New Dimensions of Japanese Financial Market
Only with freedom and democracy, the values of open society and professionalism can the investment chain function effectively
The iconic leader of the Tokyo Stock Exchange since 2007, now Group CEO of the Japan Exchange Group gave a Press Conference at the Foreign Correspondents Club of Japan on June 12, 2015, a few days before his retirement, to give an overview of his achievements and to review the status of Japan’s financial markets today.
Atsushi Saito expresses his satisfaction and pride and surprise about the big improvements in corporate governance and the mind change happening in Japan now.
Atsushi Saito has worked as equity analyst in the USA, experienced the US pension fund debate, and when he was pushing for reform of corporate governance in Japan around 1990 was ignored or even criticized. He is surprised to see that these changes he has been keeping pushing for since 1990 are actually implemented now.
Atsushi Saito directly expressed his shame about the accounting problems recently revealed at Toshiba, and contracts Hitachi, which has independent outsiders, women and non-Japanese foreigners on the Board of Directors, with Toshiba which has not. Atsushi Saito directly said: “I am very puzzled why Toshiba is so lazy to check their accounting”.
Atsushi Saito – leading the Tokyo Stock Exchange since 2007
Leading the Tokyo Stock Exchange since 2007, Atsushi Saito aspired to create an attractive investment destination in Tokyo for investors from all over the world with the following achievements:
- modernized the trading systems
- developed a self regulatory body
- merge with Osaka to create Japan exchange group
Reform corporate governance to improve capital efficiency and corporate value of Japanese companies
The most imperative challenge has been left untouched for far too long: reform of corporate governance in Japan to improve capital efficiency and corporate value of Japanese companies.
Recently we introduced the Corporate Governance Code and we see a shift of mindset in Japanese companies.
Structural impediments remain remain in Japan’s financial market
Structural impediments remain remain in Japan’s financial markets, indirect finance from Banks remain a significant force in corporate finance.
Japanese investment bankers continue to fall way behind European and US rivals.
The post financial crisis regime under Basel 3 puts breaks on excessive leverage.
When global economy returns to high growth, we are not able to rely solely on money centered banks – banks will not be able to provide enough capital satisfy demands in a growing world economy.
Foresee demands for international organizations WorldBank, ADB and new AIIB and private equity funds.
With FinTec, we expect unbundling across separate financial service lines
With fintec, combining financial services and technology, we expect increasing unbundling across separate service lines for banking services, between settlement, wire transfers, loans and other services.
We will see more financial services.
Over dependence on main banks, risk aversion, lack of sense of duty by corporate managers led to the death of Japanese equity as an asset class
In Japan, as a consequence of dependence on indirect finance by money centric main banks, deep involvement of the main banks in corporate management, Japanese companies grew increasingly risk averse shied away from dynamic investment, and ultimately damaged corporate value.
There was a demise of the sense of duty by corporate managers use equity capital efficiently, and as a consequence of these factors, we saw a global divestment from Japanese stocks, eventually leading to the death of Japanese equity as an asset class.
Pushing since 1990 for reform of corporate governance in Japan, Atsushi Saito was not only ignored but even criticized
Atsushi Saito working as an equity analyst in the USA, followed the US pension debate, and started to push for reform of corporate governance in Japan around 1990, he was not only ignored but criticized.
Japan’s recent miraculous turn on corporate governance took Atsushi Saito by complete surprise
Today Japan addresses corporate governance, there is a miraculous turn of mindsets and regulatory framework. We saw:
- amendment of companies act
- corporate gov code
- stewardship code
That these changes could happen came as a complete surprise.
Atsushi Saito hopes that this momentum can be maintained, and fiduciary duties of pension fund managers towards beneficiaries will be strengthened to nurture greater professionalism among Japanese institutional investors, similar to The Employee Retirement Income Security Act of 1974, or ERISA act in the USA.
Only with freedom and democracy + values of open society + professionalism can the investment chain function effectively
Only with freedom and democracy, the values of open society and professionalism can investment chain function effectively. This pattern is what defines truly advanced economy
The recent transformation has brought Japan back into the focus of professional investors globally and a new dawn beckons for Japan.
All stakeholders must remain focused to follow through these early signs of change to ensure that Japan welcomes a brighter future.
Questions and answers
Q: Japan not joining the Asian Infrastructure Investment Bank (AIIB) will deprive Japan of opportunities?
A: The Japanese Government did not say that it will not join the AIIB, but today there is no clear set of rules for the AIIB, the governance structure is unclear. To use tax payers money our government needs to be prudent before they make a decision on investment. There are about 20 international banks and similar organizations, 19 of them have clear governance rules. All except AIIB have clear governance rules. In case of AIIB China will have about 30% holding. Probably our Government will wait before making a decision, and Atsushi Saito thinks this is reasonable.
Q: Will Tokyo Stock Exchange enter into international alliance?
A: Stock Exchange business is a very nationalistic business – only USA has multiple exchanges. All other states have one single Exchange totally under control, regulations, culture by single states. Theoretically Exchanges between different countries can merge, but none succeeded. We saw no case in the world were Exchanges from different countries merged successfully, all such cooperations failed.
Q: Plans of Toyota to have non-traded convertable shares?
Its up to their shareholders. Legally they did not violate any rule.
Japan does not have any priority on special stocks.
I see a discrepance in the USA: The US aggressively raises the voice for rights of shareholders, and corporate governance elsewhere. At the same time US companies are the largest issuer of special stocks for special owners, e.g. for Google or Facebook, more than 50-60% of voting power is dominated by the founders of these companies. –
I see a discrepancy, its an ironical discrepancy. I am talking to the leaders of US : US is very nosy about our corporate goverance, protection of shareholders, but how do they protect shareholders of Google or Facebook?
Q: What is your advice for Japanese economy to regain vitality and energy, for Japan to become No. 1 in the world?
A: I am very concerned about efficient capital use and corporate governance. When I was securities analyst in USA, I was always asked about financial data of Japanese corporations.
- Fuji Film had huge cash on the balance sheet – their competitor, the yellow-color photo company was always diligent with share holders, paid dividends, did share buy-backs. Fuji spent much R&D on pharmaceuticals and diversification. The Yellow color photo company disappeared, and Fuji Film is very healthy. Accumulation of sleeping capital is useless. But efficient use of capital is crucial.
- when GM went bankrupt it was discovered that they had great technology, like electrical car projects which had been stopped. GM had stopped these R&D projects, because shareholders had insisted to stop R&D spending, and pay hire dividends, and ultimately went bankrupt.
- Toyota had 3 trillion yen cash. This was heavily criticized. Toyota was secretely developing electric cars – now LEXUS electric car is bestseller in USA.
We are concerned to respect shareholders, but shareholders’ short term wishes are not always best for the company.
Even BlackRock wants long-term enterprise development rather than short term cash benefits.
Q: Impact of weak YEN on Stock Exchange
A: Even with weak yen, our trade balance is negative. Yen rate is not pushing export from Japan. Japan is manufacturing outside of Japan. Trade account is negative, capital account is black, currency account is black. Overseas subsidiaries are sending dividends back to Japan at the yen rate of 120. Its smart return in the capital account. Our industry structure has changed, we are not exporting on the back of weak yen, so we are not criticized.
Q: plans after retirement
A: I decided: no job – I will take rest.
Q: Disclosure. Often financial data are exposed early in Nikkei or Japanese press prior to official disclosure.
A: I am often asked about this. I don’t know how the press gets their information, its a free market for the press. As long as they don’t do any insider trading or use this information privately, I don’t see anything wrong with early public disclosure. Its a competitive issue between journalists, we cannot critisize competition among journalists. Very sharp journalists pick up information, we are not the police we cannot stop them. Its a competitive world – even for journalists.
I live far outside from Tokyo, sometimes journalists wait at the door to my home in the suburbs. I think this is an invasion of my privacy, and I don’t tell them information at my home.
Q: Trust in the stock market, low Japanese retail investor participation.
A: Advanced states have 60-70% own domestic investors, not outside foreign investors.
Foreign professional investors have immediately responded to the logic of our corporate governance reforms. Especially US and UK pension managers have immediately responded to the improved efficiency of our markets. Investment professionals in London, New York, Scotland can evaluate the meaning of our regulatory changes.
Japanese professional or private investors could not understand the improvements we have done, they did not react.
Mutual funds however are at record hights and we have 8 million ELISA private pension investments in Japan now. People start to build their own pensions now, so retail investors are coming into the market.
We have a normal quiet market now here in Japan regarding sales of equities.
Q: Tokyo as a financial center?
A: If you ask the same question to London, they will say that with IT all transactions are global. There may be arbitrage on the prices. If you compare Shanghai and NY, the trading volume in Shanghai is higher than in NY, but Shanghai not a global financial center, because they are not liberalized in capital in and outflow, they are No. 1 only in volume.
The definition of Financial Center of the World has changed.
We want to be one of the better places in financial business globally. We want to offer convenient and friendly conditions for financial people to come to Tokyo, as one of the centers for financial business.
Tax plays a very important role to define financial centers. London or NY or Tokyo cannot follow a city state like Singapore. We cannot have the same tax system. Tokyo is far bigger than Singapore.
“Global financial center” is a vague subject for me.
Q: Do current prices accurately reflect corp performance. Foreign investors: speculative short-term gains? will foreign investors pull out when Bank of Japan money flush ends?
A: I don’t think the Japanese market is overheating at all. I think the short term speculators have already left Japan.
Long term investors have long asked for change in Japan, Japan did not listen, but now for the first time Japan is listening and changing, and I am feeling longterm investors are understanding this change. We have long term investors here now in Japan.
Q: is high-frequency trading a danger for Stock Exchange?
A: Flash Crash in US was due to the diversity of exchanges. There are 50-60 markets in US. Flash Crash artificially made, not becaue of speed of trading.
Our rules for pricing system here in Japan, we learnt this since the Edo era, we cannot have flash crash, we limit the price changes, we are cooling the trading. Our system of pricing is different than in the USA.
We have many high-frequeny traders from abroad, and they appreciate our system. US high frequency traders critized us up to 10 years ago, but today they appreciate our pricing system here in Japan, they want to learn our Stock pricing system. This has really been a big change for us.
Q: False accounting at Toshiba. Impact on trust in Japan’s stock market.
A: I feel very ashamed for Toshiba. Toshiba should be the mentor or leader of Japanese industry – not the opposite.
Hitachi is a huge contrast to Toshiba. Hitachi aggressively introduced outside board members, foreign and women board members. Hitachi is investigated by outside and foreign board members.
Toshiba is a total contrast to Hitachi.
I am very puzzled by that – why is Toshiba so lazy to check their accounting.
We hope that auditors and accounting houses are more professional and more serious. They told us that their subsidiaries have different accounting system. They must have intentionally checked that point.
My answer: my feeling is one of shame. We should definitely not repeat this type of thing.
Q: Why do Japanese company accumulate so much cash reserves.
A: One reason is that Japanese labor laws compel Japanese companies to have reserves to pay for restructuring. We introduced changes in corp governance, and many companies now use the cash for M&A to acquire foreign companies, or e.g. Fanuc has increased dividents.
I am optimistic for Japanese companies, because they are using cash more efficiently now.
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