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Noriyuki Morimoto's Blog

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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The Impact of Nomura’s Reform Announcement

Oct 10, 2017
byNoriyuki Morimoto

On April 14, Nomura Securities announced its new management principles regarding sales of investment trusts. It was a response to policies disclosed by the Financial Services Agency (FSA) on March 30, but its quick reaction and contents that deeply reflect the intentions of the FSA made a strong impression on the financial industry. In its principles, Nomura stated that when selecting its lineup of investment trust products, it would pick high quality products from a wide range of options not restricted to those of group companies. It would also refer to research and analysis by rating agencies and choose products that are evaluated above a certain level. And by “group companies”, it is referring to Nomura Asset Management. This announcement suggests that up to now, Nomura had been treating Nomura Asset Management in a special way, essentially allowing a situation risking conflict of interest. Despite such a risk, it had been shrugging off the doubt claiming that there was no proof of active damage to the clients. However, based on the new management principles, Nomura Asset Management would become just one of many management companies. The significance of this new management principle is in the strengthened management of conflict of interest. But not only that: Nomura reviewed its process of selecting investment trusts and went another step to improve the quality of its product lineup. This dramatic change of Nomura Securities, more than being a serious response to the FSA’s policies, is likely evidence of its attempt to overhaul its business model. It is an expression of the company’s sense of urgency that there is no future in keeping the existing way of doing things. This change would probably be a fundamental and substantial one that would alter the course of Nomura’s history. Clearly, this reform would change the profit structure including dependency on sales commissions: in the short term, a decrease in revenue and profits is probably inevitable. Nevertheless, Nomura took a mid- to long- term view to improve its profit structure by increasing its compensation according to the amount of client assets, thereby increasing its corporate value. This is a great development. I wish for Nomura’s success, also for the future of Japan’s financial industry.

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Artist Takashi Murakami’s Management Strategy

Sep 25, 2017
byNoriyuki Morimoto

Takashi Murakami’s book “Art Entrepreneurship” (Gentosha) is a work of art in prose by a representative Japanese modern artist. I call it art because of its depth that allows it to be read in any way. The book is a long prose poem about the artist himself, and coming from deep insight into the social relevance of creative activity from a historical context, it is something close to a book of philosophy. It is also an excellent book of entrepreneurship based on thorough market analysis. On its cover are the words “super business book” in small print. Given that these words appear nowhere in the book’s pages, it must have been added by the publisher Gentosha. This little twist is also a nice part of this art piece. A well known statement of Murakami is that the modern art market is established with wealthy people in western countries as the main buyers, and art pieces do not sell well unless they match their preferences. As for the expectations of such buyers, Murakami presents the following three elements: whether it involves a suggestion of a new game, whether it involves a new interpretation of western art history, and whether it comes with a violation of rules with conviction. I think his second point is especially poignant: this was exactly the case for ukiyo-e prints. The value of ukiyo-e was discovered by foreigners. In isolated Japan, it was naturally impossible to position the homebred ukiyo-e tradition within the context of western art history. By coincidence, ukiyo-e flowed out of Japan and gained a position in western art history, resulting in the birth of ukiyo-e as an art form. Therefore, modern-day appreciation of ukiyo-e is not for ukiyo-e as Japanese art. It is an appreciation within the context of western art history. What Murakami did as an artist was to change the happenstance of ukiyo-e to a necessity. By studying western art history at an advanced and strategic level, and positioning his own art in its context, he succeeded in gaining a position at the cutting edge of the buyers’ collections. That’s why Murakami’s works sell at hefty prices. A simple extension of western art history does not sell expensively. Suggestion of a new game, a new interpretation, and violation of rules with conviction is needed. Murakami incorporated such drastic elements drawing from Japanese manga culture and otaku culture, bringing them together under his “Superflat” concept. He is an artist with a command of astonishingly deep strategy and highly technical tactics. Truly amazing.

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Entrepreneurship of the artist Takashi Murakami

Sep 11, 2017
byNoriyuki Morimoto

For the artist Takashi Murakami, the art market is a game structured by strict rules. Moreover, it is a game with a long history and depth which cannot be changed overnight. Since it is a game, cheating is not allowed. But by knowing and complying with the rules while incorporating intentional violation of the rules, he offers new rules to the game. Such tough effort is essential to gain acceptance in the market. An artist is worthless unless he adds new elements to the market. But newness exists only beyond strict observation of the rules of the market. Simple violation of the rules is nothing new: it is just a violation to be denied. It is not even art. There should be a profound meaning behind the title “Art Entrepreneurship” when Murakami discusses his art. Some people apparently take it as his attempt to make money out of art, which is a ridiculous misunderstanding. The form of art itself is the fundamental form of entrepreneurship in the business world. Entrepreneurship is art. Actually, if you take Murakami’s logic and apply what he says about the art market to the business market in general, the book stands as an excellent book of entrepreneurship in business. Many people aspire to start a business. Regardless of which field that business would be in, entrepreneurship should attempt to bring something new in the existing market. Meanwhile, every market has rules established through a long history. Visible and invisible rules make up a complicated network. Usually a new business starts with a critical perspective to the existing norm, but if it is just a violation of existing rules, it is simply denied. The startup ends a failure. A new business would not succeed without a new element that is accepted by the market: to borrow Murakami’s words, suggestion of a new game, new interpretation of history, and violation of the rules with conviction. It is a matter of fact that a robust business design which grasps the structural change of society is essential for the success of a business; it should be meaningful to clarify the actual contents through the three aspects Murakami presents.

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Wagyu, Manga, Nippon

Aug 28, 2017
byNoriyuki Morimoto

As English becomes a global language, it has to transform itself from the original form by obtaining new expressions and words from various other languages. However awkward the language may be, what matters is whether it can be understood. Spreading the acceptance of English with Japanese features has more value than learning authentic English. So what is wrong with Japanglish? Values that are uniquely Japanese may not always be translatable to English. As Japanese culture finds its way into the global environment, Japanese words naturally become embedded in the English language. Wagyu means Japanese beef, but since it is a special kind of beef only available in Japan, the word has been transplanted directly into English. Wagyu became a globally renowned food ingredient as a result of strenuously keeping its high Japanese quality. But on the other hand, its global appreciation is based on the status of beef as a signature ingredient in western cuisine. It might not have been globally recognized if it was simply something original to Japan. So-called “cool Japan” is not global if it is just about Japanese appeal. Thinking cool Japan from a global perspective, it should aspire to create something new by combining Japanese and non-Japanese features, rather than introducing existing Japanese things to other countries. Even if Japanese manga culture is introduced overseas from a Japanese perspective, it is not enough to spark the creative evolution of manga as global culture. Japanese manga culture can make a global contribution when it resonates with all areas of modern art outside of Japan and creatively interacts with them to deliver something new. The position of Japan in the global environment is comparable to the position of local regions within Japan. In the past, regional growth meant to bring locally unavailable things from Tokyo. This is parallel to how Japan’s development took place by absorbing the achievements of western culture. As a result, regions became increasingly dependent on Tokyo, causing local sources of growth to dry up. With the inability to give a cultural blow to western culture, Japan seems to have been backed into a corner, rapidly being caught up by emerging countries taking the same growth strategy.Efforts to revitalize regions are shifting gear to enhance locally unique qualities. Regional revitalization is the domestic source of growth, and the globalization of uniquely Japanese qualities is the international source of growth for Japan’s future.

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What’s Wrong with Japanglish?

Aug 14, 2017
byNoriyuki Morimoto

Globalization stands for the uniform rule of reason, as well as coexistence of diverse values: different values that respect, stimulate, incorporate, and affect each other to create new things. It stands for the progress of humanity, innovation in the global civil society, and socioeconomic growth. Global rule of reason and diversity, the rich culture created from diversity, the ideal global civilization... in such diversity, Japanese qualities shine, as the food cultures of China and India inspired the creation of ramen and curry rice in Japan, as ukiyo-e prints had a strong impact on French impressionism, and as Imari ware influenced Meissen porcelain. Japan can actively contribute to the progress of global culture by offering everything Japanese to the Global space of cultural creation: things that are uniquely Japanese, things that were born in the cultural tradition of Japan, things of Japanese origin, things rooted in the historical experience of Japan, Japanese characteristics, and individual strengths of each Japanese person. A strong focus on Japan is not to close oneself within Japan’s borders. To globalize means that all kinds of non-Japanese features are fused with everything Japanese to trigger a chemical reaction, or rather an explosion. In that sense, ramen is amazing. It is not global to think of promoting authentic Japanese cuisine overseas. Global means to apply the methods of Japanese cuisine to all kinds of food ingredients in the world, and to use uniquely Japanese food ingredients in all kinds of cooking techniques in the world. In that sense, learning the formal English language is far from being global. Native English speakers who speak authentic English may wish for the language to maintain its authenticity as it is used as a global language, and non-natives tend to hope to learn authentic English. But as English becomes a global language, it has to transform itself from the original form by obtaining new expressions and words from various other languages. People always talk about English education when they talk about globalization in Japan. But as the purpose is English communication as a way of social interaction, and not the acquisition of the authentic English language, the issue should be how to create opportunities to use English, not how to teach the language itself. However awkward the language may be, what matters is whether it can be understood. Spreading the acceptance of English with Japanese features has more value than learning authentic English. So what is wrong with Japanglish?

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An Innovative Way to Introduce ERISA in Japan

Jul 31, 2017
byNoriyuki Morimoto

Nobuchika Mori, Commissioner of the Japanese Financial Services Agency (FSA), gave a lecture on April 7th in which he implied that fiduciary duty applies to corporate pension funds. However, corporate pensions are under the jurisdiction of the Ministry of Health, Labor and Welfare, not the FSA. So how is the FSA going to drive a corporate pension reform? Preceding Mr. Mori’s lecture, on March 30, the FSA announced a soft law titled “principle for client-oriented business operation”. The term fiduciary duty is no longer used in the title, but before official disclosure, the preliminary title had been “client-oriented business operation (fiduciary duty)”, treating the two concepts as equal. This principle is a soft law, not a regulation imposed by the FSA. Moreover, in the process of devising this principle, despite criticism that the scope was not clear by stating that it covers “a broad range of financial businesses engaged in asset management related activities”, the FSA pushed through its position that the scope should not be strictly identified. Therefore, if a firm conducts activities related to asset management, it would classify as a financial business under this principle even if it is beyond the jurisdiction of the FSA. Then there is no room to deny that corporate pension funds are also financial businesses that fall under the scope of this principle. It is free for the companies and pension funds that support the position of the principle to actively comply with it. Conversely, entities that do not support the principle are free not to comply; if they do not think the principle applies to them in the first place, there is no need for them to explain the reason for non-compliance either. However, if even one corporate pension fund starts complying with this principle, subscribers and recipients of non-compliant pension funds should wonder why theirs do not. Such subscribers and recipients can then request explanation for non-compliance.  When that happens, there is no way the employer can explain that the company selects management firms by friendly relationships with certain financial institutions based on bank loans and shareholding, or that the person responsible for the corporate pension is selected in a way to secure positions for employees and officials who have reached retirement age. As failure to change an unexplainable situation would only prove their unacceptably low level of corporate governance, efforts should surely be taken to correct the situation. Mr. Mori regards such dynamics as a market principle driven by clarification, and uses it as a measure to address administrative issues. Companies that proactively comply with this principle are without doubt excellent companies. If one company expresses compliance and thus “clarifies” its excellence, other companies would be pressured to clarify their position as well, and such a race to excellence would drive the reform forward. This is the method of execution taken by Mr. Mori.

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The Shock of Japanese ERISA

Jul 18, 2017
byNoriyuki Morimoto

On April 7th, Nobuchika Mori, Commissioner of the Japanese Financial Services Agency (FSA), gave a lecture in which he referred to the poor state of asset management for Japanese corporate pension plans. He first pointed out the reality that firms that manage corporate pension funds are largely selected according to friendly relationships between the company and financial institutions. His second point was that the personnel overseeing the pension fund is primarily decided according to the company’s personnel relocation policies, resulting in the assignment of people who lack any professional insight. Mr. Mori said that this situation surrounding corporate pensions is problematic from the viewpoint of fiduciary duty. He is making it clear that companies and pension funds have fiduciary duty in their relations with subscribers and recipients who are the end beneficiaries. In other words, by referring to the selection of management firms, Mr. Mori is saying that managers of corporate pension funds have strict duty of loyalty to pursue the benefit of their subscribers and recipients without taking the benefit of the employer into account. His comment on selection of personnel overseeing pension funds is about strict duty of care to ensure best asset management practices for the beneficiaries. Preceding Mr. Mori’s lecture, on March 30, the FSA announced a soft law titled “principle for client-oriented business operation” to drive the reform of asset management-related businesses. The term fiduciary duty is no longer used in the title, but before official disclosure, the preliminary title had been “client-oriented business operation (fiduciary duty)”, treating the two concepts as equal. Then, does Mr. Mori’s comment imply the FSA’s view that the “principle for client-oriented business operation” also applies to corporate pension funds? By replacing “clients” with “subscribers and recipients of corporate pensions”, is the principle directly applicable to corporate pensions? If that is the case, a major reform is bound to happen in Japan in the same way as when ERISA was introduced in the United States. It should have a huge impact on Japanese corporate management, and should be a chance for Japan’s asset management industry to take a great leap forward.

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The Poor State of Japan’s Corporate Pensions Exposed by FSA

Jul 03, 2017
byNoriyuki Morimoto

Nobuchika Mori, Commissioner of the Japanese Financial Services Agency (FSA), gave a lecture on April 7th in which he lashed out at the current state of the asset management industry and demanded for a reform. In the lecture, he also referred to the management of Japanese corporate pension funds. According to the official record of the lecture disclosed by the FSA, he commented as follows: “In addition to asset management firms, the role of asset owner is also important. For instance, pension funds are required to fulfill fiduciary duty to benefit the citizens paying into the pension system. The asset owner has to determine which management firm has the capabilities to which it is best to entrust their assets, but if corporate pension funds give the mandate for management based on relations with certain asset management groups, that is problematic from the viewpoint of fiduciary duty. US university funds and pension funds that are high-quality asset owners and deliver great mid-to-long term results always have responsible personnel with a sharp eye for excellence and high skills of management. Also for corporate pension funds in Japan, it is desirable that such personnel is selected and appointed from a wide range of candidates in and outside of the company, based on expert skills and decision-making capabilities rather than relocation of personnel within the company. Both the asset owner and asset manager should heighten their fundamental capabilities and fulfill fiduciary duty for the citizens who are the ultimate beneficiaries: I believe that would lead to growth of the asset management industry in Japan.” Mr. Mori has, in effect, exposed the poor state of Japanese pension funds. Although he presents a hypothesis in saying ” if corporate pension funds give the mandate for management based on relations with certain asset management groups”, it is natural to interpret it as a euphemism for the recognition that corporate pension funds are indeed giving management mandates based on their relations with asset management groups. By saying “for corporate pension funds in Japan, it is desirable that such personnel is selected and appointed from a wide range of candidates in and outside of the company, based on expert skills and decision-making capabilities rather than the regular circulation of personnel within the company”, Mr. Mori is not simply expressing a wish but is rather pointing out the inappropriate way asset owners select their personnel for corporate pensions funds. By the way, in Japan, corporate pensions are under the jurisdiction of the Ministry of Health, Labor and Welfare. What is the intention of the FSA Commissioner to deliver this statement? Assuming that it is not overstepping of authority, is it indicative of a change in the regulatory framework?

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Japan Going Global as a Small Country

Jun 19, 2017
byNoriyuki Morimoto

The word global is used very often in Japan, as in globalization or development of global talent. But what does it mean to be global? There should be some kind of philosophy beyond superficial aspects like enhancing English capabilities, or economic phenomena such as multinationalization of companies or expansion of free trade. Being global is not the same as being international. International literally refers to the relationship among different nations. Global literally refers to the globe, a concept that transcends nations. The establishment of modern society was marked by the rise of the nation state. Ever since that happened, there has been a fundamental difference between the domestic relations among people of the same country and international relations among people of different countries. Meanwhile, to be global is simply about the relations among people. For a Japanese company, the idea of selling products to an American customer is international. Globally speaking, this is simply a company selling products to one of its customers. Globalization has to be this shift in the way of thinking. The global concept represents historical progress, advancement in human wisdom, and creative development of intelligence. Human history has long been a history of rule of violence. The rise of the nation state at least manifests the rule of reason within the country, but in turn justifies violence between countries in the form of war. Nevertheless, the advancement of globalization is likely to overcome the limitations of the nation state and ultimately achieve rule of reason in the form of a single global civil society. However far that day may be, it is sure to arrive: the direction of mankind is set towards that destination. If American companies are backed by their country’s overwhelmingly powerful military force when expanding into foreign markets, that is not global. It is global only when American companies expand worldwide purely based on business rationality. Globalization has to be the shift from the rule of power to the rule of reason. True globalization is in the horizon of social philosophy, not by physical force but by the force of intelligence. That is why Japan has a great opportunity, having abandoned active use of military power, being a small island country bound to shrink further through population decline, and having betted on establishing itself as a knowledge-oriented nation.

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