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May 31, 2002

Spotlight on Tokyo

Foreign companies fishing for new investors should visit Japan

It's early morning at the Tsukiji fish market in Tokyo, and prospective buyers are poking, prodding and tasting hundreds of fresh-caught tuna. At 5.30 am the tuna auction begins with a frenzy of yells and gestures - much like 9.30 am on the floor of the New York Stock Exchange.

Not far away in the Marunouchi and Otemachi financial district, Japanese investors are increasingly bringing the same verve to equities research, looking prospective purchases in the eye and checking under the skin. The question is, should non-Japanese companies make the long trek to be poked and prodded? According to Tokyo's fund managers, equity salespeople and IR consultants, the trip would be well worth their while.

Despite Japan's economic malaise, Tokyo is still the world's third largest financial center after New York and London. All the top-tier sell-side firms have a foothold here, and with good reason: the country's pension coffers are bulging, and there's scant opportunity for new investment at home. Japanese assets are steadily globalizing as pensions evolve from defined benefit to defined contribution, while the country's network of cross holdings, which once ensured a constant source of passive capital, is fast unraveling.

'Enter the age of competition for capital,' announces Darrel Whitten, director of business development for the IR Corporation, Japan's largest independent IR consultant. 'Japanese companies henceforth will have to compete not only with US and European but increasingly Asian and now Chinese companies for their share of the global pool of investment capital.'

Whitten, an American who has lived in Japan for over 30 years and who led Japan research for both Lehman Brothers and ABN Amro Securities, believes 2002 is the turning point for Japanese investment in overseas equities. A big driver is the dismantling of the Fiscal Investment & Loan Program (Flip), which was created to funnel pension savings into public works. Starting in 2002, pension savings are being poured instead into the financial markets at a rate of about ¥9 tn a year, arriving at a total of ¥35.5 tn in 2002. Moreover, while pension investments in domestic equities will rise by about ¥1.7 tn, investments in foreign stocks and bonds will be boosted by ¥3 tn. 'What this adds up to is that it's a good time for US and UK companies to seek Japanese investment,' Whitten concludes.

Japan is home to a huge pool of capital, confirms Toyohide Tanaka, chief executive of DLIBJ Asset Management International in London. But it's been a tough decade, with the Nikkei now languishing at one third of its peak, and pension funds haven't been able to increase the value of the funds. 'Investors are very risk-averse as a result,' he says. 'The Japanese corporate attitude towards shareholders is one reason for the market's slow recovery besides the deflationary economic environment. Those issues have to be resolved. In the meantime, institutional investors have been paying more attention to overseas investment opportunities.'

'Japan is not the place to invest right now, but it is the place to find capital. In fact there's cash in the drawer for good quality overseas companies. It's the right time for them to meet Japanese investors and enhance their market exposure,' says IR Corp's London-based director of overseas IR, Tomoko Shigiya-Minter, a veteran M&A advisor from Kleinwort Benson.

Western tsunami

This is not the first time foreign companies have heard Japan's siren song. In the late 1980s the first wave enthusiastically listed on the Tokyo Stock Exchange, a trend that peaked in the early 1990s. Then, after the Japanese bubble burst, there was a rush to delist; low trading volume on the TSE didn't justify the extra cost of listing fees and Japanese-language annual reports.

Now it might be time for IR teams to return. Indeed, according to the lament heard at the Tokyo sales desk of a European sell-side firm, many companies may find that they never really left: 'Why are European companies reluctant to come to Tokyo? It's not as if Japanese investors aren't interested or don't hold their shares.' The problem, this broker says, is that companies often don't know about their Japanese investors because they're hidden behind nominee accounts. She recently took the IRO from a large European bank to meet a Japanese pension fund. 'Are you a shareholder?' he asked politely, and was shocked to find out the institution held 7 mn shares.

Campbell Gunn, chief investment officer and managing director of Tokyo's Meiji Dresdner Asset Management, agrees there's a growing impetus for US and European companies to target Japanese investors. The world's top companies now have 1-2 percent Japanese equity ownership; with the expected growth of Japan's huge but underfunded pension industry, the level could rise to 5 percent. Indeed Japan's total investment capital could grow from around 2-3 percent to 5 percent of the world's total.

Meanwhile, Japanese investors are finding slim pickings at home. 'The long-term prognostication for Japanese equities is not strong,' this transplanted Scot observes. 'Japanese pension funds are probably at their maximum level of exposure to domestic equities of 30-35 percent; their exposure to foreign equities is only 15-20 percent.'

But the yen would have to weaken substantially before a real surge in offshore investing could take off. 'Once the yen breaches 150 [currently $1=¥130] there will be a considerable outflow of portfolio investment,' Gunn predicts. 'It will start with currency deposits, but eventually institutions will invest more in foreign securities.'

More momentum will come from Japanese individual investors. Their personal assets totaled $10.8 tn as of Q3 2001, with only 0.75 percent or around $77 bn in overseas securities and cash. But that proportion is growing fast. Foreign currency deposits are up nearly tenfold since 1997, while direct investments in foreign securities have increased by 60 percent to $50 bn. That trend should continue given the domestic market's poor expected returns.

Jun Iida, IR Corp's president and CEO, expects further growth in retail investment because of Japan's changing demographics. Today as few as 7 mn individuals actively trade stocks, with the bulk of individual savings held in insurance policies and post office accounts by people over 60 years-old. 'Over the next decade, this money will be passed on to the next generation, which has a higher risk profile and which is more educated about overseas investments,' Iida says.

Building the brand

Gunn suggests IR is integral to doing business in brand-conscious Japan. 'If your company is a brand name in Japan but you aren't doing IR here, there's something seriously wrong,' he warns. 'IR builds the brand and the brand builds IR, but I don't see enough foreign companies doing that here.'

ING's CFO recently led an Asian roadshow with a stop in Tokyo. 'ING is a global brand, it's in a variety of industries here, and it has targets for increasing Japanese shareholding. It just makes sense to build the IR brand as well as the corporate brand,' Gunn says. 'It's all part of raising a company's profile with investors, partners, customers and the public, and the program should be one and the same.'

However IROs shouldn't expect a lightning response from Tokyo's new breed of institution; a conservative attitude still holds sway and an IR program here is a long-term commitment. 'The relationships are more important than the numbers,' Gunn says. 'Japanese institutions are much more comfortable with long-term, stable shareholdings, taking a 1-2 percent stake and expecting to hold it for a very long time. But it's on a partnership basis, and the reciprocity is access to senior management.' He advises companies to invest time in understanding who the key individuals are at Japanese institutions, perhaps working with a domestic IR consultant which can introduce them.

The sheer size of this capital pool may seem daunting, but in fact the investment community is quite concentrated. Geographically it's simple: everybody's in Tokyo. Even Daiwa Securities, which used to require a side trip to Osaka, has moved its asset management operations to the capital. And out of $666 bn held in pension funds, the top 30 asset managers control 88 percent, while the top 30 investment trust managers handle 97 percent of the $326 bn mutual fund industry.

When seeking pension fund investment, IROs should look past the pension trusts to the asset managers that actually make the investment decisions. In some cases it's foreign fund managers that have the mandates, so companies are already unwittingly catering to Japanese institutions in meetings in Boston or London. Nippon Life, for example, has relationships with Putnam and Gartmore, which US and UK companies have well covered.

However, many Japanese asset managers are starting to do more foreign asset management themselves, moving from a passive to an active orientation as they gain confidence. The leading institutions have traditionally been the insurance companies and the trust banks, which manage pension money. But recently Japan's commercial banks have plunged into asset management; they now handle 15 percent of mutual fund sales and are expected to capture 34 percent of the market by 2006.

The industry has consolidated to the point that four mega-banks dominate: Bank of Tokyo-Mitsubishi; Mizuho Financial, which includes Daiichi Kangyo, IBJ and Fuji; Mitsui-Sumitomo; and Sanwa-Tokai-Asahi. They're now in the process of merging their asset management subsidiaries which will put them among the country's top ten asset managers. Unlike many insurance companies, which have well established links with foreign fund managers, the big banks are mostly relying on their own expertise. 'They're new and they're big, and I would target them first,' says a Tokyo investment pro.

Expanding reach

After enduring the long-haul flight to Tokyo and adjusting to the Blade Runner megalopolis, roadshow teams can expect to settle into the familiar routine of investor meetings much like those held anywhere. Japanese investors have access to the same information sources as their New York or London counterparts and come to meetings well-informed and well-prepared.

Regulation FD may not be in force here, but foreign visitors should be aware of the strong current of feeling against selective disclosure. The Japan Investor Relations Association (Jira) has had many discussions about Reg FD, says Yoshiko Sato, program director and senior research fellow: 'We look at how companies can disclose information fairly, with no difference between institutions and individuals.'

Many Japanese companies now produce webcasts of their results meetings with service providers like e-Associates, which also has a corporate information portal site ( and alliances with major business portals such as Nikkei Net and Finance@Nifty for webcasting to retail investors. Teruo Shiina, president of e-Associates, describes how US insurer Aflac, which has a big presence in Japan, will webcast its Tokyo analyst meeting in September.

IR Corp's overseas IR director, Tomoko Shigiya-Minter, adds that using the web can help squeeze more mileage out of a Japanese roadshow. She says a webcast can raise a company's overall profile while tapping into Japan's enormous pool of retail investors.

By all accounts, an active Japanese IR program is critical for large-cap companies doing business here. As for the rest, the potential upswing in Japanese equity investment portends well. As one Tokyo fund manager concludes, 'Assuming you have Europe and North America covered, IR programs have to expand to Japan. The incremental shareholding that might be gained anywhere else just isn't worth it.'

Pension muscle

Top 10 designated investment managers by pension assets under management ($bn)
Sumitomo Life Asset Management 67.74
Nissay Asset Management 57.37
DLIBJ Asset Management 54.37
Barclays Nikko Global Investors 53.25
Nomura Asset Management 39.15
Daiwa SB Investments 24.66
Nikko Asset Management 22.56
Merrill Lynch Investment Managers 19.27
Mitsui Life Global Asset Management 19.18
SG Yamaichi Asset Management 18.33

Source: IR Corp

Visitor Information
Where to present
Otemachi First Square
West Tower, 23rd floor
1-5-1 Otemachi,
Tel: +81 3 3217 0779
Fax: +81 3 3217 0820

Urbannet Otemachi Building
Level 21
2-2-2 Otemachi, Chiyoda-ku

Hotel Okura
2-10-4 Toranomon,
Tel: +81 3 3582 0111
Fax: +81 3 3582 3707

Hotel New Otani
4-1 Kioicho, Chiyoda-ku
Tel: +81 3 3265 1111
Fax: +81 3 3221 2619

Where to stay
The Westin Tokyo
1-4-1 Mita
Tel: +81 3 5423 7000

Hotel New Otani

Hotel Okura

Imperial Hotel
1-1-1 Uchisaiwai-cho
Tel: +81 3 3504 1111

Where to eat
6-10-17 Minami Aoyama
Tel: +81 3 5467 0022

TY Harbor Brewery
2-1-3 Higashi Shinagawa
Bond Street
Tel: +81 3 5479 4555

Trader Vic's
Hotel New Otani
Tel: +81 3 3265 4707

Zakuro Akasaka
5-3-3 Akasaka
Tel: +81 3 3582 6841

Culture club

In a TV ad for HSBC, a foreigner bows while a Japanese man offers his hand. Then the foreigner goes for a handshake and the Japanese bows. It's just another episode in the long and sometimes uneasy love affair between Japanese and gaijin since Commodore Perry sailed into Tokyo Harbor in 1853.

All overseas roadshows demand sensitivity to local etiquette, but a Japanese trip more than most. A business meeting here is a ritual that begins with the respectful exchange of business cards and extends to how you lift your teacup. Western management teams, who are seated furthest from the door to protect them from potential attackers, would do well to prepare by reading a book on the subject such as Japanese Etiquette & Ethics in Business (McGraw-Hill, 1994) or Doing Business with Japanese Men: A Woman's Handbook (Stone Bridge Press, 1993).
No need to take it too far, though. The axiom holds that a little bit of knowledge can be dangerous. For instance, foreigners today are expected to shake, not bow. But politness impresses. As one Tokyo fund manager puts it, 'Be more formal, less backslapping and American. If you go a little way - but not the whole way - toward understanding how things should be done, you will be much better received.'

Even language presents few problems because most professionals whose brief includes foreign equities speak good English. However, IR Corp's Tomoko Shigiya-Minter recommends translating presentations or other written materials, because they're often passed on to staff whose English may not be as good. She adds that a translator, though not essential, is appreciated by Japanese investors. An intermediary at a meeting - someone who understands the expectations of both sides - 'helps the flow of communication.'

Top Toshin

Largest mutual fund managers
by investment trust assets
Nomura Asset Management 101.98
Daiwa Asset Management 68.74
Nikko Asset Management 35.27
Shinko Investment Trust 17.95
UFJ Partners Asset Management 17.95
UFJ Partners Asset Management 16.87
Dai-ichi Kangyo Asset Management 14.14
Kokusai Asset Management 13.69
Fidelity Investments 5.24
Goldman Sachs Investment Trust Management 4.63

Source: IR Corp