should be the new prime minister of Japan.
He is the former civil servant who recently attempted Japan's first hostile takeover, setting his sights on
, a small electronic-parts maker. After buying 6.52% of the company, he attempted to gain control of the rest, offering a 14% premium to shareholders. He also caused a furor, since hostile takeovers just do not occur in consensus-driven Japan Inc.
Ultimately, the attempt failed. Murakami had the support of many shareholders, but not the majority stakeholders, the
or conglomerate of which Shoei is part. Murakami's bid was voted down.
Still, the bid was significant, historic even. A couple of weeks before Murakami's attempt, I was discussing economic reform in Japan with a mutual fund manager who invests in Japan. He said what he would really like to see in Japan is a hostile takeover. In his mind, that would be a clear sign that Japan Inc. was changing the way it does business, and that the Japanese economy was ready for a healthy dose of creative destruction, to use economist Joseph Schumpeter's phrase about the powerful transformations capitalism can bring. The Murakami bid is just such a sign. Just a few years ago, a hostile takeover attempt like this one would have been unthinkable.
Reflecting this new dynamism, Japanese markets have performed strongly, especially considering Japan's languid economy. Since hitting a low in October 1998, the
index is up 58%. A number of mutual funds have shown outstanding returns recently, too: the
TCW Galileo Japanese Equity fund is up 73% over the past 12 months; the
Japan fund is up 96%; and the
Goldman Sachs Equity Japanese fund is up 63%. The winner so far this year is the
Matthews Japan fund. It has risen 22% since the beginning of the year, well above the benchmark
MSCI Japan Index's
6.79% decline. Given the current uncertainty in the U.S. market, and given there are signs that Japan is finally pulling itself out of a 10-year downturn, investors are wise to consider the country as a place to invest.
The change fueling the strong markets is coming from the ground up, not from the government. That is worth keeping in mind as new Prime Minister
takes power, replacing
, who fell into a
coma after suffering a stroke last weekend. Unlike the U.S. markets, which would likely convulse if the president were suddenly incapacitated, Japan's stock traders were indifferent to the premier's condition. The Nikkei actually rose 1.92% last Monday after his condition was announced. The rise was due, not to callouness, but to the release of an optimistic economic report, an indication that traders look elsewhere than the politicians for evidence of economic change.
Since the Japanese economy collapsed in the early 1990s, successive governments have tried to revive it, but without really taking on the main task of politically difficult and painful structural reforms of the economy. Instead, the government has tried fiscal stimulus, spending enormous amounts of money to get the economy moving but to no avail. After two quarters of negative GDP growth, Japan is officially back in
recession again. Meanwhile, the public debt now equals 130% of the economy, the highest among industrialized nations by far, presenting a new economic difficulty down the road.
However, for its part, the private sector has enthusiastically embraced restructuring. There is a new openness foreign participation in the market, witness
. There are announcements of job cutbacks. Banks are consolidating, poised for increased efficiency. There are entrepreneurs starting new tech companies. Japan Inc. just may be disappearing.
Thus, while it is certainly a stretch to say it doesn't matter who leads the world's second-largest economy, well, it really doesn't matter that much. Nor will Mori likely offer a change in direction and a new commitment to reform. "It's still a bunch of scared old men who aren't changing the country," says Jim Bogin, portfolio manager of the Matthews Japan fund.
While there are no true reformers in the picture, there is, of course, a possibility that a leader would move Japan backward. Obuchi did little to push real reform, placing his bets with the fiscal stimulus, but he did not block reforms in the private sector. However, it seems likely that the new government will continue Obuchi's policies. Nonetheless, new leadership and elections scheduled for the fall, by nature, present some uncertainty.
In the meantime, Japan offers a number of reasons to be optimistic. The economy is showing signs that it is pulling out of the recession and is headed for recovery. While consumer confidence has long been a problem, the recent
survey showed it was rising. The tech boom offers significant long-term opportunities for investors. And the maturing of $1 trillion worth of postal service deposits over the next 18 months means a certain boost of new capital into the market. Many Japanese investors put their money in these instruments, a kind of certificate deposit, 10 years ago when the economic bad times first started. With interest rates now near historic lows at least some will put their money in the stock market, especially in local mutual funds. Even a conservative 30% going into the markets is a healthy piece of change.
Businesspeople and investors in this country are often dismissive of politicians. They don't believe their leaders can accomplish anything worthwhile. Instead, they merely hope the politicians won't screw things up. As a veteran of government service, I always take issue with that. In Japan, however, it is certainly true.