Teramento – Taking the wind out of the FSA

Teramento Aquires Sony and Toyota, amongst othersIf you haven’t already heard, news broke a week or two that a small firm based in Kawasaki, Teramento (テラメント) Corporation falsely reported to have acquired a 51% stake in six large (giant) Japanese companies: Sony Corporation; Toyota Motor Corporation; Nippon Telegraph & Telephone Corporation (NTT); Fuji Television Network Inc.; Mitsubishi Heavy Industries Ltd.; and, Astellas Pharma Inc. (ソニー、トヨタ、NTT、フジテレビ、三菱重工、アステラス製薬). The reports were made through the Finance Service Agency’s online electronic database, EDINET, on January 25th, totaling a whopping 20 Trillion yen (20兆円, US$190 billion) of securities filings.

Between the falling Nikkei, rapidly fluctuating foreign exchange rates, French rogue traders, and not to mention the rest of the world suffering due to the subprime mortgage crisis, perhaps Teramento’s head and only employee, Shigeru Yamaguchi, thought no one would notice.  Obviously the six companies who have apparently had their majority stake seized by some small, random company in Kawasaki were going to, and no doubt have been puzzled by Teramento’s filings. Teramoto it seemed grew an impressive portfolio overnight!

Teramento – Tera…who?

It has been reported that Yamaguchi executed the orders through Lehman Brothers Holdings Inc., though no one from Lehman’s has said to have received such instructions.

So, the question on everyone’s lips is, why? No matter which way you look at it, it appears to be an amateurish scheme to draw attention, and one cannot help but think that Yamaguchi will end up as nothing more than a laughing stock. The FSA (金融庁, “kinyucho”) ordered Teramento to submit correction reports by January 28th given that there is no evidence of share certificates issued of the alleged acquisitions, but still nothing has been given. Making false shareholding filings can bring a maximum 5-year prison sentence or fine of 5 million yen, perhaps a bit much for a company with capital of only 1000 yen, but then again, has apparently 100 trillion yen worth of “oil money” at their disposal. While the FSA has not decided whether to treat the incident as a criminal matter, given reports that Yamaguchi has apparently refused to submit corrected reports, the FSA may have no option to pursue such a course of action.

Here is the news clip trying to explain what happened. They interview the owner of Teramento and he denies that his report to the FSA is false. It is quite amusing, although doesn’t shed much light on his bizarre claim:

But will the FSA do so? In what appears to be a very obvious stunt, performed by a man who seems to be in need of mental therapy, it’s the FSA that may end up with more egg on their face than Yamaguchi.

It is Yamaguchi’s actions that have certainly brought forward the issue as to whether the self-reporting system could be used to manipulate the market. While in this instance, the filings appeared online after the market closed, one must wonder what could have happened had the filings been made public during market hours, considering that EDINET filings are scanned regularly for evidence that hedge funds or other buyers are targeting a company, and investors often trade off the information such filings contain.

Given the stigma associated with the aggressive nature of some foreign hedge funds and other private equity groups whom have up until now been foiled in their attempts to acquire large stakes in Japanese companies, it makes for a different perspective on what could happen to the market if local investors decided to go hostile.

The FSA now must go back to the drawing board and review their filing procedures, examining how to control and regulate the self-reporting system. Though in their own admission, they did not have the staff to check every report, which makes you wonder what could happen if companies and individuals wanted to willfully abuse the system, publishing false reports, even far less blatant than Teramento’s, to achieve their own ends.

So while we can all agree that Teramento, involved in the automobile industry, telecommunications, electronics, nuclear power, broadcasting, pharmaceuticals and aerospace, is just a smoldering pile of BS, they have at least taken the wind out of the FSA and their not-so-trusty self-reporting EDINET system. The effect has been somewhat similar to the effect of “Telament” (perhaps the source of inspiration for the company’s name???), a drug which helps prevent cramping in new born babies by breaking down bubbles and taking the wind out of them (a bit of advice for all those that are pregnant in Japan!

16 thoughts on “Teramento – Taking the wind out of the FSA”

  1. The FSA will make an example out of Teramento, but they won’t change any of their procedures. Gaijin influence in Japanese companies is never welcome. This is an “in house” problem that doesn’t have anything to do with foreigners. Japan doesn’t care if foreigners want to invest in their country or not. I think many European-Americans and Europeans do not have any idea how to do business in Japan, which is why they are continuously burned and denied takeover opportunities. You can’t just go into Japan and try to take stuff over without having the proper connections.

    Furthermore, Japanese companies aren’t run for shareholders and profits. They are run for market share. Japan will only deal with foreigners for a piece of interesting market share. If a foreign company wants to do takeover in Japan, I would suggest that they first offer Japan the ability to gain market share where they want. Then they can show Japan that they are interested in a takeover for market share and not for profits. Most European Americans have to take care of their shareholders and make profits which makes Japan an unrealistic investment for them.

  2. End of the road for the Japanese markets already. The country is frankly an irrelevance to the rest of the worlds investors.

    That much was clear at this years WEF in Davos, where the Japanese PM’s “rountable” was one of the least attended events on record. The number of empty tables manned by solitary Foreign Ministry officials was farcical.

    But Japan is complacent and rich enough not to care.

  3. Don’t you think much of the ‘irrelevance’ is caused by the turmoil with the US’s bubbles? Bernanke and his predecessor Greenspan must be losing sleep over their monsters.

  4. The Japanese markets are great because whatever the time of day, there is an external excuse for the poor performance of companies, stocks and policmakers. If not the Yen/$ rate being pushed around by speculators, it must be the weak/strong US economy, or “oil money”, or the perilious Chinese.

    The sad reality is that the Nikkei-225 peaked at 18,000 2 years ago and has only gone into reverse since. Sure, we the rest of the world is now fretting about the US credit crisis but Japan – like it’s revered catfish – seems to have taken fright long before.

    The reality is far more banal. Resistance to foreign capital and foreign players in the market has seen them move to HK and Sing – where as we can see the FSA has sought to extend its reach. Since 2005 the rest of Asia has powered ahead, leaving Japan in the dust and putting paid to the once popular idea that investing in big-brother Japan was the logical way to capture Chinese growth. I think the Chinese shut the door on that idea a while back.

    Meanwhile, people continue to pour good money after bad into 1980s icons like Sony on some deluded pretence that this is a real market, where shareholder interests matter.

    Still, a lovely place to visit. What did the Japanese say about Europe at the height of the bubble; a museum? Well, looks like they are in the same camp now.

    So, to summarise, my view is simple. Japan’s irrelevance is home-grown. The world has moved on and Japan’s uniqueness in Asia has long since faded.

  5. The problem with your theory–at least one problem–is that Japan is such a huge creditor to the US and other trade deficit superpowers.

    Shareholder interests is a misleading term. If you invest across the stock markets you don’t have the same interest as someone who holds a lot in a particular country. Look at the situation with MS trying to take over Yahoo. They aren’t doing so MS shareholders benefit. They are doing it to try and claim back some sort of abstract share of computing they think they have lost to Google. If you were a yahoo shareholder–I mean where it was a store of your wealth–you might welcome this move because your languishing stock will go up and you will get a lot of money from MS. But is it good for the health of either MS or Yahoo?

  6. Ah yes, the old current account deficit canard. Its not relevant because the world works on the dollar standard not the euro or JPY or RMB standard – at least for now. Hence, these “liabilities” borne by the US Treasury and funded by Japan, China and the petrodollar exporters are not really a burden because they are paid back when due in more dollars (not JPY, EUR or RMB). i.e. You lend me a dollar, I pay you back the dollar plus interest in more dollars. You are forced to accept these because you “chose” to lend me in dollars.

    Its called seignorage and like droit de seignur is something Japan is compelled to accept – at least since 1945 – because they were unable to successfully internationalise their economy (open up to perfidious foreigners and allow them to become addicted to yen) in the 1990s. Remember the “Miyazawa plan” for a yen-zone in Asia? Dead duck. Until there is an Asian euro – or at least a RMB bloc – the greenback looks pretty secure (even the euro at these levels cannot remove its role as the world’s reserve currency).

    Ergo, the debt Japan holds is frankly of zero value in terms of exerting leverage or being liquidated. In fact, most of what the BoJ holds are classified by the US Treasury as “non-marketable securities” which are units of credit for the G7 central banks. What does this mean? Remember the old joke about bankers: “if I borrow $10,000 from you and cannot repay I have a problem. If I borrow $10 million from you and cannot repay then YOU have a problem”….

    As for the point about shareholder value. Yes, its true that the MS bid for Yahoo is for strategic reasons (technology control and market share) but those are simply stepping stones to ultimate profitability. That is something Japanese kaisha never manage to achieve. They are always stuck on the stone, never able to step up to profits.

    Moreover, in the stock market the ability of one firm to buy another in an uncouth hostile manner maximises the combined value of both entities – not always true of course, the world is littered with failed mergers driven by vanity and fashions – so that investors (i.e. your and my pension funds and insurance policies) holding a broad portfolio of shares achieve sustained returns. That is the point. For the greater good, companies must evolve or be eaten and reconstituted. This is the main failing of Japan’s compartmentalised capitalism where one part of the bento box is always reserved for a particular filling.

    I remain open to being positively surprised. And of course Japan’s cultural choices are as valid as any other market societies. But its been a long time since the bubble burst and still no phoenix. With the demographic challenge now undeniable its hard to see anything more than gradual fading away.

  7. Really the analysis of ‘Japan passing’ itself is passe’.

    Their political economy doesn’t need a bunch of short-term investing from overseas. It’s self-sufficient. So long as the government can keep selling all those bonds to domestic investors anyway.

    Foreign interests have huge investments in Japan. Whether it is Coca Cola or P&G or all those private equity groups who got paid to take over banks–or Prudential helping Kyoei Seimei to run itself into the ground and then getting to take it over. Ford probably makes more money off of Mazda than any of its North American manufacturers. Etc etc.

    The US is going to come unwound in a big big way. Not Japan. Or if Japan does, it will because good ole American capitalism and hegemony did it in.

  8. I’m sorry, we seem to be talking about different things here. “Their political economy” is lacking seriously in some types of human capital that can only come about from FDI. Problem is, the Japanese HR system can’t mesh with the rest of the world. Any gaijin who’s every worked for a Japanese multinational would tell you the same – Ghosn sama is sui generis. Poor old Howard is having a torrid time at Sony.

    I don’t dispute the anecdotal cases of success, but this is possibly sample bias because as a percentage of total investment (and compared to any meaningful peer) Japan’s net FDI take is negligible. And it’s not all because they don’t need the money. Intra-industry investment is pretty low because of corporate governance (i.e. employment policy) issues.

    Well, we’ve been waiting for nasty Anglo-American capitalism to unwind for a long time but the damn thing just keeps mutating. I don’t dispute your view that Japan’s capitalism is in a subordinate position however – it’s been that way since 1945 – but I’m afraid its already unwound itself during the deflation and hasn’t managed to find its way back yet.

    What’s missing in Japan now is an economic purpose, a narrative, that motivates people. The country feels trapped in a 1980s time-warp.

  9. Japan’s capitalism as rhizomed–to SE Asia and China. Its movements to the US were mostly expensive attempts to appease trade protectionism there. Though it did help GM and Ford to make better cars.

    I’m not really sure what you are talking about Astro, but you sound like a guy who made a bet that the Nikkei would get to 20 thousand before you sold your stake.

    Sony hired Howard to win the DVD standards war. They won!

    It’s true American business culture (exported worldwide through those awful MBA programmes) doesn’t mesh with Japan’s.

    My advice to all those American business majors lost in Japan: shed those Brooks Bros suits!
    They make you look like an American.

  10. BTW, Ghosn seems to have slipped up after he left Japan. As has Mark Fields–the guy who hung out at Mazda and then went back to Ford. Japan made these losers look like winners.
    Sort of like the corporate version of ‘gaijin taleento’.

  11. Just to add my two cents to your discussion, there was talk on a late night news show that with Sony winning the DVD format battle, there is interest building from a Dubai-based government-affiliated fund. While it has been well documented that Japanese companies have had a very negative attitude to the often gung-ho antics of US private equity investors, hedge funds, etc., it is a common perception that government-affiliated funds would not find the same backlash. From the Japanese perspective, these government affliated funds present far less of a threat, with hostile takeovers virtually impossible.

  12. I’m not so sure about how closed, outside of the rhetoric, Japan is to private equity. The PE people came into Asia after the 1997 crisis and bought a lot, including in Japan. In fact, these guys were practically paid to take over banks. That is because they got the good debt on the books (a bank’s money making assets) and got to stick the taxpayer with the bad debt.

    All to appease the American masters, which nationalist conservative governments in Japan have always done–if they can sell it in the name of reform, all the better apparently for them.

    Japan is seeking tie-ups with ME countries for one reason only: OIL. It would not matter how these countries manage their surpluses and invest in countries like Japan, private equity, government equity, sovereign funds etc.

  13. Actually, I have to correct myself. The interest in economic ties with the ME comes down to:
    oil and gas. Japan uses a lot of both and imports it all.

    We also get mineral water from UAE. Nothing like that oasis water in a PET bottle that is produced more cheaply than it would be in Japan (the bottle, not the water).

  14. Importing water from the ME? IN plastic bottles? Amazing! Great carbon footprint on that industry I bet. Are you sure about this Charles? Sounds like a long way to go in the wrong direction….or is “oasis water” something very niche and commands a premium in Ginza bars?

    Interesting that Japan is open to “dumb money” from oil funds. Same reason there is talk of using the MoF’s foreigh exchange reserves to create a Japanese “sovereign wealth fund” who’s principal goal is to support local stock markets. Someone needs to tell policymakers that (a) the purpose of foreign exchange reserves is that they should be in foreign currency – otherwise you create another bubble, (b) yet again they are ready to use tax payer’s money to bail out failing companies for political reasons, and (c) sovrereign wealth funds are meant to diversify overseas not double up on the local economy.

    I agree about the “gaiji taleento” absolutely. The fact that they were viewed as gods in Japanese corporate circles but revealed feet of clay in the big bad outside world merely highlights how low the talent bar is in Japan. You could take a 3rd rate gaijin exec and drop him into a Japanese co. and the results would be equally good. This is Japan’s achilles heel: great craftsmen and engineers, but not enough good managers and leaders able to play the global game.

    Such a pity that Macarthur emasculated the country by removing the ruling elite. Every since then, its been rule by descendants of the peasant class who lack the social authority to achieve change but are able to resist any effort at resurgence by the old elites. Look at how the LDP reacts everytime the scion of an old family attempts to gain power.

    Let’s not get too excited about the DVD story folks. Squeezed between Apple and Samsung, Sony still looks like a sitting duck with too many unprofitable product divisions.

    Oh, and since you asked Charles: having been patient elephant hunters throughout the 1990s we bought the TOPIX at 7900 and got out at 1720 when it became clear that (i) the Chinese were not buying Japanese goods as much as the world thought they would, hence the Hang Seng would break through 18,000 but the Nikkei would languish below that ceiling (ii) the Koreans were the new masters of innovation and content in Asia while Apple was rewriting the playbook globally and (iii) Japanese mom-and-pop investors were more eager to buy Australian kangaroo bonds and euro deposits than supposedly “high-quality, long-term blue-chips” listed on the Nikkei.

  15. Well Astro we live in a world where the PET bottle costs more than the water, shipping, and storage. The Lawsons near where I live still stocks the UAE oasis water. It’s delicious–like all the water in Japan. Something about the place that makes a commonplace thing I never gave a thought to something for everyday conversation!

    Congrats to you on when you got out. I never thought the Nikkei should have got as high as it did the past few years.

    Small time investors know that the only money in stocks in Japan are the elite (you said they were emasculated, but they know their insider deals) who get to buy, for example, Japan Post when that thing lists.

    Japan’s industrial migration to Asia has certainly helped the quality of goods sold in the US.
    And companies like Uniqlo have got the Chinese-made stuff up to the quality of Japan-made.

    I see Apple as a two-trick and a half pony (Imac, Ipod, Iphone). With not much to follow up with right now.

    As for Sony, what sort of outside advice did it get? Sell your insurance division–because it makes you look like GE? I would bet they are glad they held on to it–it actually makes money.

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