Sony setting an example

As Japanese Prime Minister Shinzo Abe
heads to the United States this weekend,
the Nikkei stock exchange has provided
him with a triumphant talking point.
When he visited the New York Stock Exchange
in 2013, he urged traders to “buy
my Abenomics” — and buy they have.
The Nikkei, which closed above 20,000
earlier this week, has roughly doubled
since the start of Abe’s premiership in late
2012.
The question now is whether Japanese
corporations can produce the profits
to sustain the rally. There’s reason to expect
they can. But they would have an
easier time of it if they followed the example
set by Sony’s ambitious CEO Kazuo
Hirai.
Until now, Japan’s stock surge has
been driven by monetary policy, the product
of what Stewart Richardson of RMG
Wealth Management calls the “QE trade.”
The trillions of dollars the Bank of Japan
unleashed via quantitative easing boosted
equities, with an assist from public entities
like the $1.1 Government Pension
Investment Fund that were prodded by
the government to buy shares. As Richardson
tells Bloomberg News, central
bank and public stock purchases are “putting
an underlying bid on the market”
and more investors can be expected to follow
the herd to Tokyo.
That’s not to say Abe hasn’t given investors
reasons to be optimistic about the
Japanese economy. He has augmented the
government’s stock-boosting policies
with efforts to encourage companies to
tighten governance, hire more women
and increase wages. By joining the U.S.-
led Trans-Pacific Partnership talks, Abe
has put some of Japan’s most entrenched
interests, like those in the agriculture sector,
on the defensive. The yen’s 30 percent
drop has also touched off a boom in tourism,
particularly among China’s nouveau
riche.
Meanwhile, the exchange rate is propelling
corporate profits to all-time highs.
Earnings of the nearly 200 companies that
were Nikkei members back in 2000 totaled
an estimated $139 billion in the fiscal
year that ended March 31 — a huge
increase from $67 billion in 2013 and $49
billion 2012. Estimates for this fiscal year
put Nikkei profits at $160 billion.
But Japan’s corporate leaders — and
their investors — should tread cautiously.
The Nikkei’s gains are now running ahead
of both corporate and broader economic
fundamentals. Wage gains remain stingy,
a sign Abenomics is boosting little more
than asset prices. In March, household
spending dropped 2.9 percent from a year
earlier, the 11th straight monthly decline.
Exporters face increasingly grim prospects
as China slows, U.S. growth underwhelms
and European faces another
round of its euro crisis.
To catch up with the Nikkei, companies
need to reduce bloat, improve transparency,
and focus on their core competencies.
They should also upend the traditional
hierarchical management structures
that often prevent good ideas from getting
to company leaders.
Sony is a great example to follow. Unlike
its longtime competitors Sharp —
which now finds itself angling for government
aid — Sony is now enjoying the
fruits of restructuring. In recent years, Hirai
exploited the cushion afforded by the
weak yen. This wasn’t just a matter of cutting
costs. Hirai sold Sony’s PC business,
overhauled its TV operation, and pruned
its smartphone lineup. He also moved
some operations outside Tokyo to save on
rent and focused more closely on China as
an export market. Now Hirai is focusing
on mentoring the next generation of designers
and programmers, and encouraging
them to dream up the industry’s next
game-changer.
There are clear benefits to prioritizing
innovation and competitiveness in this
way. Last week, Sony raised its profit
forecast for the second time since February.
Its annual earnings more than doubled
to $567 million in the fiscal year that
ended in March, compared to the $393
billion analysts expected and more than
triple its February forecast.
If more companies followed Sony’s
lead, Abenomics would have better odds
of succeeding. A thriving corporate sector
would create the jobs, higher incomes and
new economic frontiers Japan has been
lacking for two decades. And Hirai has
proven it’s possible to initiate big changes
in corporate Japan, even when a weak
yen, and a surging stock market, have
taken the pressure off.

*The author is a Bloomberg View columnist based
in Tokyo and writes on economics, markets and
politics throughout the Asia-Pacific region.

by William Pesek