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Rebuilding the Lost Myth in Japan

Apr 10, 2018
byNoriyuki Morimoto

Once upon a time, a farmer at his deathbed told his lazy sons that there was treasure hidden somewhere in his vineyard. After his death, the sons dug up the entire vineyard but could not find anything. Instead, they had a great harvest. Above is the well-known Aesop Fable called The Farmer and His Sons? The moral is that hard work itself is a treasure. This fable is quoted by philosophers including Georg Simmel and Walter Benjamin as having a deep significance. The philosophical point of discussion is that the sons took the farmer’s lie as a fact: a historical truth without any room for doubt, and this was supported by the father’s authority that let a lie pass as truth. Every ethnic group has its own myths of origin and traditional tales. While a lot of the myth may be high-flying fantasy, the ethnic members more or less have faith in it. In other words, the scope of which the myth holds some authority defines the scope of ethnic groups, in the same way that believing in the farmer’s lie made his sons his sons after all. Companies also have what are called myths of origin, traditions, cultures, beliefs, or philosophies. This is not the personal conviction of the founder or management, but something that grew out of it to be shared by the organization, breathed like air, believed in, and becoming a natural discipline of the members of the organization. This may be the myth around past success, but also becomes a driving force for the company’s future growth. In the past, Japanese companies often had a more or less religious kind of atmosphere, singing company songs and chanting corporate philosophies like dedicating an ode. But the myth has long been lost. How can this myth be rebuilt? We can’t just get employees to sing the company songs as a ritual again. Take the myth of technological strength: we see various projects in which small companies with high processing technologies take on difficult tasks, and attract much public attention when they succeed. But such projects do not hold much economic rationale. The intention here is to foster the belief in technological strength to the level of a myth. Commissioner Mori of the Japan Financial Services Agency is also putting effort in creating a myth in the finance industry. “Creation of shared value with the customer” is a myth. Financial institutions should hold the conviction that they would benefit not from pursuing their own profits but from taking action for the customers’ benefit. In that sense, this is a myth they have to believe in.

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Cultural Differences between US and Japan as Seen in Mortgage Loans

Mar 26, 2018
byNoriyuki Morimoto

When you take out a mortgage with a fixed rate, you either gain or lose depending on the change in interest rates. You lose when interest rates go down, and gain when they go up. But in theory, based on rational expectations in the entire market, the losses and gains should be equal: this is a hypothesis delivered on the premise that they have to be equal in order for the market principle to work. Asking whether or not a theory works out in a market is the same as asking whether the market is efficient. Efficiency probably depends on the rational regulatory environment, rather than the level of freedom in transactions (i.e. having less regulations), as well as how financial thought is grounded in daily practice, rather than sensibility of participants (i.e. how rational they are), so it is interesting to observe the structural differences of the US and Japanese mortgage markets. If a fixed-rate mortgage loan can be refinanced without fees at any given timing, a drop in interest rates will accelerate refinancing at lower mortgage rates. The US market is that type of market. In other words, the debtor has an advantageous right, called an option in financial theory, to refinance at a lower rate. Since everything has a price in theory, debtors are paying for this option as well: usually in the form of a higher mortgage rate. Thus the values of mortgage loans that can be refinanced and those that cannot are made equivalent through option fees. With mortgage loans that basically don’t allow refinancing, but can be made refinancable with an additional payment of fees, the theoretical value of such fees can be calculated through this equivalence. In the US mortgage market, the price of a refinancing option is thought to be at a point close to its theoretical value. While a highly advanced calculation method is needed to provide this theoretical value, in the US, the most advanced mathematics are applied in the mortgage market, which is very close to the lives of ordinary people. On the other hand, what about the Japanese mortgage market? For example, is the actual level of refinancing fees close to its theoretical value? The gap is probably bigger in Japan, with the stiff structure of bank fees and overcompetition of mortgage services. In other words, the Japanese mortgage market may not be so efficient.

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Japanese Mega Banks Don’t Understand Taste

Mar 12, 2018
byNoriyuki Morimoto

The Principles for an Effective Risk Appetite Framework, announced by the Financial Stability Board on November 2013, is a management framework that sets out elements of a financial institution’s healthy risk appetite, including risks they should willingly accept in order to achieve their business objectives. According to the Financial Services Agency, the framework features “risk appetite” as the aggregate level and types of risk that a financial institution is willing to accept in order to achieve its business objectives, based on business models specific to each institution. It is intended to be used as an internal common language to manage overall risk-taking policies, including capital allocation and maximization of profits. Japanese megabanks have also formed what should be their risk appetite frameworks and disclosed summarized versions of them, but without any specific description of risks they would willingly accept. They have only written down the structures in which they manage risks they actually take in a passive manner. What triggered the implementation of risk appetite frameworks was the lesson learned from the global financial crisis of 2008. Apparently, one cause of the crisis recognized by regulatory authorities was the management practices of major financial groups: their pursuit of profit without strategic objectives, which led them to lose sight of the finance industry’s role in society and to fail to fulfill their responsibility towards their customers. In other words, financial institutions had decided on which risks to accept from the viewpoint of putting profit above all. Consequently, financial institutions have since been required to reestablish their specific business models and redefine risks they willingly accept. This is an initiative for financial institutions to increase corporate value in the mid- to long-term, as a priority over pursuing short-term profits. Given that megabanks select the risks they willingly accept based on their specific business models, their healthy sensibility for risks is being tested here. When you liken that sensibility to taste, the cause of the financial crisis may be described as an overwhelming urge to relieve hunger: to pursue profits regardless of taste. In the risk appetite framework, institutions are expected to take sensible risks according to their own sophisticated taste cultivated in their culture. So there is supposed to be a shift from the tasteless pursuit of profit to tasteful creation of value, but can’t the megabanks tell good taste from bad?

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The Origin of the Myth that Japanese Prefer Savings to Insurance

Feb 26, 2018
byNoriyuki Morimoto

Insurance companies are strictly defined as companies that run insurance businesses by regulation, so they cannot handle savings products that don’t have an aspect of insurance. Therefore, they created savings-type insurance products that bundle savings products with insurance. This is how endowment insurance originated.   Funds for Japan’s post-war economic growth were based on the accumulation of small amounts of individual savings. Insurance companies played an important role in absorbing such small savings efficiently, using endowment insurance as a core product. However, by around 1980, the economy shifted to a slow-growth phase, and the social need for accumulating savings went into a decline.   As the economy matured, the social function of insurance shifted from savings to death security. Insurance companies rapidly increased the portion of death security, setting the life insurance payment at 10 times, then 20, 30, and 40 times that of maturity proceeds. This is how they started offering endowment insurance with term policies. The 40 times difference makes the insurance portion the outstanding component over the savings function. The central role of the product actually became insurance.   Then, why did the savings aspect still remain? One factor may be that the products were developed as an advanced version of endowment insurance. However, the more important factor is probably the profit gained from interest margins. In the financial environment at the time, insurance companies were generating investment profits above the promised interest rates, which they actively returned to the customers as dividends. The attractiveness of expected dividends played an important role in selling insurance products.   On the other hand, there was a theory that said Japanese people like savings and dislike insurance without maturity proceedings. According to this theory, since savings is a Japanese cultural preference, pure death security without maturity proceedings do not sell, so insurance providers had no choice but to bundle the savings aspect in their products.   However, I suspect that this theory was a myth created by insurance companies as a sales policy to sell savings products.

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Philosophers of Investment Should Reside in This Area in Tokyo

Feb 13, 2018
byNoriyuki Morimoto

Jimbocho is a district in central Tokyo. It is just north of Otemachi, a beautiful area with many high-rise office buildings facing the imperial palace: scenery that can be proudly presented to the world. No wonder that it fetches the highest rents in Tokyo. Meanwhile, Jimbocho is known for streets full of used bookstores. It looks like the type of commercial district that exists all over Japan: many small, low buildings remain in the area, with only a few large office buildings. However, the district is in central Tokyo all the same, offering very convenient transportation, including access to subway lines. Moreover, or despite of those facts, rents are low: not in absolute terms, but relative to the value it offers. How can that be said? Starting from Otemachi and heading north to and beyond Jimbocho, the farther you go from the center of Tokyo, the lower rents become. But the decline is not directly proportional to the distance. While there is a large gap in the rents in Otemachi and Jimbocho, the decline is much smaller even if you go much farther up north from Jimbocho. When you depict the changes in a graph, a steep cliff appears between Otemachi and Jimbocho, and from the bottom of the cliff, there is only a gradual downward slope. While Otemachi and Jimbocho have little difference in terms of convenience, rents are much lower in the latter. Farther up north from Jimbocho, while rents do not differ much, the level of convenience declines dramatically. Therefore, judging from the relation of price and quality, we can say that Jimbocho is a bargain?high quality and low price?as opposed to the area north of Jimbocho, where lower prices only match the quality of what you get. The basics of investment is to grasp the value of what you invest in: to find what is underpriced. A company that runs an investment business should follow that principle and base itself in such a location. That’s why our office is located in Jimbocho.

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A Price-less Rarity of a Book

Jan 29, 2018
byNoriyuki Morimoto

Books with historic value, an extremely small number of existing volumes, and very low chances of being found in used bookstores are classified as rare books. Whenever they happen to appear on the market, they are likely to be traded at extremely high prices?or are they? There is a book written by Takashi Negishi, a renowned economist and honorary professor of the University of Tokyo who was awarded the Order of Culture, titled The Time Tunnel of Economics (1984). This is an exciting collection of reviews on 24 selected classic works in economics, although the book itself is not rare. One of the books introduced in the above book is “seldom found in the lists of used bookstores, and doesn’t fetch a price because the volume is so rare”. It is Hiroshi Kawaguchi’s Study on Keynesian Economics (1953). Dr. Negishi described this book as “one of the earliest works in Japan featuring a full-fledged academic study on Keynesian economics: it is not only a good guide with excellent interpretations, but one of the best in terms of raising questions,” adding “I think I have been affected greatly by this book, at least at a subconscious level”. Since it was such a good book, a new edition was published in 1999 after Dr. Negishi wrote about it. Becoming a rare book means there is a strong demand for it among economic scholars, so from the publisher’s point of view, a new edition likely had prospects to sell. When a new edition is published, it seems that the price of the original edition is likely to fall, but what actually happens is not clear. As Dr. Negishi mentions, it is so rare that the book isn’t even properly priced. Put simply, without a book there is no transaction, without a transaction there is no price, and without a price, there is no way of knowing the price changes. Actually, I am the owner of this extremely rare Study on Keynesian Economics. I didn’t buy it expensively: instead I picked it up very cheaply from a box in which the used bookstore had thrown all kinds of worthless books. It was a moment of joy and excitement as a book lover. When Dr. Negishi says the book is so rare that it doesn’t fetch a price, it is only a presumption to interpret it as being extremely expensive. The reality of being price-less may be that it is totally forgotten and therefore available for almost nothing.

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Cool Japan and Cool Regions

Jan 15, 2018
byNoriyuki Morimoto

Cool Japan is to create additional values unique to Japan. In the global economy, Japan has to be Cool Japan. In the same way, in the Japanese economy, domestic regions have to create authentic values to become Cool Regions. Vitalization of regions is to make them cool. Wherever you go in Japan, stores and signs of the same retail and restaurant chains and identical ready-made houses line up alongside new, straight roads. This landscape is forming alongside desolate districts with narrow, winding roads and historical towns. It is not cool at all. Moreover, celebrating the opening of factories of major companies and mourning over their closure is an attitude that represents of the subordinate position of regions. It is not cool at all, either. Meanwhile, strong local characteristics are nowadays just a remainder of history. Even if they give people a sense of nostalgia, the potential for economic growth cannot be seen. Therefore, the fantasy of the old-time countryside is not cool, either. Cool Japan cannot be the extension of ”Fujiyama, sukiyaki, geisha” images. It cannot be a trivialized, distorted fantasy of Japan only appreciated by antique collectors and Japanophiles. Similarly, Cool Regions cannot mean the nostalgic feel of rural areas. It’s not that traditional pottery is cool: what’s cool is the advanced ceramics technology that evolved from the long history of pottery in Japan. It’s not that Ukiyo-e prints are cool: what’s cool is what evolved from its unique method of expression, like manga and art works of Takashi Murakami. It’s not that traditional features of local regions are cool: we have to go beyond them to create cool, new things. That’s what it means to revitalize regions. So then, regional vitalization will no longer involve mascot characters, theme parks, roads, airports, factories of big companies, sports centers, or public halls. It would no longer involve local produce, hot springs, or reconstruction of castles. Because none of them have creative aspects, and they are not cool at all. Cool has to be the creation of value.

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A Sad Little Tale in Pre-War Japan

Dec 18, 2017
byNoriyuki Morimoto

Denji Kuroshima is a now-forgotten writer who died during World War II. One of his notable short stories is The Two-Cent Coin (1925), a simple story in which a poor farmer’s son is tending the family’s cow when the cow steps on his head and kills him. When the boy was stepped on, he was pulling the string of a spinning top across a pillar of the cow shed, when his hand slipped and he fell over. The reason he was pulling on the string was to make it longer, since it was a bit short. The string for the top was a bit short because the mother had held back 2 cents when buying it. The proper length had cost 10 cents, but there was one string that was shorter than the others, so the shopkeeper said 8 cents would do for it. The mother handed over 10 cents and received a 2-cent coin in change. The title of the story comes from that 2-cent coin. There is another underlying plot to this story: the day the boy died, a travelling sumo event came to the neighboring village, to which all the other children went together to watch. The boy had also wanted to go, but the mother did not allow him to, saying, “Poor people like us can’t afford to do such a thing!” Three years after the incident, the mother still regrets: she shouldn’t have bought the shorter string just to save 2 cents; she should have let the boy go watch sumo. ”That is how she still sheds tears......” The writer’s emotion is fully expressed in how the story trails off at the end. While it is only natural that a mother regrets and mourns over the death of her son, her sparing 2 cents and keeping the boy from watching sumo don’t have a direct correlation with his death. To find a kind of correlation, you have to go one step higher: poverty forcing the mother to exclaim: “Poor people like us can’t afford to do such a thing!” and the social structure that creates such poverty. If the core factor of the incident was the fact that the young child was forced to work, if the real problem was poverty forcing labor onto the young child, the government should be held responsible for neglecting measures to save such people in poverty. If that is the case, the mother has to fight. The accumulation of the small fights of many such mothers would have caused a social reform. However, needless to say, the story ends with ”......” out of consideration for strict restrictions against expression in pre-war Japan.

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Japanese People Love to Gamble

Dec 04, 2017
byNoriyuki Morimoto

Whether or not casinos should be approved has been a political issue over many years. Gambling is illegal, so a special policy objective is needed to legalize it. Now that the official objective for casinos has become to attract foreign tourists, the discussion is heating up towards actual implementation. Actually, quite a number of gambling activities are legalized in Japan already. For example, horse racing basically falls under the crime of gambling under article 185 of the Criminal Code. However, article 35 of the Criminal Code states that ”An act performed in accordance with laws and regulations or in the pursuit of lawful business is not punishable,” and Article 1 of the Horse-Racing Act states that the Japan Racing Association and prefectural governments are authorized to operate horse racing. Therefore, it is a legal form of gambling. In the same way, lotteries are basically a crime according to article 187 of the Criminal Code, but it is legalized by the Lottery Ticket Act. This act limits sellers to local governments, and its purpose to fundraising for local administration (Article 1). Horse racing and lotteries are legalized forms of basically illegal activities for the purpose of fundraising, mainly of local governments. Therefore, for the operators to secure income, it goes without saying that the gamblers are at a disadvantage. It is an extremely unfair economic transaction, given that the income of the operators is very large. This extreme unfairness is a fundamental factor of gambling: gamblers are in pursuit of pleasure that does not make economic sense. Whether the pursuit of such pleasures should be liberalized is a matter of advanced legal discussions, also related to regulations around drugs. Horse racing and lotteries are legalized based on a comprehensive decision, considering that they are historically and socially established forms of public entertainment, that problems of addiction and other issues are not too severe, and that they serve public benefit as a source of funds for local governments. And the fact is that horse racing and lotteries are popular: Japanese people love to gamble. Racing and lottery tickets sell well because of their popularity, which is why local governments can raise funds from them. The Japanese government might have legalized and monopolized gambling for public-sector fundraising based on the Japanese people’s love for gambling. Casinos cannot be legalized under the same logic. Perhaps that is why the debate has not reached a conclusion.

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The disease of Japanese banks

Nov 20, 2017
byNoriyuki Morimoto

The Japanese have a way of assuming the other person’s intentions. Although this is no longer as prevalent as it had been in the past, it is deeply rooted in the Japanese society as a chronic and malignant disease. There is no growth without reform, and no reform if we are caught in over-assumption. Is it possible to overcome this disease? Banks seem to be suffering especially severe symptoms. From the past, banks have considered it an extremely important job to assume the intention of governing authorities. This has not changed even after the FSA became independent from the Ministry of Finance and underwent a major overhaul led by commissioner Mori. A typical case is that banks do not respond straightforwardly to inquiries and requests for information from the FSA, but always make assumptions on what is happening in the background. As a result, they usually identify the intention to restrict activities. For instance, when they are asked to submit information on the balance of card loans, they assume at that point that the FSA has a negative view on the expansion of card loans. The assumption made in the case of card loans happens to be correct, but this is not always the case. For example, the FSA is frequently commenting on sales commissions of investment trusts, and the banking industry holds a general assumption that they are not supposed to charge sales commissions. However, the FSA is not denying sales commissions as a legitimate payment for service: it is just asking for their logical basis. Probably the Ministry of Finance, as well as the FSA in the past, held the assumption that the banks would make a correct assumption when they negotiated inquiries and requests for information. Seen from the outside, it was an extremely unclear and incomprehensible situation, but it should have worked as an extremely sophisticated and technical method of administration among the parties involved. Nevertheless, the current FSA led by commissioner Mori has completely abandoned this old-school administration method, so banks no longer have to be capable of such assumptions. A grave problem is that banks still use their now worthless ability of assumption in totally pointless ways. The current FSA positions itself not as a supervisor but as a counterpart of dialogue with banks. It is pointless to assume hidden intentions when open dialogue is taking place. It should not be called a dialogue in the first place if both sides talk based on assumptions of the other side’s intentions. And because the banks do just that, the intentions of the FSA do not reach them in a straightforward manner, but are misunderstood and interpreted in a distorted way. This is a regrettable situation.

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Which company is Nomura Holdings Going to Sell?

Nov 06, 2017
byNoriyuki Morimoto

Nomura Securities responded to the Financial Services Agency’s (FSA) policies and set out new management principles that strengthen control over conflict of interest. This has great significance for Nomura Holdings, the parent company of Nomura Securities, because it seems to lose rationale for holding both Nomura Securities and Nomura Asset Management as core businesses. Between Nomura Securities and Nomura Asset Management, there is a risk of conflict of interest for all operations related to asset management. In eliminating all risks of conflict of interest under the new management principles, the two companies should sever all ties in the forms of business philosophy, human resources, sales support, information exchange, and so on. For Nomura Securities, Nomura Asset Management is now merely one of many managers of investment trusts, and for Nomura Asset Management, Nomura Securities is just one of many companies that sell its products. Now that their brotherhood has completely lost its meaning, Nomura Holdings would be questioned of the logic behind holding two unrelated companies, as such a structure cannot completely get rid of the potential risk of conflict of interest. It is likely that some members of the investment community immediately thought of the difficulty the two companies would face in coexisting. That was what actually came to my mind, and I was also asked very candidly by the representative of a renowned foreign management firm about which of the two companies I thought would be sold off by Nomura Holdings. Of course, Nomura Holdings can expect to raise overall efficiency by holding multiple unrelated businesses with different revenue structures, based on portfolio theory or financial conglomerate strategy. As a financial group, conglomerate strategies are also under the restriction of business scope, so investment management seems to be an attractive business which only requires small equity capital. Then, how is the situation outside of Japan? When a financial group holds an investment management business, the only feasible way is rationalization based on portfolio theory. It is also rare to share trade names within the group: companies in the same group usually have unrelated names. There are also quite a few financial groups which do not hold investment management businesses. This is because investment management is basically an independent and specialized business in the first place.

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Can Nomura Asset Management Let Go of Nomura’s Name?

Oct 23, 2017
byNoriyuki Morimoto

As a response to new policies set by the Financial Services Agency (FSA), Nomura Securities disclosed its new management principles. In it, the company announced that it would no longer give special treatment to Nomura Asset Management under the same holding company. It also stated that the selection process of investment trust products would be improved to utilize research and analysis results of rating agencies, and high-quality products would be selected from a wide range of options. It is not just Nomura, but all financial groups in Japan that prioritize relationships within the same corporate group, allowing for conflict of interest. Needless to wait for the FSA’s comments, that has been a common understanding in the financial industry. Nomura’s decision to change this situation would likely hold significant meaning in the history of finance in Japan. Between Nomura Securities and Nomura Asset Management, the risk of conflict of interest exists not only around investment trusts, but in all types of asset management businesses. The idea of Nomura’s management principles should not be limited to sales of investment trusts. When attempting to remove all risks of conflict of interest, the relationship between the two companies would be severed in every way, including shared management philosophy, exchange of personnel, cooperation in sales activities, and exchange of information. Since Nomura Securities has a strong client base, expanding its reach of product procurement would only have positive impact. However, Nomura Asset Management has now become one of many management companies for Nomura Securities. Without Nomura Securities’ support, is it able to survive as a truly independent investment management business, purely by its own management skills? Of course, it is not a question of whether Nomura Asset Management can survive. There is no other choice for it other than to part ways with Nomura Securities and establish itself as a completely new company, and improve true skills of asset management. Ultimately, it should become independent enough that its trade name Nomura would get in the way, urging the company to be determined to get rid of it. So, would Nomura Asset Management be able to let go of its Nomura trade name? If it can, would that happen in the near future?

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