the end, and so there's there's always some naysayers

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Speaker 2: here and there. But yeah, it's been okay, and there's

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Speaker 2: been a lot of changes and those changes have really

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Speaker 2: been rewarding for those of us who've been watching and

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Speaker 2: waiting for these changes to manifest themselves more publicly. Yeah.

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Speaker 1: So we are speaking to Travis Lundy. He is, of course,

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Speaker 1: repeat All Thoughts guests and a special situations analyst who

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Speaker 1: publishes on smart Karma. One of the smartest people I

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Speaker 1: know when it comes to both markets and general trends,

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Speaker 1: I guess in Asia based out of Hong Kong, but

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Speaker 1: you have a lot of historical experience with the Japanese

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Speaker 1: market right. In fact, this is sort of your bread

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Speaker 1: and butter corporate Japan, special situations, big events in that market.

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Speaker 2: Yes, I've been involved in the Japanese markets for twenty

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Speaker 2: plus years. I lived in Japan for twenty plus years.

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Speaker 2: I moved to Hong Kong for a job and I'm

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Speaker 2: still here, but I do a lot of my work

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Speaker 2: related to Japan.

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Speaker 3: So this is the thing that you hear. The thing is,

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Speaker 3: you've been hearing it for a while, So this is

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Speaker 3: why I'm not entirely satisfied. But a thing that you

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Speaker 3: hear is, oh well, suddenly corporate Japan. Management in Japan

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Speaker 3: have become much more focused on returns or become more

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Speaker 3: shareholder friendly, et cetera. I guess there was this perception

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Speaker 3: at one point, you know, and that management in Japan

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Speaker 3: for a long time ran the business for management or insiders,

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Speaker 3: and now they're running for.

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Speaker 1: Sharehold first, salary men for their employees.

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Speaker 3: Is this true? Is there is this actually a phenomenon

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Speaker 3: that's changed.

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Speaker 2: Yeah, it's changed quite a bit. It really has. And

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Speaker 2: part of this is if you go back to the history,

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Speaker 2: you know, back in sixteen forty two, seriously, the post war,

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Speaker 2: you know, the occupation administration broke up the Zybots, but

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Speaker 2: they were afraid of communism, so they allowed, you know,

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Speaker 2: they allowed the corporate groupings to reform. Instead of vertically,

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Speaker 2: they allowed them to reform horizontally around banks and financial institutions.

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Speaker 2: And a bunch of the shares in corporate Japan were

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Speaker 2: handed off to individuals, but individuals then sold over the

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Speaker 2: years and there were no buybacks, but the financial institutions

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Speaker 2: just accumulated them. So by the mid eighties, financial institutions

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Speaker 2: that is to say, banks, trust banks, regional banks, life

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Speaker 2: insurance companies, property and casualty insurance companies, and then of

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Speaker 2: course corporations, they held two thirds of the market, which

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Speaker 2: is just nuts, right. Since then it's gone way way down.

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Speaker 2: And part of this is, you know, banks support you know, companies.

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Speaker 2: They a company has a need to invest capital, so

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Speaker 2: they go borrow some money from the bank. The bank says, here,

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Speaker 2: I'll buy some warrants too, and the warrants become shares. Okay,

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Speaker 2: Now you IPO a subsidiary of a major company, and

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Speaker 2: that subsidiary has you know, you know, three different insurance companies,

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Speaker 2: three different banks, five different supplier partners, ten different customers

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Speaker 2: already as shareholders. They sell some off to retail, but

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Speaker 2: it's still eighty percent you know, corporate and finance, and

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Speaker 2: this is part of society. You know, cross holdings wasn't

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Speaker 2: some you know, malicious thing designed to keep out you know,

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Speaker 2: voting shareholders. It was really, you know, let's go all

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Speaker 2: do this together, support each other, be nice and friendly.

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Speaker 2: And suddenly became rude to sell. You know, why would

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Speaker 2: I would sell this in order to go make money

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Speaker 2: for myself. You know, I'm part of a society. I'm

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Speaker 2: just going to support this now. Eventually, you know, they

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Speaker 2: started selling down because they needed to. There was a

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Speaker 2: you know, we nineteen eighty nine, and then you know,

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Speaker 2: by nineteen ninety eight, we were you know, half half off.

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Speaker 2: And you know, there was a banking crisis in the

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Speaker 2: late nineties that persisted through the early naughties. A couple

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Speaker 2: of brokers went the bust in the late nineties. A

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Speaker 2: couple of insurance companies went bust in the early naughties,

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Speaker 2: mostly because they held too many shares which had gone

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Speaker 2: too far down that and real estate obviously, and you know,

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Speaker 2: the shares started going down, and the banks and insurance

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Speaker 2: companies in corporate started seeing this is kind of an

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Speaker 2: existentialist risk, so they sold shares, and you know, those

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Speaker 2: shares ended up in the hands of foreigners, retail and

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Speaker 2: more public shareholders engended more questions about what management was doing.

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Speaker 1: So one of the things I'm curious about is what

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Speaker 1: the proximate trigger is or was for this new found

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Speaker 1: I guess like investor slash return focused idea in Japan inc.

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Speaker 1: So you know, when it comes to Japan, I think

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Speaker 1: I can remember, like for decades, almost everything touching the

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Speaker 1: Japanese market and economy tends to be discussed in almost

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Speaker 1: cultural terms. It's kind of weird, but like people were

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Speaker 1: always debating whether or not the culture of the Japanese

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Speaker 1: economy could change, whether or not it would be more

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Speaker 1: open to things like imported labor immigration, or whether that

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Speaker 1: was just impossible given attitudes towards foreigners, but also whether

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Speaker 1: or not the I guess the sort of like internal

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Speaker 1: focus of companies was down to a different type of

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Speaker 1: societal value, so more of a collectivist society versus maybe

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Speaker 1: the rampant individualism that we see in the US. So

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Speaker 1: what was the change here because people were kind of

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Speaker 1: like dismissive of the idea that this could happen for

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Speaker 1: a long time.

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Speaker 2: I think a couple of things. First was, you know,

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Speaker 2: when the dollar yen went from one hundred and fifty

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Speaker 2: and nineteen ninety to seventy nine in nineteen ninety five,

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Speaker 2: all of Japan Inc. Which produced in Japan and sold abroad,

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Speaker 2: you know the giant XP machine, and they lost huge,

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Speaker 2: huge sums, and so all of the Japanese companies they

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Speaker 2: set up production bases abroad. So now you have you know,

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Speaker 2: Toyota making America cars in America sold to Americans, and

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Speaker 2: you know, Japan turned the demographic corner. Japan was much

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Speaker 2: slower to come back after its banking crisis than you know,

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Speaker 2: the US was after its own banking crisis in the eighties.

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Speaker 2: And you know, Japanese, the Japanese business of Toyota didn't

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Speaker 2: make nearly as much money as the US business, So

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Speaker 2: you know, profits piled up abroad, and you know, companies

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Speaker 2: became cash rich because companies had found that they were

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Speaker 2: unable to borrow when they needed to invest simply because

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Speaker 2: the banks were too weak to lend too much money,

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Speaker 2: and they were always afraid of lending to companies who

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Speaker 2: had a plan rather than companies who had assets to

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Speaker 2: back their loans. Companies started to hoard cash. They hoarded cash,

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Speaker 2: and they hoarded shares. Shares were not more to market,

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Speaker 2: and so they became a rainy day fund. And as

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Speaker 2: long as they didn't get hit, you know, you were okay.

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Speaker 2: Go down fifty percent, you have to impair them, but

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Speaker 2: as long as they don't go way way down, you're

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Speaker 2: generally okay. So they became a rainy day fund just

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Speaker 2: because they needed to hold on to this stuff to

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Speaker 2: be sure that they had access to money when they

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Speaker 2: needed it. And so we kind of went through the naughties.

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Speaker 2: Japan you know, came through the GFC better than you know,

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Speaker 2: most people, I think, And then there was a push

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Speaker 2: towards increased stewardship and increased corporate governance. Part of this was,

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Speaker 2: you know, based on the Scandinavian experience, where some of

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Speaker 2: the pensions decided to go whole hog on better stewardship

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Speaker 2: and better corporate governance, pressuring companies back in the late nineties,

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Speaker 2: the UK did so in the early naughties. The Tsee

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Speaker 2: set up a corporate governance code in two thousand and four,

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Speaker 2: which nobody will remember and nobody ever paid attention to.

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Speaker 2: The UK set up more of a stewardship code and

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Speaker 2: more of a corporate governance code. As time went on

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Speaker 2: there were more reports about the effectiveness. Japan copied that

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Speaker 2: and set up a stewardship code in a corporate governance

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Speaker 2: code after much you know, back and forth in the

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Speaker 2: political arena, and it finally got there in the just

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Speaker 2: after mister Abbe was elected in late twenty twelve. It

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Speaker 2: showed up twenty fourteen and the Corporate Governance Code in

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Speaker 2: twenty fifteen. There was pressure people saw it. It was

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Speaker 2: finally you know, starting to push.

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Speaker 3: From what it sounds like, you know, I started in

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Speaker 3: the beginning with my cynicism as like, oh, you always

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Speaker 3: hear this. It's like Japan is turning the corner on

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Speaker 3: share on you know, management styles and corporate governance, et cetera.

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Speaker 3: What it sounds like is actually all that's been true.

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Speaker 3: It's just a very long process. So there's the long

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Speaker 3: process of the sort of diminution of the cross holdings,

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Speaker 3: the long process of the various expectations at the TSC,

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Speaker 3: et cetera. So all of it was always true. It

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Speaker 3: just takes a while for these things to sort of

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Speaker 3: come to Fruce.

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Speaker 2: That's yeah, that's exactly right. And you know, we hit

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Speaker 2: Japan hit bottom in twenty twelve when the dollar yen

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Speaker 2: was super low and it's been up since. You know,

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Speaker 2: we've had a four bag or five bagger in the

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Speaker 2: nike A in twelve years. Call it so, and that

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Speaker 2: isn't that bad. You know, it's been in end terms,

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Speaker 2: which means it's less than dollar terms. But that's where

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Speaker 2: we started from. And we had to come up the

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Speaker 2: hill through abenomics, through a bunch of different privatizations, to

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Speaker 2: get some leadership examples out in the publics so that

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Speaker 2: the media could point to that company, that company did

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Speaker 2: something good. And the hint that everyone's supposed to take

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Speaker 2: is I should be more like them.

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Speaker 1: I under stand that. You know, at a high level,

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Speaker 1: there are examples of shifts in Japan corporate governance, so

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Speaker 1: you know there are actions being taken at a sort

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Speaker 1: of like executive slash strategic level. But I kind of

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Speaker 1: wonder how much that filters down to day to day

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Speaker 1: business because I remember a lot of my friends from

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Speaker 1: high school in Tokyo, you know, they stayed in the

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Speaker 1: city and they went to work for Japanese companies. And admittedly,

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Speaker 1: the last time I spoke to them, a lot of

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Speaker 1: them was pre pandemic, so this would have been like

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Speaker 1: twoenty nineteen or twenty eighteen, and so many of them

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Speaker 1: were just miserable, Like the working culture was terrible, you know,

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Speaker 1: gender dynamics were terrible. I just wonder, like how much

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Speaker 1: of that aspect of Japan's corporate culture has actually changed.

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Speaker 2: That's actually changed a lot, and it changed a lot

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Speaker 2: in you know, post GFC in part because you know,

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Speaker 2: companies weren't making any money, and Japanese companies didn't want

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Speaker 2: to pay overtime, and so one of the things is,

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Speaker 2: you know, you pay overtime and eventually people end up

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Speaker 2: with a little bit more cash in their pocket. The manager,

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Speaker 2: you know, his job is to take out the subordinates.

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Speaker 2: They all go to some bar and you know that's

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Speaker 2: where they end up at the hostess bar. But they

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Speaker 2: no longer had any money and Japan really, you know,

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Speaker 2: when I arrived in Japan in nineteen ninety. You know,

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Speaker 2: this was Julianna's Tokyo. Actually they went under just before that,

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Speaker 2: but you know it was really you know, Japan's great,

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Speaker 2: Japan's fantastic, Japan's the top of the world. We will

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Speaker 2: conquer the US in five years. And you know, Hong

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Speaker 2: Kong was much like that when I arrived in twenty eleven.

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Speaker 2: But Japan, you know, took us, you know, a step back,

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Speaker 2: and they really, you know, fifteen years of being beaten

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Speaker 2: down economically speaking, you know, household incomes not going up,

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Speaker 2: asset prices going down, real estate prices going down. People

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Speaker 2: decided that, you know, leisure, hobbies, foreign travel, all of

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Speaker 2: this is much more interesting. If I'm going to have

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Speaker 2: a job which really stinks, well, guess what, I'm going

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Speaker 2: to quit that job and I'm going to go work

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Speaker 2: for a foreign company where I'm treated better.

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Speaker 3: Trevis is a lot of that you mentioned, the importance

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Speaker 3: of you need some company to do it, and then

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Speaker 3: everyone wants to emulate them. So some company takes some actions,

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Speaker 3: the stock goes up, people shareholders get rich. Another shareholders

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Speaker 3: want to get rich. Which company did that in Japan?

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Speaker 3: Who is that prime mover?

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Speaker 2: That's a good question. The example which was perfect here

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Speaker 2: was when the when the Tokyo Stock Exchange and the

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Speaker 2: FSA changed the Corporate Governance Code. This the first time,

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Speaker 2: you know, after the original. They made an amendment to it,

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Speaker 2: one of the general principles which said, if you hold

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Speaker 2: corporate crossholdings, you are obliged to check them every year

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Speaker 2: to see whether you need to hold them in order

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Speaker 2: to do business. And strictly speaking, you should never need

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Speaker 2: to hold crossholdings in order to do business. You should

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Speaker 2: be able to do business with partners all the time anyway,

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Speaker 2: and no company should restrict other companies from you know,

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Speaker 2: selling their shares. That withholding business as a threat would

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Speaker 2: be a really bad thing. So they put that in

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Speaker 2: there and then they said, okay, we're going to do this.

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Speaker 2: As an example, then CSE owned four point nine percent

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Speaker 2: of the Singapore Exchange and they you know, they made

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Speaker 2: a little presentation and says, well, we've decided, we've talked

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Speaker 2: with the Singapore Stock Exchange. We've decided we don't need

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Speaker 2: to do this, but we'll have a continued good relationship

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Speaker 2: with them and partner on products and services, and so

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Speaker 2: we've decided to sell one third of our stake every

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Speaker 2: year for the next three years in order to not

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Speaker 2: disrupt the market and not cause market you know, consternation,

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Speaker 2: and we will apply the proceeds to you know, improving

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Speaker 2: shareholder returns. And that was the example, just as they

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Speaker 2: changed the corporate Governance Code. You know, since then, we've

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Speaker 2: also seen activists coming in. Actually a perfect example, an

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Speaker 2: absolutely perfect example is Tokyo Electron. In twenty thirteen to

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Speaker 2: two thousand five fifteen, there was a long running merger

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Speaker 2: negotiation and approval process between Tokyo Electron and Applied Materials

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Speaker 2: in the United States, and they ran a similar business.

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Speaker 2: And you know, Tokyo Electron was always kind of stodgy.

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Speaker 2: They held some cross holdings, they held a lot of cash,

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Speaker 2: and they kind of built their business in a certain way.

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Speaker 2: And they spent you know, basically the better part of

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Speaker 2: two years talking to AMAT and they walked out of it,

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Speaker 2: and the deal broke. The DOJ you know, blocked it,

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Speaker 2: and it was announced at the end of April twenty fifteen,

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Speaker 2: and they came out and said, all right, we've learned

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Speaker 2: so much in the process of two years. We're going

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Speaker 2: to completely change our business.

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Speaker 3: Why I'm just looking at.

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Speaker 2: Them a going up as a ten bagger, right, So yeah,

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Speaker 2: they basically said, you know, they said, we're going to

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Speaker 2: concentrate on our customers in a different way. We're going

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Speaker 2: to have a different dialogue with our customers, much the

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Speaker 2: way Amat has a dialogue with their customers. We're going

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Speaker 2: to take all of our extra cash, we're going to

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Speaker 2: buy stock back. We're going to set a minimum payout

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Speaker 2: ratio of fifty percent, so every quarter or every half,

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Speaker 2: you know, we're going to pay out exactly half of

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Speaker 2: our earnings, so you know what you're going to get

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Speaker 2: as a dividend, and we will strive to produce more

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Speaker 2: shareholder return. It wasn't noticed at the time, but you know,

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Speaker 2: people noticed it later and the stock is way up.

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Speaker 2: Other companies, you know, took a less good governance stance

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Speaker 2: at the time, but you know they were. There were

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Speaker 2: a bunch of examples, and it's slow, but it's it's

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Speaker 2: kind of you know, Rolling Stone.

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Speaker 1: So speaking of people noticing, I mean you mentioned just

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Speaker 1: then there's been more activism. We've we've certainly seen a

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Speaker 1: lot of inflows into the market as well. And I

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Speaker 1: think the fact that you know, stocks the Nicky is

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Speaker 1: a record is obviously catching a lot of people's attention,

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Speaker 1: but are you seeing that impacting investor behavior, Like are

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Speaker 1: people responding to the market maybe differently than they once did.

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Speaker 1: And I'm also thinking back to again this is kind

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Speaker 1: of a cliche, but the Missus Watsonabe idea. It used

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Speaker 1: to be that a lot of retail investors in Japan

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Speaker 1: would be focused on currency arbitrage because that was kind

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Speaker 1: of a way of getting returns in a period of

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Speaker 1: slow economic growth and the Lost decade and all of that.

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Speaker 1: But I mean, now you can invest in stocks and

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Speaker 1: get a return that way.

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Speaker 2: Yeah, it's an interesting question. Last year there were a

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Speaker 2: lot of you know, strategist comments and a lot of

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Speaker 2: you know, some of the famous japan specialist twitterati. We're

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Speaker 2: commenting on how much foreign inflow there was into the market.

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Speaker 2: And indeed, in the first half of twenty twenty three,

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Speaker 2: we saw about four point five trillion yen come in,

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Speaker 2: which was a really big thing. That was the biggest

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Speaker 2: inflow we had seen in almost ten years. But you know,

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Speaker 2: the second half, you know, kind of dampened it and

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Speaker 2: we'd lost one point five trillion. But if you go

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Speaker 2: back twenty twenty two, twenty twenty one, twenty nineteen eighteen.

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Speaker 2: You know that three trillion yen didn't cover half of

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Speaker 2: the outflow during the previous five years, so it was

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Speaker 2: nice to come back, but we were at no means,

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Speaker 2: you know, overweight foreign exposure. The other thing is, you know,

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Speaker 2: you've seen this everywhere. The rise of passive has been

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Speaker 2: you know, dramatic, and that includes you know, American pensions

359
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Speaker 2: investing with American fund managers who manage international portfolios. A

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Speaker 2: lot more of it's now impassive than active. And so

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Speaker 2: we've seen a rise of passive flows and a decrease

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Speaker 2: of active flows. But the activism itself depends on active investors,

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Speaker 2: not passive investors, because the passive investors, you know, they

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Speaker 2: just go with the thing. If it gets taken over,

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Speaker 2: it gets taken over. It doesn't get taken over, it

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Speaker 2: doesn't get taken over. What am I going to do?

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Speaker 3: So one investor, one investor who's out bullish on Japan

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Speaker 3: and even wrote about it in his recent note, Warren Buffett,

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Speaker 3: and he has stakes in five companies, and he says

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Speaker 3: they follow shareholder friendly policies. Some of their Mitsubishi Mitsui's

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Speaker 3: Sumitomo or Benny Tochu. I don't know if I'm pronouncing

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Speaker 3: all those correctly. And he says they don't pay their

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Speaker 3: executives as much as US executive. So what is it

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Speaker 3: about these companies are like, what is this opportunity or

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Speaker 3: the sort of the new buffet in Japan trade?

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Speaker 2: Well, so that was a fantastic trade and the reason

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Speaker 2: why it is a fantastic trade was because those companies

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Speaker 2: are really great companies. They are effectively listed private equity funds.

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Speaker 2: They are very competitive, They pay their young people a

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Speaker 2: lot of money. They recruit very very good personnel. The

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Speaker 2: personnel get trained, they enter a kind of a little

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Speaker 2: pod and go forth and do projects. There's a project leader,

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Speaker 2: you know, that's a flying V. Goes up in the

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Speaker 2: hierarchy for the next five or ten years. Eventually, you know,

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Speaker 2: you kind of get kicked out, You get sent off

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Speaker 2: to another project. Maybe you spin out and you do

387
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Speaker 2: an IPO of a port. You take control of a

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Speaker 2: project which they then invest in. But back when warren

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Speaker 2: It started investing, they were able to buy the projects

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Speaker 2: at or buy the company at zero point five times. Book,

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Speaker 2: that's pretty good. You generally can't buy private equity funds

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Speaker 2: at zero point times fund five times book. And these

393
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Speaker 2: guys had had, you know, a couple of years of

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Speaker 2: bad returns because they were heavily invested in the oil

395
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Speaker 2: patch oil and gas, and when you know, oil and

396
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Speaker 2: gas was very high in twenty fourteen and got crushed

397
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Speaker 2: in twenty fifteen twenty sixteen, these guys had to write

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Speaker 2: off a lot of a lot of their investments or

399
00:22:31,480 --> 00:22:35,080
Speaker 2: write down the investments. So they did, and you know,

400
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Speaker 2: it got kind of it stayed weak for a little while.

401
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Speaker 2: They started buying back some stock, but they were kind

402
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Speaker 2: of you know, underloved. But they are still very very

403
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Speaker 2: good companies for what they do. They are very financially savvy.

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Speaker 2: They are a bit like private equity because most of

405
00:22:51,720 --> 00:22:54,919
Speaker 2: their investments are non listed and they actually have a

406
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Speaker 2: fair bit more leverage than you can see by looking

407
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Speaker 2: at their financial statements. But they just managed it well

408
00:23:00,320 --> 00:23:03,840
Speaker 2: and it got long term funding. They're super professional. And

409
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Speaker 2: it could be that the top bosses don't get paid

410
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Speaker 2: you know, like fifty million dollars a year. They get

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Speaker 2: paid pretty well, and you know that's just part of

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Speaker 2: the Japanese way. Really executives around Japan. Don't get paid

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Speaker 2: stupid money. Carlo's goan was one of the examples, and

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Speaker 2: he got paid ten million dollars I think, and everyone's like,

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Speaker 2: oh my god, ten million dollars.

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Speaker 1: Oh Carlos going, oh my gosh, that that was such

417
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Speaker 1: a story. I just remembered I did a TV ad

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Speaker 1: for Mitsubishi. This was my other high school job, was

419
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Speaker 1: doing like ads of various sorts, and it must have

420
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Speaker 1: been like two thousand or two thousand and one. I

421
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Speaker 1: think I got paid probably like about the equivalent of

422
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Speaker 1: fifty dollars. I should have asked for.

423
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Speaker 3: Stock, Yes, you should have.

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Speaker 1: Yeah, that'd be not a million.

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Speaker 2: Well they went down from there. From there for ten years.

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Speaker 3: Held Tracy would have held the buy and hold investor here.

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Speaker 1: I would have. Actually, there's one other thing I wanted

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Speaker 1: to ask you, which is, you know, we've been very

429
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Speaker 1: focused on corporate Japan. But how much is this whole

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Speaker 1: conversation we're having about changes. How much of this is

431
00:24:06,800 --> 00:24:11,520
Speaker 1: a reflection or even a vindication of ebonomics.

432
00:24:12,600 --> 00:24:16,000
Speaker 2: I think it is a vindication of abenomics, in part

433
00:24:16,160 --> 00:24:20,399
Speaker 2: because part of what mister Abe wanted to do was

434
00:24:20,440 --> 00:24:25,680
Speaker 2: he wanted to make Japan conscious of its shall I

435
00:24:25,720 --> 00:24:29,120
Speaker 2: call them positive attributes, where Japan had something to offer

436
00:24:29,200 --> 00:24:31,520
Speaker 2: the world. He said, you know, go forth and make money.

437
00:24:32,080 --> 00:24:34,400
Speaker 2: We will support you, We will you know, figure out

438
00:24:34,440 --> 00:24:36,200
Speaker 2: how to get you loans that you need to do

439
00:24:36,320 --> 00:24:39,639
Speaker 2: to go, you know, spread the good word. And I

440
00:24:39,680 --> 00:24:42,280
Speaker 2: think that at the same time we had the introduction

441
00:24:42,359 --> 00:24:45,720
Speaker 2: of the Japan Stewardship Code, which gave you know, activist

442
00:24:45,720 --> 00:24:49,720
Speaker 2: investors basically a stick to beat on companies, and then

443
00:24:49,840 --> 00:24:53,399
Speaker 2: gave the Corporate Governance Code as you know, part of

444
00:24:53,440 --> 00:24:57,399
Speaker 2: the the anvil, if you will. And there were simply

445
00:24:57,440 --> 00:25:00,000
Speaker 2: a bunch of things which entered into the frame work

446
00:25:00,040 --> 00:25:03,760
Speaker 2: which helped companies get out of some of the doldrums

447
00:25:03,800 --> 00:25:09,240
Speaker 2: post March twenty eleven earthquake and end twenty eleven Thai

448
00:25:09,400 --> 00:25:13,080
Speaker 2: floods which impacted the Japanese economy dramatically. I think that

449
00:25:13,560 --> 00:25:17,480
Speaker 2: it was all kind of came together to bring Japan

450
00:25:17,560 --> 00:25:19,919
Speaker 2: out of what had been five year doldrums, which had

451
00:25:19,960 --> 00:25:22,479
Speaker 2: been at the tail end of twenty year doldrums. And

452
00:25:22,560 --> 00:25:25,520
Speaker 2: I think that he gets a fair bit of credit.

453
00:25:25,560 --> 00:25:28,720
Speaker 2: But I really think that kind of a societal change

454
00:25:28,760 --> 00:25:32,920
Speaker 2: which happened with a large number of inputs, and it's

455
00:25:33,040 --> 00:25:34,880
Speaker 2: just as you mentioned, Joe, it's going to take time.

456
00:25:35,200 --> 00:25:38,360
Speaker 2: A perfect example is cross holdings, right, we talked about

457
00:25:38,400 --> 00:25:43,680
Speaker 2: that before. Japan is effectively the world's largest long short fund.

458
00:25:44,400 --> 00:25:49,360
Speaker 2: There's something like seventy trillion YEN of cross holdings across corporates, banks,

459
00:25:49,640 --> 00:25:52,640
Speaker 2: property and casualty insurers. Actually seventy trillion was last year's number.

460
00:25:52,640 --> 00:25:54,280
Speaker 2: I think we're probably up to one hundred trillion. Now,

461
00:25:54,600 --> 00:25:56,879
Speaker 2: this is a lot of money, but basically all of

462
00:25:56,920 --> 00:26:00,880
Speaker 2: those cross holdings are funded by the equity of the holders.

463
00:26:01,080 --> 00:26:04,200
Speaker 2: That is to say, if the if a bank sells

464
00:26:04,200 --> 00:26:06,480
Speaker 2: its cross holdings, it gets money, then it takes the

465
00:26:06,520 --> 00:26:08,680
Speaker 2: money and it buys back its own shares. Well, if

466
00:26:08,680 --> 00:26:11,960
Speaker 2: you know unpack that, it basically means all of these

467
00:26:11,960 --> 00:26:15,919
Speaker 2: companies and banks and insurance companies have if they've effectively

468
00:26:16,000 --> 00:26:20,160
Speaker 2: shorted their own stock in order to own the cross holdings.

469
00:26:20,720 --> 00:26:23,680
Speaker 2: Now that's really really bad governance. And I don't know

470
00:26:23,760 --> 00:26:27,399
Speaker 2: that that Japanese companies have figured that out yet. But

471
00:26:27,800 --> 00:26:30,160
Speaker 2: by the idea of saying I don't need to hold

472
00:26:30,160 --> 00:26:32,040
Speaker 2: the cross holdings in order to do the business, and

473
00:26:32,080 --> 00:26:34,200
Speaker 2: then I will take that money and buy back the stocks.

474
00:26:34,840 --> 00:26:37,159
Speaker 2: You know, that's really great. The thing about this is,

475
00:26:37,160 --> 00:26:39,919
Speaker 2: you know, the banks hold a thousand different stocks, and

476
00:26:40,160 --> 00:26:43,600
Speaker 2: every one of these cross holdings is a strategic position.

477
00:26:43,840 --> 00:26:46,840
Speaker 2: This is a corporate to corporate relationship. It's embedded in

478
00:26:46,880 --> 00:26:49,880
Speaker 2: the DNA of the corporates for the past decades. It's

479
00:26:49,960 --> 00:26:54,240
Speaker 2: part of their business, you know. It's it's a huge

480
00:26:54,320 --> 00:27:00,439
Speaker 2: number of relationships which need to be unwound politely. You

481
00:27:00,480 --> 00:27:02,359
Speaker 2: can't simply go to somebody and say, hey, you know,

482
00:27:02,480 --> 00:27:05,239
Speaker 2: we've you know, thanks for all the laughs, but you know,

483
00:27:05,880 --> 00:27:07,600
Speaker 2: I'm going to go sell five billion dollars a year

484
00:27:07,640 --> 00:27:09,639
Speaker 2: stock in the market. I hope it doesn't hurt the

485
00:27:09,640 --> 00:27:13,119
Speaker 2: stock too much. So you have to be polite about

486
00:27:13,160 --> 00:27:15,480
Speaker 2: getting out of it. You have to consider how it's

487
00:27:15,480 --> 00:27:18,880
Speaker 2: going to impact the shareholders of that target company. Also,

488
00:27:18,920 --> 00:27:21,480
Speaker 2: if you've got you know, some company has like fifteen

489
00:27:21,520 --> 00:27:24,760
Speaker 2: different crossholders, they can try to accommodate, but they can't

490
00:27:24,800 --> 00:27:28,800
Speaker 2: accommodate their fifteen different crossholders unfairly. They have to treat

491
00:27:28,840 --> 00:27:31,359
Speaker 2: all of them fairly. So if all of them want out,

492
00:27:31,480 --> 00:27:33,320
Speaker 2: then you know, they have to figure out how to

493
00:27:33,320 --> 00:27:36,040
Speaker 2: get out of their own crossholdings. To get the cash

494
00:27:36,080 --> 00:27:40,120
Speaker 2: to buy them back. So it's it's a huge enormous

495
00:27:40,160 --> 00:27:43,639
Speaker 2: logistical problem here, and this takes time. It has taken

496
00:27:43,680 --> 00:27:45,880
Speaker 2: time for the past ten years. It's going to take

497
00:27:45,920 --> 00:27:49,639
Speaker 2: another five or ten years. Just today we had the

498
00:27:49,640 --> 00:27:53,800
Speaker 2: property and casualty companies come out with their business improvement

499
00:27:54,000 --> 00:27:57,119
Speaker 2: order plans. They had a scandal last year where they

500
00:27:57,119 --> 00:28:01,720
Speaker 2: had a price fixing and the FSA sided that in

501
00:28:01,800 --> 00:28:05,040
Speaker 2: part of this was due to the overly cozy relationships

502
00:28:05,040 --> 00:28:09,440
Speaker 2: which were caused by crossholdings. Now that's kind of garbage,

503
00:28:09,560 --> 00:28:12,679
Speaker 2: but they said it. And this is actually, you know,

504
00:28:12,720 --> 00:28:17,639
Speaker 2: it's absolutely perfect for the Japanese insurance because you know,

505
00:28:17,800 --> 00:28:20,399
Speaker 2: if you're out there saying, gosh, you know all my

506
00:28:21,280 --> 00:28:23,359
Speaker 2: all of my shareholders are telling me, I got to

507
00:28:23,400 --> 00:28:25,560
Speaker 2: sell your stock, and you know, I really don't want

508
00:28:25,600 --> 00:28:27,280
Speaker 2: to sell your stock, but you know, what can I

509
00:28:27,320 --> 00:28:29,240
Speaker 2: do here? And then the regulator comes in and says

510
00:28:29,280 --> 00:28:33,320
Speaker 2: you must sell the stock. Then the insurance company goes

511
00:28:33,359 --> 00:28:35,439
Speaker 2: to all its partners and said, you know, my regular

512
00:28:35,520 --> 00:28:37,280
Speaker 2: tells me I got to sell all my stock. It's

513
00:28:37,280 --> 00:28:40,080
Speaker 2: the law. So this is you know, insurance companies are

514
00:28:41,240 --> 00:28:44,160
Speaker 2: have to be super happy about this because the regulator

515
00:28:44,160 --> 00:28:48,520
Speaker 2: has now told them cross holdings are bad, therefore got

516
00:28:48,520 --> 00:28:49,200
Speaker 2: to sell Tracy.

517
00:28:49,800 --> 00:28:51,760
Speaker 3: My new party trick, by the way, is I'm going

518
00:28:51,840 --> 00:28:54,360
Speaker 3: to say, you know, Japan is really a long short

519
00:28:54,400 --> 00:28:57,360
Speaker 3: headshott masquerading is a country, and then I'm going to

520
00:28:57,400 --> 00:29:01,040
Speaker 3: scratch my beard and walk away and sound very I look.

521
00:29:00,880 --> 00:29:02,200
Speaker 1: Forward to the tweet, Joe.

522
00:29:02,280 --> 00:29:04,960
Speaker 2: I'm sure it's coming, and you know how to talk

523
00:29:05,000 --> 00:29:08,400
Speaker 2: about this. Otherwise, the Japanese insurers, and they're one of

524
00:29:08,440 --> 00:29:11,080
Speaker 2: the really big crossholders, you know, they had to come

525
00:29:11,080 --> 00:29:12,560
Speaker 2: out with their plans and they said, you know, we're

526
00:29:12,600 --> 00:29:14,360
Speaker 2: going to get rid of our cross holdings as soon

527
00:29:14,400 --> 00:29:16,680
Speaker 2: as we possibly can. And one of them said, you know,

528
00:29:17,200 --> 00:29:18,960
Speaker 2: we're definitely going to get rid of all of them

529
00:29:18,960 --> 00:29:21,720
Speaker 2: by fiscal year twenty twenty nine, which is like six

530
00:29:21,760 --> 00:29:23,920
Speaker 2: years from now, so you know it's going to take time.

531
00:29:24,480 --> 00:29:27,440
Speaker 2: I don't think there's any there's no expectation that it's

532
00:29:27,480 --> 00:29:29,080
Speaker 2: going to you know, they're all going to be out

533
00:29:29,080 --> 00:29:32,400
Speaker 2: the door next year. And what the other interesting thing

534
00:29:32,480 --> 00:29:36,400
Speaker 2: here is that if the if the insurance companies have

535
00:29:36,520 --> 00:29:39,720
Speaker 2: been told by the FSA that they can't hold cross

536
00:29:39,720 --> 00:29:44,280
Speaker 2: holdings because it's a danger to appropriate business practices. Well,

537
00:29:44,280 --> 00:29:46,480
Speaker 2: what does that say about banks? You know, the FSA

538
00:29:46,600 --> 00:29:50,880
Speaker 2: regulates the banks too, so if it's bad for insurance companies,

539
00:29:50,920 --> 00:29:53,080
Speaker 2: it's bad for banks. So we're going to see this

540
00:29:53,640 --> 00:29:56,600
Speaker 2: sometime later this year, I think where the FSA is

541
00:29:56,600 --> 00:29:58,360
Speaker 2: going to go into the banks and say you too,

542
00:29:58,600 --> 00:30:00,840
Speaker 2: you got to do it. And you know, we're already

543
00:30:00,880 --> 00:30:03,760
Speaker 2: seeing it here the last few weeks or a few

544
00:30:03,800 --> 00:30:07,600
Speaker 2: months where companies and banks et cetera, they're doing huge

545
00:30:07,600 --> 00:30:11,440
Speaker 2: offerings of stock out in the market. Foreigners are buying them,

546
00:30:11,480 --> 00:30:14,280
Speaker 2: they're distributing the shares out to other buyers, et cetera.

547
00:30:14,480 --> 00:30:17,600
Speaker 2: So there's a lot more flow here this year and

548
00:30:17,720 --> 00:30:19,320
Speaker 2: the very end of last year. So we're going to

549
00:30:19,400 --> 00:30:23,440
Speaker 2: see more flow, more interest. It's gonna all happen. It's

550
00:30:23,440 --> 00:30:25,360
Speaker 2: all good. It'll be good for years.

551
00:30:25,560 --> 00:30:29,440
Speaker 1: It sounds good aget Like I kind of it makes

552
00:30:29,480 --> 00:30:32,320
Speaker 1: me long for the go go years of like of

553
00:30:32,760 --> 00:30:35,640
Speaker 1: Tokyo and when when you mentioned this, but when everyone

554
00:30:35,760 --> 00:30:38,240
Speaker 1: was like, oh, Japan can do anything in the world.

555
00:30:38,360 --> 00:30:42,240
Speaker 1: Japan's great, Like it feels like we're maybe not that extreme,

556
00:30:42,280 --> 00:30:44,280
Speaker 1: but coming round a bit to that again.

557
00:30:44,640 --> 00:30:47,040
Speaker 2: Yeah, I don't think we're going back that way, actually

558
00:30:47,600 --> 00:30:50,040
Speaker 2: definitely not. I think that what Japan has done is

559
00:30:50,040 --> 00:30:56,160
Speaker 2: they've learned to be earnest and have you know, a

560
00:30:56,200 --> 00:30:59,320
Speaker 2: fair bit of humility. But also you know this abbe

561
00:30:59,560 --> 00:31:02,360
Speaker 2: pri in what you can do. May not be able

562
00:31:02,400 --> 00:31:04,920
Speaker 2: to do everything, may not be magnificent seven, but I

563
00:31:04,960 --> 00:31:07,600
Speaker 2: know I can do the right thing. And that's one

564
00:31:07,600 --> 00:31:11,280
Speaker 2: thing which I think foreign investors should get out of Japan.

565
00:31:11,360 --> 00:31:13,320
Speaker 2: And I think, you know, Warren Buffett made a comment

566
00:31:13,360 --> 00:31:16,400
Speaker 2: about that there's some high quality businesses in Japan, and

567
00:31:17,120 --> 00:31:19,800
Speaker 2: you know, governance is pretty good, I mean, and it's

568
00:31:19,800 --> 00:31:22,320
Speaker 2: got a tailwind to it. So that's that's the right thing.

569
00:31:22,760 --> 00:31:24,400
Speaker 2: And you know, there may not be a Google or

570
00:31:24,400 --> 00:31:27,200
Speaker 2: an Apple here, but there's a bunch of really good stuff.

571
00:31:27,440 --> 00:31:30,360
Speaker 2: Gay Electron, Tokyo Electron.

572
00:31:31,160 --> 00:31:33,880
Speaker 1: I want to take Joe to Tokyo at some point

573
00:31:33,960 --> 00:31:36,440
Speaker 1: and like show you all the places I need to

574
00:31:36,480 --> 00:31:43,760
Speaker 1: go out in. Lots More is produced by Carmen Rodriguez

575
00:31:43,760 --> 00:31:46,200
Speaker 1: and dash Ell Bennett, with help from Moses Ondom and

576
00:31:46,280 --> 00:31:50,120
Speaker 1: Cal Brooks. Our sound engineer is Blake Maples. Sage Bauman

577
00:31:50,280 --> 00:31:51,880
Speaker 1: is the head of Bloomberg Podcasts.

578
00:31:52,280 --> 00:31:55,640
Speaker 3: Please rate, review, and subscribe to Odd lots and lots

579
00:31:55,640 --> 00:31:58,960
Speaker 3: more on your favorite podcast platforms.

580
00:31:58,640 --> 00:32:01,400
Speaker 1: And remember that Bloomberg Drivers can listen to all our

581
00:32:01,440 --> 00:32:06,080
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