A few weeks ago I wrote a column titled “The Barbarians Are Back,” which looked at how cash-rich U.S. firms were drawing the attention of “activist investors” — a.k.a. corporate vultures.
Well, American companies aren’t the only ones in their crosshairs — Japanese blue chips are too. Sony, one of Japan’s best-known brands, has become a target for American activist investor Daniel Loeb. His $11 billion hedge fund Third Point has taken a $1.1 billion stake in the Japanese conglomerate, and last weekend delivered a polite but firm letter pushing the company to spin off a big chunk of its entertainment businesses in order to focus more on its underperforming consumer-electronics division.
The demise of Sony, and the structural problems of Japanese firms — which include insular management, inflexible labor, overly large conglomerate structures in which various divisions don’t talk to each other, and a focus on incremental innovation at the expense of big, disruptive ideas — have been well documented in recent years. A few years back, in my previous life as international-business editor at Newsweek, I edited this story on the topic by Tokyo correspondent Christian Caryl. More recently, the Financial Times’ John Kay gave a smart explanation of why Apple, not Sony, invented the iPod.
The question is whether Japanese firms, and the entire Japanese market, may be at a tipping point. Investors like Loeb are making a bet less on the potential of any one company than on the power of Abe-nomics, the new economic regime put in place by Japanese Prime Minister Shinzo Abe, which includes aggressive monetary easing of the kind we’ve already seen in the U.S., as well as structural changes to the economy, like deregulation of protected sectors, tax reform, trade liberalization and so on. It’s the Fed-style bond purchases that investors are especially banking on; already, the announcement that the Bank of Japan will ramp up purchases of Japanese government bonds has sent investors into higher-risk assets like stocks, pushing the Nikkei to a six-month rally. And today new government data showed that, last quarter, the economy grew at the fastest pace in a year. These trends show no signs of stopping, and as I wrote in a post about the Dow rally last week, it’s folly to fight central bankers once they decide to goose the markets.
But in focusing on Sony’s consumer-electronics business, Loeb may also be hoping to benefit from a side effect of Japan’s new quantitative easing: a weaker yen relative to the dollar. American car companies and consumer-electronics firms, many of which compete with Japanese ones, should be at a competitive disadvantage now that the dollar has risen 30% against the yen since September. That makes American exports more expensive on the global market relative to Japanese ones. But here is where those structural problems within Japanese firms that I mentioned earlier come into play. Over the past decade, U.S. companies have gotten leaner, meaner and more innovative, and the cost of unit labor in the U.S. has fallen by 14%, according to a recent report by London based Capital Economics. (Unit labor reflects, among other things, the increases in productivity achieved by the American workforce.) Meanwhile, unit labor costs in Japan have increased by 10% over the same time. That productivity differential wipes out much of the gains that the Japanese might have from a weaker currency. Meanwhile, say the economists at Capital, it’s possible that some Japanese producers might decide to use their cushier, currency-generated advantage to take higher profit margins rather than push aggressively for new market share.
Whether or not that happens at Sony, it’s worth remembering that Western activist investors in Japan don’t have a great track record (see TCI, Steel Partners and Cerberus’ various deals since 2007). Japan needs corporate reform and a boost in competitiveness. But activists like Loeb have their work cut out for them, even with the winds of Abe-nomics at their back.