In “Hollowing Out, Tokyo Style,” FT Alphaville’s Gwen Robinson does a fine job of capturing an ongoing, and now accelerating human resources conundrum. While it seems like there’s no shortage lately of fake Japundits (not to be confused with the real Japundit, who is simply trying to keep it real on the cultural front) saying to go long Japanese stocks, boots-on-the-ground evidence provides further insight into the opaque. First, the positives:
“You know when the big guys like Goldman and Lehman cut their small cap teams that we’ve reached the bottom – you have to think, it’s got to be upwards from here”. [FTA’s quoting of an expat broker]
Also, the fact that Japan-focused hedge funds have been hammered (FTA cites Eurekahedge: AUM contraction in 2007 of $10.9B due to poor performance including $7.7B of redemptions) and there’s very little enthusiasm for new funds, except perhaps from Ed Rogers of Roger Investment Advisors — who was reported by alternative investment news to be preparing to launch a $200M-$300M PE fund to seed Asian hedge funds — invokes the old saying that it’s time to buy when there’s blood in the streets. True, but as we like to keep things in perspective, the overall universe (AUM) of HFs in Japan is of course ridiculously small compared to the U.S. and EU.
Anyway, the negatives are aplenty. There really isn’t enough deal flow in M&A and new or secondary listings that warrant keeping the bigger staff at i-banks. While M&A is not dead by any means and is actually a plus for the equities market, in the sense that there may be some, albeit limited, expectations of potential buyouts, the IPO market (essentially dead) is almost like a double-edged sword, with especially negative implications for those smaller caps mentioned above.
In closing, it appears that being long Japan at this point is not particularly risky, given the already steep drop year-over-year and the potential to at least recoup last year’s highs (~20% upside). However, non-Japanese or institutional investors have some challenges, such as forex, to contend with. Notably, a weakening yen doesn’t bode well for dollar-denominated investment funds. In addition, the investment vehicles available to play Japan are still rather limited.