I could'nt resist responding to your question. First I must point out that I have found Stephen Gilbert's posts very educational and generally speaking right on. Nevertheless I will give you fundamental reasons for the problem something many have tried and failed.
The question to ask is what does it take for a country to create wealth? A major component to me is an ability to objectively determine what areas to invest and what not to. The determination needs to be made by an objective price mechanism which we ( in America ) enjoy. I am not claiming that our stock market is a perfect price mechanism all the time- merely it is roughly accurate most of the time and can be massively inaccurate for some of the time. Thus venture capitalists know what to invest in simply by looking at what areas command very high prices which is the markets way of signalling a lack of supply.
For an economic system to work it needs three things. The first is transparency ( you cannot value what you do not know ), secondly an ability to provide feedbacks to information, and finally a willingness to invest in what creates wealth rather than your own notions of what to do.
Japanese companies financial statements are very close to being meaningless and thus the market cannot respond. Secondly even if they were accurate, the market could not respond as the float is very small. Crossholdings have generally limited the float to permit feedback that is accurate. Finally most Japanese management have motivations that are not purely or even largely wealth creation. Size, employment numbers etc tend to govern their decision making. Thus Japan fails on all three levels.
Japan is changing; new accounting standards are forcing transparency ( read the AFR for some great commentary on its implications); gradually crossholdings are being unwound; motivations are also changing albeit very, very slowly. All the main time bombs remain- demographics,postal savings systems, actual losses in the banking system etc. The question is whether Japan's reforms will show effect before the time bombs will explode.
Why was Japan succesful in the past when they had the same economic system? Firstly the industries to focus on were obvious ( steel, automobiles, consumer electronics etc ) and they largely did what had already been done but a whole lot better. This focus on size ( marketshare ) comes from those days when size was truly correlated with wealth creation. In the face of collapse our system through the price mechanism allowed us to invent new industries and as such the western world controls the infrastructure of business. Thus if you start a business, any business, you will have to buy a PC ( pay intel, microsoft ) buy applications software ( microsoft, IBM, SAP etc ), connect to the Internet ( Cisco, Ciena, Qwest, Global Crossing etc ) and consume beverages and food from KO, etc. Same story in pharmaceuticals. Thus while the lack of a pricing mechanism did not hurt them in the early stages it certainly failed once the profit was sucked out of their current ones and as a side allowed monstrous harm to their banking system and their long term saving system.
Japan will muddle through. There may be great trading opportunities. But I cannot make a long term bull case for Japan. |
