TSE’s Saito Offers Strategies to Challenge Global Competition

May 28, 2009

Speaker:
Atsushi Saito, President & CEO; Tokyo Stock Exchange Group, Inc.

Presider:
Shigesuke Kashiwagi, President & Chief Executive Officer, Nomura Holding America Inc.; Director, Japan Society

Atsushi Saito of the Tokyo Stock Exchange visited Japan Society to offer his thoughts on Japan's way forward in a time of global financial turmoil.

Some believe that the current financial crisis demonstrates that market-oriented economies are doomed to failure, Mr. Saito said. But in truth, the crisis came about through "repeated actions of concealment, greed and ignorance" that directly contravene the principles of an open market, which is grounded on "information disclosure, fairness and honesty."

"It seems to me that the current state of the global economy is one in which the gods of the market have been angered and are now exacting severe punishment on Wall Street for having abused market functions solely for its own benefit. In this regard, it seems that market mechanisms are indeed working."

As social entities, corporations have responsibilities not just to their shareholders but to the larger society, Mr. Saito declared. In turn, governments are obligated to regulate corporate life. These principles--"the idea of state capitalism"--are embedded in Japanese awareness and culture, and indeed, the policies of the Obama administration appear to signal a change in direction in the American polity along these very lines.

Despite structural reforms over many years, Japan's exports grew from around 8 percent of GDP 10 years ago to 18 percent today, he continued. The domestic market has languished due to the country's declining birth rate and rapidly aging population. American purchasing power has been supported not by savings but by debt; Japan and China built up ever-larger foreign-currency reserves, and the U.S. current account deficit ballooned. These imbalances were unsustainable, and the fragile equilibrium among the world's economies collapsed, bringing a credit crunch that has become a global financial crisis.

The crisis has brought renewed attention in Japan to the fundamental values of Japanese business life, including "the idea of morals, self-control and honorable poverty peculiar to Japan's culture," Mr. Saito said. "As a result of strict admonitions against the business practice of maximizing its own profit at the cost of the market or expanding operations unreasonably by riding on the waves of transient booms," Japanese firms "have endured through the years by quietly, but simply, maintaining the quality of their products and gaining the trust of their customers." Thus a study by a Waseda University professor counted some 100,000 companies in Japan over 100 years old, of which 3,000 have lasted 200 years or more, equal to the number of 200+-year-old companies in all of western Europe.

This business tradition embraces "the nobility of virtue in human beings through self-discipline," he said. Company insiders monitor compliance with its precepts, and owners derive "a more spiritual feeling of satisfaction" from operating their firms in accord with family ideals of corporate responsibility. By contrast, he said, Western companies rely on shareholders and regulators to watch over corporate behavior and punish misconduct, and the chief measure of performance is not morality and honor but profit.

Progress in economic policy-making and management theory in the West is founded on rationalist inquiry, but responses to the global financial crisis suggest "that the world has grown somewhat tired of this and instead craves some form of irrationality," continued Mr. Saito.

"Increasing exemptions from mark-to-market accounting principles made the real difficulties of the financial crisis indistinct. Massive amounts of non-performing assets are being unloaded" to off-balance-sheet vehicles "in order to expunge them temporarily from company balance sheets, but no one dares to evaluate these assets." Stock prices are beginning to rebound, but "no one criticizes the enormously ballooned balance sheets of the central banks." Efforts to repair the damaged economy proceed "as if currencies have not been damaged," but there's danger that these would-be cures will produce inflation and rising interest rates that will choke off recovery.

What should be Japan's way forward? Mr. Saito asked. "If we cannot rely on abnormal and unsound over-consumption in the U.S., we will need to find new markets of demand," whether domestically or elsewhere in Asia, where China, India, the Philippines and Indonesia "are expected to grow by about 2 percent to nearly 7 percent. In addition to improved literacy rates," these countries have higher savings rates and more substantial foreign exchange reserves "thanks to lessons learned from the Asian crisis" that began in 1997.

"Consumer demands in these markets are unlike those artificially-created secondary or tertiary demands in Europe, the U.S. and Japanese markets. These are instead primary demands of wishing to own items such as that first television set, car, washing machine and refrigerator, and we expect these demands will remain steady over the long term."

"By investing Japanese capital in Asian countries and encouraging their production and consumption, we can prevent the Japanese yen from skyrocketing and maintain a certain level of exports from Japan."

On the domestic front, Japan needs "drastic investment commitments" in health care for the aging, in the environment, and in education, he said. Japanese industry will capitalize in particular on advances in solar power, nuclear power, low-carbon automobiles and water purification.

"It is said that of the total financial assets held by people above the age of 60, ¥150 trillion are excessive savings," Mr. Saito concluded. "By utilizing the tax system to transfer this to the young working population, I think we will be able to become a mature yet growing nation with a secure safety net."

***
Q&A with the audience followed.

As Japan and other Asian countries shift away from reliance on U.S. and European markets to a greater focus on their domestic markets, do you foresee a relatively seamless transition, or something more potentially traumatic?

"It's not easy work," Mr. Saito said. As Japanese manufacturers relocate their facilities elsewhere in Asia, and experienced Japanese engineers are being hired to train workers abroad, there will be increased unemployment in Japan. Yet Japan will continue to work collaboratively with other countries to provide economic aid and to fund business development in countries such as Vietnam, Indonesia and India. China "would like to distribute their currency directly, but fortunately or unfortunately they have a very strict foreign exchange control, so probably the Japanese yen will have much more liquidity in the Asian market," he added.

How will the Tokyo stock market keep its competitiveness against other rising money centers in Asia like Singapore, Hong Kong or Shanghai?

There's quality, depth and transparency on the Tokyo Stock Exchange, Mr. Saito replied. "We are not trying to offer some speculative money play," but a rational system for raising risk capital.

What's being done to encourage foreign companies to list in Japan?

The Tokyo Stock Exchange and the London Stock Exchange are opening a joint venture called Tokyo AIM, geared to smaller growth companies, Mr. Saito said. Trading of stocks listed on the new exchange will be conducted by professional investors only; retail investors won't be able to buy and sell these stocks. Quarterly reports won't be required. Financial reporting can follow either the International Financial Reporting Standards or U.S. GAAP or Japanese GAAP, and disclosure can be either in Japanese or in English.

--Katherine Hyde