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Noriyuki Morimoto's Blog

In the past, money had a say in Japanese companies.

Nov 19, 2018
byNoriyuki Morimoto

Money can have more influence than its actual amount. A key practice of the HR department in traditional Japanese companies was to make small amounts meaningful. In other words, by devising various ways of payment based on expense items (e.g. allowances), timing (e.g. advance payment, belayed payment), method (e.g. directly handing cash), form (e.g. provision of environment, provision in kind, treasury stock), they could expect to generate an oversized or additional effect. In hardboiled novels, when a detective pulls out information from someone like a bartender, he would often flicker bank notes while skillfully playing the phycology of his counterpart. This method would definitely not work with just the promise of paying. It is essential to show the cash for it to work. What moves people is not the amount, but the bank notes in front of them. This is a typical case in which money has a say. In the past, there was the case of paying bonuses in cash. There was the idea that even when monthly salaries were paid via bank transfer, bonuses have to be handed in cash for them to bear meaning. Moreover, companies would gather all of their employees and hand the cash over to each person, in front of everyone. It is clear that this ceremony carried more meaning than the actual amount. Apart from money, there was the case of apartments for government employees. They still exist, and are probably called civil servant housing nowadays. The apartments are quite stately, and moreover, despite being in a good location, the rent is inexplicably cheap: it was a very advantageous in-kind benefit. This was possibly due to the special nature of the bureaucratic career, where workers could be relocated to anywhere in the country at short intervals, and also circumstances of housing in the past. But it seems that an even stronger aspect was to symbolize the prestigious position of bureaucrats. For bureaucrats working in Hokkaido, cold weather allowances were provided. I do not know whether it still exists. This allowance was intended to compensate for increased heating expenses, but it seems to have represented a feeling of consolation for hard circumstances. Speaking of comfort, there might be the same aspect in severance pay. In modern enterprises in the global economy, will money not say things as well? Maybe we should give money a say.

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Okinawa and Stamp Speculation

Nov 05, 2018
byNoriyuki Morimoto

There is a strange book with the title meaning The Guide to Make Money with Stamps. It was issued on November 1, 1964 by a company called Kitte Keizaisha (the Stamp Economy Company). The content is nothing of significance. If this book is to be meaningful today, it is not in the content, but in the issue year of 1964. Needless to say, this was the year of the Tokyo Olympic Games. This book opens from both sides. Opening from the back cover, there is the "1965 version stamp investment catalog", with photos of stamps and their prices. For example, the Ukiyo-e series "Mikaeri " is 2000 yen. 2000 yen in 1964 is extremely expensive. This part is called the investment catalog because of its evaluation of "investment value" for each stamp. The investment value of “Mikaeri” ranks the highest, with "triple circles", something like a three-star evaluation. Its definition is "Active buying, high popularity, shortage of stock, price has been rising but will definitely keep going up, should purchase even when found higher than the market price.” Now, when you look at online sites that sell stamps, apparently "Mikaeri" costs about 10,000 yen if it is in good condition. It seems that it was right to give it a three-star. However, looking at the whole picture, while there have been some price increases, others including Olympic stamps are lowering their value significantly. It seems that “Mikaeri” was rather an exception. Actually, in the period from the 1964 Olympic year to the 1972 return of Okinawa to Japan, there was what can be called a stamp boom, stamp bubble, or stamp speculation, which chased the price increase of commemorative stamps. This is the background of the publication of The Guide to Make Money with Stamps. And after the return of Okinawa, the bubble burst. Why did the return of Okinawa matter to stamps? Due to its return to the mainland, the Ryukyus government postal authority was to discontinue the issuance of stamps. This perceived rarity of Okinawan stamps was the reason for the inflow of speculative funds, which caused the Okinawa stamp bubble. One interesting thing is that one of the speculators that set up Okinawa stamp buyers was Kitte Keizaisha, the publisher of The Guide to Make Money with Stamps. This company apparently went bankrupt in June 1973 when the bubble burst.

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Japanese casino legalization and finance

Oct 22, 2018
byNoriyuki Morimoto

It looks like casinos are finally becoming legal in Japan. Casino legalization is a controversial issue with strong arguments on both sides. Supporters argue that developing integrated resort (IR) facilities including casinos would become one of the pillars in Japan’s growth strategy, as it will generate large consumption demand, particularly by increasing inbound visitors. On the other hand, opponents point to social problems such as gambling addiction. Gambling can cause outcomes that run against customers’ benefits, such as addiction and loss of huge amounts of money. Therefore, it is a crime. But even when the act is a crime, if there is a social benefit like financing local governments through public gambling, special laws can be made to decriminalize the act. With the same reasoning, casino legalization is being discussed. The assumption in legalization of gambling is that it produces remarkably high customer satisfaction. That is the source of strong demand, and supporters are attempting to realize social benefits by using that demand. Similar things can be said for tobacco and liquor: considering their health impacts, we cannot deny their aspect of running against customers' real gains, but there exists a very strong demand based on customer satisfaction. Therefore, they can sell even when high tax rates are imposed, which in turn creates a stream of tax revenue. In addition, it is extremely difficult to distinguish between fraud and fraud-like activities. For example, if you believe that a duvet is being sold at a price significantly exceeding its real value, even if you suspect it to be a fraud, there is nothing to be done if the person who purchased it believes the product is high quality because it is expensive. Such shady schemes also work based on their creation of high customer satisfaction. Also, in areas that support modern consumption, such as fashion, food and drinks, entertainment, and so forth, customer satisfaction is formed at a level that far exceeds their critical functions and bare necessities of clothing, shelter and living. Put bluntly, the pathology of wasteful overconsumption has become a driving force for economic growth. However, there are also established areas in this ailing modern society where it is crucial to consider the customers’ true benefit based on necessity, even against customer satisfaction. These are regulated industries including medicine, education, and finance.

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The crisis of Japan's financial industry without risk taking

Oct 09, 2018
byNoriyuki Morimoto

In finance, risk taking is easily confused with risk management. Looking at the actual business of financial institutions, the risks they take are within the scope set by regulations as banking businesses, to the extent that such risks can be taken - rather than should be taken - under such regulations, in a passive, or - by a stronger expression - unaware manner, often merely as an extension from the past. Finance is also a business, and as common business sense, financial institutions should have to determine the unique differentiated scope of their business, identify priority customers, and take the risks that should be taken to create value from the customer's point of view. Such risks have to be strictly defined, and risk-taking must be carried out with awareness. The confusion between risk-taking and risk management is particularly noticeable in Japan. It may be a result of the fact that full-scale financial regulation reform was late to be implemented. Unfortunately, there are no financial institutions that conduct risk-taking with full awareness. However, the Japanese financial industry is now at its ultimate crisis. Moreover, the crisis was not caused by external factors such as negative interest rates. As a result of fruitless interest rate competition, sales of investment trusts and insurance diverged from the customer's point of view, and cost reduction without strategy, their capability of fundamental risk-taking declined consistently. When the results materialized, it had just been a matter of time, although the external environment did certainly accelerate the crisis. Therefore, in recent years, the Financial Services Agency has been strongly demanding financial institutions to take risks with awareness. Certainly, the FSA’ sense of urgency should have been deeply and quietly penetrating the financial world, but on the surface, it seems that the financial industry is hardly aware of this crisis. It’s not easy to provide an answer on how to get out of the crisis. Because it is not easy, financial institutions have not been able to take concrete actions, and look like they have no idea of what should be done. That is the current state of Japanese finance.

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Japanese banks cannot decide what they want to eat

Sep 25, 2018
byNoriyuki Morimoto

In November 2013, the Financial Stability Board issued the Principles for an Effective Risk Appetite Framework. According to the Financial Services Agency, this is a management framework to be used as an internal common language that covers the whole range of risk-taking policies, including capital allocation and maximization of profit, with “risk appetite” defined as the types and total amount of risk that each institution actively takes in order to achieve its business plan, based on its specific business model. Japanese banks are also building RAFs, but it is no exaggeration to say that it is just form without substance. The core of the RAF, as the FSA states, is the definition of risks that the bank actively takes in order to achieve its business plan, based on its specific business model. The active appetite for risks is an important issue precisely because the risks are to be actively taken. However, as far as the disclosed descriptions of the Japanese banks’ RAFs are concerned, they lack any concrete description of "risks to actively take". What is written there is merely how to manage the risks that are currently passively accepted. Even if RAF terms are used to describe the management system as reinforcing risk culture, it is at best just a technical improvement, not fundamental governance reform. In the case of Japanese banks, is it not even possible to consider the specific business models, that is, differentiation in business objectives? Can’t they decide what they want to eat based on their own will and desire? Then, will they eat whatever is around them? A creature that eats anything with a strong appetite seems to be a bit dangerous.

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Osekkai Japanese Finance

Sep 10, 2018
byNoriyuki Morimoto

If you look up the word “osekkai” in the dictionary, it is defined as unnecessarily interfering with people’s matters. But whether any act is unnecessary or not depends on the subjective view of the recipient of osekkai: for the person who carried out the osekkai act, it is done because it is necessary. Tetsugoro Obara, who was a leading figure in the Japanese financial industry, is quoted as saying "not lending is also kindness". He meant that when considering a loan application based on the customer's true benefit, there are cases where refusing the loan may be beneficial to the customer, depending on factors like the purpose of the money. Tetsugoro Obara was adamant in refusing loans, even with sufficient collateral, when their intended use was something like real estate speculation. He reasoned that it would ultimately prove to hurt the customer. Whoever was refused a loan in this manner must have been very frustrated. By contrast, those who took out loans to buy real estate during the Showa bubble period must have felt very satisfied at the moment. However, given that many of them were economically destroyed, such actions of the financial industry had been proven to run against the true interests of their customers, and the financial community itself suffered a huge loss as well. If the financial community had been faithful to Tetsugoro Obara’s philosophy, the Showa bubble could have been prevented. Tetsugoro Obara believed that it is kindness to consider the real benefit of the customer. Therefore, as long as one maintains kindness, he believed that he could not lend what he could not lend, even if it damaged customer satisfaction. And he was convinced that maintaining that kindness would prove beneficial for the financial community. Actually, Tetsugoro Obara referred to financing a customer as "worrying for” a customer. That is a totally osekkai attitude.

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The Ideal Global Civil Society Beyond Japan

Aug 27, 2018
byNoriyuki Morimoto

The history of mankind is the history of dominance by violence. The formation of modern society is defined by the formation of the nation state. While the establishment of the national state at least establishes the rule of reason within the country, it in turn justifies the exercise of violence among nations in the name of war. Globalization involves the progress of history, advancement of human wisdom, and creative development of reason. The progress of globalization shall eventually overcome the limitations of the nation state and ultimately establish rule of reason on the earth as one global civil society. No matter how far it may seem, the direction of mankind being set, that day will definitely arrive. Globalization is at the horizon of social philosophy. However, this in turn tells how the real society is far from global. A prime example is the Olympic Games. Although it is supposed to be a truly global celebration of the sports, it actually represents the competition among nations, from the structure of each sport to host city selection. Rather than the Olympic Games, global economic activities may be actually supported by truly global coordination and mutual understanding. Perhaps that is due to the underlying universal principle of economic rationality within economic activities. Since Japan exists on the earth, it is in a sense global. As far as the economic field is concerned, Japan is a very big part of the global economy. The global economy is not the external environment surrounding Japan, but one that contains Japan as a major element. As Japan is a part of the earth, denying Japanese elements and eliminating uniquely Japanese features are not acts of globalization. Globalization is not to be integrated into any one thing. Besides reason, human beings do not have anything in common in the first place. Everything is unique. Globalization is not only the rule of reason but also the coexistence of diverse tastes, mentalities, values, languages, food, clothes and everything else that is unique. Therefore, another important concept along with globalization is diversity. Global becomes meaningful only in combination with diversity. Diverse elements remain diverse as they respect, stimulate, absorb, and interact with each other to create new things. That is what it means by the progress of human beings, creative innovation of world culture, and growth of economic society.

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Will the Japanese Court Rule in English?

Aug 13, 2018
byNoriyuki Morimoto

There is a concept to make Tokyo the largest international financial center in Asia, although experts who know more about Japan's financial situation tend to dismiss it as an unrealistic delusion. The first challenge is English. English, not just as a language problem, but the need to establish the common law system in the same way as the US and UK in legal culture. An international financial center would need to be regulated by an internationally accepted legal system, and in the current world of international finance, the common law system has an overwhelming advantage. This is not about translating Japanese law into English. Translation would be confusing rather than useless. For example, considering that trusts under the U.S. law are quite different from Japanese trusts, simply translating the word is a source of misunderstanding. It is necessary not to translate but to make Japanese trusts the same as trusts under common law. Of course, we cannot change Japan’s entire legal system, so we need technical arrangements. One of such arrangements is the concept of ​​national strategic special zones. The purpose of such zones has to be to create a special legal space within domestic law, allowing for exceptional treatment not only for legal affairs related to international finance, but also for a variety of legal fields including tax treatments, land use, and employment. Then, in these special zones, will the court make decisions based on common law as a means to ensure legal effect? Special judicial systems operate in some specialized fields, such as marine accident inquiries. Given the high expertise required in financial transactions, shouldn’t there be consideration for establishing an independent special court in special fields such as cross border transactions, if not the entire financial system? Anyway, since laws work as laws only when their effect is ensured, the establishment of the judicial system is a critical element. Then, will the trials be done in English? Setting aside lawyers, it’s hard to imagine judges speaking English under the present circumstances. However, assuming that non-Japanese parties will be involved in the litigations, to become a truly international financial center, it will have to be an English trial. In any case, there is a serious issue of jurisdictional arrangements in contracts. Given the current situation of Japan, overseas participants in transactions are likely to be reluctant to set the jurisdiction in Japan. If the Japanese side makes a compromise and recognizes jurisdiction overseas, it becomes significantly disadvantageous to Japan. Again, if it is necessary to set the same conditions for litigation in Japan and litigation abroad, we need to change the judicial practice in Japan.

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The Economics of Japanese sake

Jul 30, 2018
byNoriyuki Morimoto

Kagoshima is an area whose land is covered in volcanic ash. Sweet potato was chosen as a suitable produce that grows in the poor soil, and this led to the creation of Kagoshima’s unique shochu culture. The world has an extremely diverse range of traditional alcoholic beverages, as the result of people developing ways to produce alcohol with whatever was locally available. This is also why the fact that beer and whiskey can now be produced in Japan, at world-class quality, is a symbol of the nation’s industrial development since Meiji era and a source of pride. Now, although Japanese cuisine has spread throughout the world, Japanese sake has not. In Japan, imports of French and Italian wine probably grew together with the rising popularity of French and Italian cuisine. For France and Italy, wine has become an important industry, because it was backed by a comprehensive strategy to export food culture. For Japanese sake, that strategy was missing. While wine in France and Italy became major regional industries and also global ones at the same time, Japanese sake, which lacked a food culture strategy, seems to have dwindled into regional industries that are not even very big, let alone global. In Okinawa, people basically drink awamori. That’s because awamori is strongly integrated in its distinct food culture. Without this established food culture, there is no tourism industry or penetration of Okinawan cuisine and awamori outside of Okinawa. It’s not clear whether economic domains created cultural domains, or the other way round: it may have been simultaneous, and the order does not matter. Then, given Japan’s current situation, some fundamental development should be needed, where the revitalization of regional cultures leads to the revitalization of regional economies. Initiatives to create regional industrial clusters that accommodate the full process from R&D to production activities for advanced fields, such as advanced medicine, international finance, or life science, also have to overcome the traditional framework of attracting facilities. They have to go all the way to creating a new cultural zone extending to education, with people taking initiative in putting medicine at the core. Or we may have to go back in history. The old realm of cultural exchange back in the Edo era was naturally overlapped with the economic realm built upon a logistics network centering on waterways. By looking back at old layers of industrial clusters, we might be able to find an outlook for building a new economic realm. An economy has to be a cultural foundation that people create. A rich economy is nothing else than a rich culture.

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The Risk Appetite Framework of FSA Commissioner Mori

Jul 17, 2018
byNoriyuki Morimoto

Financial regulations demand financial institutions to comply with extremely elaborate and lengthy numerical standards as preparation for expected losses. However, while such a defensive approach may be effective in stabilizing the financial system, it encourages passive risk-taking behavior appropriate for one’s equity capital. It inhibits the financial institutions’ efforts to improve skills in aggressive risk-taking.   Commissioner Mori of Japan’s Financial Services Agency was early to identify the drawbacks of these regulations surfacing in the Japanese economy, and led a drastic reform in financial regulations ahead of many countries. The reform encourages financial institutions to return to the fundamentals of management: to take risks actively within a customer-centric approach, realize capital profit appropriate to the taken risk, and actively work to procure necessary capital.   This principle of Commissioner Mori can be described, using financial terms, as application of a risk appetite framework at its highest level.   In a risk appetite framework, the starting point is to define the risks that financial institutions should knowingly take in order to execute their unique business objectives and strategies. In other words, this is to identify the subject of primary risk-taking as a business. According to Commissioner Mori’s words, the objective of primary risk-taking is for financial institutions to create shared value with their customers. Here is a clear indication of active risk-taking from the customers’ perspective.   There are various other risks that are derived from primary risk-taking, but is should be noted that the risks in primary risk-taking and the derivative risks are on a clearly different level, or dimension. The shortfall of conventional risk management was the lack of a clear distinction between these two levels, and that it treated primary risks in a relative sense.   Conventional risk management pursued objectivity and precision so far that it overemphasized unification by numbers, control over the total amount of quantified risks, and reference to past statistics as a condition for precise quantification. Consequently, it had serious harmful effects such as ignoring the difference in the nature of different risks, failure to capture unquantifiable risks, and lack of a forward-looking perspective that incorporates future developments.   By contrast, the risk appetite framework aims for at least three important improvements. First, risks within primary risk-taking are clearly put at a higher level as a direct management subject. Second, the framework avoids unified quantification and directs attention to different risk natures and unquantifiable risks. Third, it incorporates developments that are particular to the future, rather than envisioning a static future as an extension from the past.

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International Equity Returns Distorted by Japan’s Bubble Economy

Jul 02, 2018
byNoriyuki Morimoto

The global economy has integrated into one, as companies increasingly became multinational or lost national identities. It is the time of global equities without borders. The asset category of international equities, which is based on the distinction between equities of one’s country and equities of others, is a thing of the past. Nevertheless, until quite recently in Japan, international equities, not global equities, were the mainstream. Suppose during that time, a Japanese investor attempted to choose a management firm with which to invest in international equities (from a Japanese perspective). The investor would find that actually very few firms manage such assets. Neither do they have much experience in managing global equities. The useful information turns out to be management results of international equities, from a US perspective. In the 1980s, when Japan went through the so-called bubble economy, how to treat Japanese equities was a tricky question for other countries. Especially with international equities from a US perspective, the weight of Japan had become overwhelming. At that time, many of the management firms were viewing Japanese equities as overpriced, so they probably had drastically reduced the percentage of Japanese equities in their portfolios compared to their actual weight. When the bubble burst, because of the single factor of the weight of Japanese equities, many management firms ended up beating the market. So what value does this track record hold when assigning the management of international equities from a Japanese perspective, excluding Japan? And suppose there is an asset management firm that operates globally: for Japanese clients, it manages international equities from a Japanese perspective, and for US clients, it manages international equities from a US perspective. In this case, it would be quite common that one beats the market while the other loses. For example, when the stock selection of US equities doesn’t go well, the results would differ significantly depending on whether those stocks are included in the portfolio. Such odd situations in international equities would not occur with global equities. There is only one global category, so they can be compared consistently. Although this is a technical point, it is also one advantage of global equities.

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The Fate of the Japan Atomic Power Company

Jun 18, 2018
byNoriyuki Morimoto

The Japan Atomic Power Company (JAPC) is the entity that started the first commercial nuclear power generation in Japan with Tokai Power Station in 1966. This station ended its operation in 1998 and is now in the process of decommissioning. JAPC’s Tsuruga Power Station Unit 1 also stopped operation last year and is due to be decommissioned as well. Currently, JAPC still operates the Tokai No.2 Power Station and Tsuruga Power Station Unit 2. But as the Nuclear Regulation Authority (NRA) identified an active fault line beneath Tsuruga Power Station Unit 2, it is virtually inevitable for it to be decommissioned. If JAPC could operate just one nuclear reactor (if it can be restarted) while having to decommission three, it may be too much pressure for the company even to survive. For Japan’s nuclear power industry, whether the business is to keep going or not, decommissioning technology is going to be vitally important going forward. In that sense, JAPC’s history as pioneer of both starting and ending nuclear power generation is a valuable one. Therefore, the company’s experience and skills as a group of technical experts have to be maintained. Even if the Japanese people choose to phase out nuclear power generation, it would take an extremely long time to complete the process. In order to phase out safely and to rationalize costs, a high level of nuclear technology has to be maintained and developed as a political agenda. Moreover, in theory, the government’s nuclear power policies should have settled with keeping nuclear power generation: the NRA, a government agency, is very active in enhancing safety of nuclear power generation and the healthy development of the nuclear power industry. Such activities would be an unacceptable waste in the direction of nuclear phase-out. Under the new regulatory standards of NRA, there will be a huge amount of additional cost including major refurbishing expenses. Such additional costs would ultimately be funded by the citizens, in form of utility fees or tax. If Japan was to phase out nuclear power after such a burden, it would be a tremendous waste.It the policy is to go toward nuclear phase-out, the NRA would have to focus its purpose strictly on safe decommissioning measures. And even in that case, the agenda of maintaining and developing advanced nuclear technology cannot be crossed out. 

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