Joel Tillinghast on investing in Japan

In the United States, every executive has been instructed that his or her top goal is increasing shareholder value.  When I bring up this idea in Japan, most businessmen (and in Japan, they are men) have no clue what I'm talking about.  Perhaps it's because employing armies of people and having a dominant market share bring more prestige in Japan than high profits.  Some argue that the Japanese are taking the longer view than American corporations.  Eventually, having a strong market share should lead to profits.  On average, though, Japanese companies earn lower returns on equity than other businesses around the globe.  Social ties and responsibilities are conceived differently in Japan.

"The nail that sticks out gets hammered down"; so goes the Japanese proverb.  If making too much money would make them stick out, they won't do it.  CEOs in Japan are paid much smaller multiples of the average employee's pay than CEOs in America.  Employees probably do feel greater loyalty to their company when everyone is more nearly in the same boat.  This might explain why politics is less polarized in Japan.  But today the "salaryman" system of lifetime employment really exists only at larger companies.  Many companies try to prevent being hammered down by holding large cash balances and avoiding debt.

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As an investor, I want profits that will keep sticking out and not be pounded down quickly.  The retail industry is where I've often found the un-Japanese desire to stand out, and these have indeed been stand-out investments for me.  Cosmos Pharmaceutical is a discount drugstore chain on Kyushu, a smaller island on the southwest corner of Japan, far away from Tokyo.  Cosmos offered very sharp prices to consumers by keeping a tight rein on operating costs.  It's selling, general, and administrative (SG&A) expense was just 14 percent of sales, an outstanding number.  Walmart, which also pinches pennies, spends 19 percent of sales on SG&A.

Cosmos was founded in 1983 by its CEO, Masateru Uno, and has grown rapidly.  Perhaps because Cosmos is in a less populated region of Japan, good store locations can be secured more quickly and at a lower cost.  Drugstores earn better profit margins on private label products than on branded products; Cosmos sells a lot of private label.  Cosmos turns its inventory over faster than the leading American drugstores, CVS and Walgreens.  The average life expectancy is four years longer in Japan than in the United States, so the population is aging.  This would seem to set up drugstores for strong growth, but the stock was trading at only ten times earnings in 2011.  Over the next five years, the stock soared sixfold, as growth continued and the P/E expanded.

~ Joel Tillinghast, Big Money Thinks Small (2017), pp. 91-93

The Wall Street Journal: Japan returning to nuclear power

Energy common sense is in short supply these days, so all the more reason to cheer Japan for rethinking its flight from nuclear power. Prime Minister Fumio Kishida on Wednesday unveiled plans to return nuclear energy to a central place in the country’s electric grid. 

Tokyo will aim to bring seven reactors back into service, for a total of 17, and will invest in developing and installing next-generation reactors. Nuclear plants generated about a third of the country’s electricity 20 years ago, according to the International Atomic Energy Agency, but that has fallen to 7.2%. Most of the country’s 33 operational reactors have been offline for years undergoing safety checks. 

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As hard as the politics will be, however, Japan has little choice. Japan must import almost all of its coal, oil and natural gas, and the Russian invasion of Ukraine has sent global prices skyrocketing while setting off competition for supply. Japan’s electric grid has barely avoided blackouts this year. The economic costs of chronic energy shortages are starting to loom larger politically than the drawbacks of a nuclear restart. 

Perhaps Japan’s decision will get through to Germany, which also started phasing out nuclear after Fukushima and is now mired in a debate about keeping its three remaining reactors online. This should be an easy call as natural gas shortages loom this winter. Advanced economies need reliable base load power, and at least Tokyo understands this.

~ WSJ editorial board, "Japan Revives Nuclear Power," The Wall Street Journal, August 25, 2022

Japanese Prime Minister Fumio Kishida

Thomas Sowell on immigration

When only 2% of immigrants from Japan to the United States go on welfare, while 46% of the immigrants from Laos do, there is no single pattern that applies to all immigrants. Everything depends on which immigrants you are talking about and which periods of history. 

~ Thomas Sowell, Basic Economics (2000)

Harold Ickes on provoking Japan towards war (1941)

There might develop from the embargoing of oil to Japan such a situation as would make it, not only possible but easy, to get into this war in an effective way.

~ Harold Ickes, U.S. Secretary of the Interior, June 23, 1941

Japanese wisdom on the hidden danger of the free lunch

There is a popular saying in Japan that goes "Tada yori takai mono wa nai," meaning: "Nothing is more costly than something given free of charge."

~ Michihiro Matsumoto, The Unspoken Way, 1988

Tim Kelly on the Japan Airlines bankruptcy

Yet the biggest winner in JAL's collapse may be Japan's domestic travelers. The recession felled the biggest tree in the forest and is giving sapling discount carriers their first real chance to crack the comfortable JAL-ANA duopoly that has kept airfares high for decades. It can cost more to fly between Japanese cities than to fly from Japan to New York. That JAL couldn't survive even with a cushy home market is testament to the sloppy management of an airline stuck in an era of high-cost elegant travel that disappeared most everywhere else years ago. A myriad of militant pilot and cabin attendant unions ready to strike at any hint of cost cutting helped keep that air castle afloat.

~ Tim Kelly, "The Joy In JAL's Nightmare," Forbes.com, January 17, 2010

BW: Book critical of Japan's electronics industry "jumping off shelves" (2007)

Fumiaki Sato's latest book sounds like a bit of a snooze: It's titled A Scenario for the Realignment of Japan's Electronics Industry. But the Deutsche Bank analyst's 323-page tome has been jumping off shelves since its release last August. It's now in its fourth printing as electronics companies buy it for their employees, and Sony Corp. has even asked for an English version. Sato's message is dire. "Japan's electronics makers aren't competitive enough to survive for long," he says.

~ BW, "Do or Die; A book calling for the remaking of Japan's electronics industry is a surprise hot seller," May 7, 2007, by Kenji Hall

Jim Grant on where he invests his own money

How am I investing my own untold wealth? In a confection of long-short equity hedge funds (no bonds), in gold and in Japanese stocks, chronically cheap but cheaper than ever in 2008.

~ Jim Grant, "Valedictory," Forbes, February 25, 2008

Ben Eldred on Japanese inflation

After waiting so long, the Bank of Japan may well end up with the wrong sort of inflation. Rising energy and food prices are bad news for firms and consumers and will provide a further headwind at a time when Japan already has to contend with a sharp slowdown in the U.S.

~ Ben Eldred, Senior economist, Daiwa Securities, "Japans Long Awaited Inflations Saps Spending, Growth," Bloomberg, January 29, 2008