Slow burn

I WAS INITIATED into the Japanese investment-banking scene in a murky Tokyo izakaya in early 1988. Selling Japanese stocks to international investors was a new game – foreign securities firms had been permitted by the authorities to buy seats on the Tokyo Stock Exchange only two years earlier – and everybody was learning the rules as they went along. Or making them up.

‘No, no, you still don't quite get it,' my boss insisted, shunting aside his glass to create more space in which to gesticulate. Beer slopped up and over the edge of the glass, forming a little pool on the table. Around us, waitresses in bright blue and white happi coats weaved between the tables and emerged from clouds of cigarette smoke with trays of sashimi and tofu. Eda-mame shells lay scattered between the plates and on the floor.

‘Look, in this business, there's this big trough of money, right? You've got to stick your snout into the money trough and keep it there! You plant your elbows like trotters in the mud, get your head down and snuffle, snuffle, snuffle! Every now and then, other little pigs will grab your hindquarters and try to drag you squealing from the trough, but you can't let them.'

Imposing, blunt and prone to espousing politically incorrect views with unashamed glee, James was an Englishman ten years my senior who had been transferred from his firm's London office, having found himself in stockbroking after studying particle physics at Cambridge and in Moscow. Ebullient but cynical, he didn't suffer fools and held himself and those around him to a high standard.

I spoke Japanese, but otherwise knew precious little. This saved me, as it turned out that some American with an MBA had also interviewed for the job. ‘Give me the Aussie guy,' James growled at the human-resources team. ‘I might be able to do something with him.' He took me under his wing, trained me and kept me sane.

From the window of our office in Akasaka, Mt Fuji could be glimpsed to the south-west when the occasional typhoon sluiced away the haze pumped out by the paper factories in Shizuoka. On the thirty-ninth floor was a bar next to a glitzy home-fixtures showroom featuring the latest shapely multicoloured toilet bowls with heated seats and electronic control panels, and automated bidets with hot-air dryers. After work we would sip our beers and admire the porcelain. Perched on one colleague's desk was one of those over-the-head rubber Halloween masks. This one was a Mongol, perhaps Genghis Khan: wispy facial hair, topknot. Sitting there it looked uncannily like a severed head. Take no prisoners.


I WAS TWENTY-ONE and had already been living in Tokyo for two years. The asset-price bubble of the late 1980s was inflating quickly, fed by low interest rates, aggressive bank lending and euphoria, but I wasn't conscious of it at the time. I was high on Japan and a youthful fervour for the exotic. Not until later did I perceive the extent to which Japan was high on itself. For me it was a can-do kind of place, where anything was possible. Disbelief is never too difficult to suspend. If stock markets teach us anything, it is that.

Across Minato-ku in central Tokyo, crude hand-painted signs hung on tiny dilapidated cottages, around which all surrounding land had been acquired and cleared for redevelopment: Tochi wa uran! I won't sell my land! The ji-age merchants – standover men who tried to bully landowners into selling – persevered anyway. In Yoyogi Park, hundreds of Iranian men, many of them in the country illegally to labour on construction sites, would congregate on Sundays. On weekends, I joined a group of other Australian expats in games of Australian Rules football against teams fielded by a couple of local universities. The young, fit Japanese guys ran rings around the older, fatter Aussies, who had been out drinking in Roppongi the night before. But we, the recent arrivals, were taller and by marking above their heads we held our own.

After university I had briefly been a reporter with a Japanese wire service but quickly became disillusioned with the work. It was all speed, not much creativity. At the press clubs at the Tokyo Stock Exchange and Bank of Japan, where I was assigned, I was surrounded by rumpled, perpetually exhausted Japanese reporters who hung out at their desks reading tabloids or manga until 8 pm, having filed their final stories for the day four hours earlier. When they then went out drinking I asked them why they didn't go home to their wives and families. They laughed, amused at my ignorance of the evening habits of sararimen.

Each weekday, a huge electronic stock-price board glowed like an idol gazing down over the press room. Share prices that were up that day flashed green; those that were down flashed red. The board was a sea of green nearly all the time and I was enthralled. Japanese corporations were on the brink of taking over the world, so I decided I had better find out how they were doing it. I had struggled in economics classes at university, but this was different. The stock market was the real economy in action: living, breathing, throbbing. I wanted in. That I knew absolutely nothing about stocks meant I got my wish.


WHILE WESTERN MARKETS struggled after Black Monday, the Japanese stock market took only six months to recover the losses incurred in October 1987, and then kept rising. Analysts whose stock recommendations went up considered themselves geniuses. Portfolio managers congratulated themselves when their funds posted big gains. Equity salesmen could pick spurious stock ideas from the dirtiest, raciest tabloids and puff out their chests as the phones kept ringing. When success is so easy, human beings lose sight of their limitations: hubris triumphs over humility. Most of the Japanese salespeople made no attempt to hide their contempt for the analysts, who they considered superfluous and a drain on the bonus pool. I was not only foreign but young and inexperienced as well, so I was pointedly ignored, not significant enough even to merit disrespect.

The Japanese companies whose activities we studied had little interest in shareholders' opinions and were not inclined to ingratiate themselves with anybody beyond their main commercial lender or local stockbroker. Employees, clients and suppliers ranked higher on the pecking order; investors were like pesky gnats. A quasi-socialist system in capitalist drag.

Our conversations were entirely in Japanese but we rarely spoke the same language. I would thrust with a question about a firm's plans to raise its return on equity. The company representative would block or parry, asking if I could use chopsticks or liked Japanese girls. We were tolerated but not welcome, like distant relatives who invite themselves over and stay too long.

Some of the younger investor-relations men opened up, though, especially if I plied them with liquor. One myth soon exploded was the idea that Japanese companies were somehow collaborating under the banner of ‘Japan Inc.' to gain an advantage over western competitors. I discovered that Japanese companies' greatest rivals were each other, and much of the time there was no love lost.

‘I despise Nintendo,' growled a representative of a major electronic component manufacturer as we sipped our fourth bottle of sake in a dim Kyoto bar one evening. His necktie was askew and his pink cheeks glowed. ‘At least the stuff we make is used in things that improve the quality of people's lives: TVs, phones, cars. All they do is turn kids into lazy zombies, and they make billions doing it. Parasites.'

The clouds began darkening as the stock market approached its peak, in December 1989. Valuations were already stretched to ludicrous levels. Foreign fund managers had either given up on Japan in disgust or were playing the spurious game because the benchmarks of their international funds meant they had no choice but to try and keep up. The market became less interested in earnings per share or even underlying asset value, and more intrigued by thematic stories that could supposedly lead to profitable opportunities for certain stocks or industry sectors. Investors bought first and asked questions later – mostly in pump-and-dump style. Superconductivity, room temperature fusion, waterfront, geofront: these were the precursors of the internet bubble of a decade later. And then it all went down.


IN HINDSIGHT, THE easiest part of adjusting to life after the bubble was the three-year period through to 1992 when the stock market halved, a process which quickly burned off unrealistic hope, incinerated much of the ego in the atmosphere, then extinguished itself. Fine, I thought. The correction we had to have. The cycle will kick in. And so I waited.

By 1998, Japan was approaching the end of its first ‘lost decade' after the bubble, but the fire under the stock market had yet to reignite. A correction followed each rally, a bit of greed but then more fear, and eventually it became clear that all we had left was a hot ember. After collapsing from nearly 7 per cent in 1988 to virtually nil in 1993, real GDP growth had only once flickered briefly above 2 per cent, in 1996. By early 1998, the stock market was back at its level of six years earlier and later that year would sink to yet another new low. Prime Minister Hashimoto had hiked the consumption tax the previous year, throttling a nascent recovery and knocking the country back into recession. The banking system was basically insolvent.

As the years passed, I barely noticed my expectations being lowered. It was an insidious process, being ground down, conditioned to hope for less as the business cycle was smoothed out. Japan was rotting under the surface.

I loved the work but disliked the job. The research was absorbing. I learned how a semiconductor chip works and how a hard disk is made, why the shelves at 7-Eleven were always stocked no matter the hour, which textile companies were diversifying successfully into plastics and which just made denim fabric and fire hoses, why Japan's biggest warehouse operators are really property-leasing companies and how a Japanese trading house makes money (you think it merely trades?). If the stock market wasn't often up, there was still plenty of fodder for my curiosity. I was like a little boy on the floor surrounded by his toys, oblivious to his mother calling him.

The job, though, required much more. An equity analyst needed to be something between an evangelist and a stand-up comic: knowledgeable, sincere and, above all, entertaining. To be paid, analysts had to sell, had to earn. All the knowledge in the world was useless if you weren't well ranked in the annual analyst survey, in which fund managers voted for those analysts they regarded as most helpful or influential. Institutional investors looked at the poll when allocating their commissions to brokers, and corporations looking to sell shares or bonds sought the bank with the highest-ranked analysts. Unfortunately, presenting to clients bored me. So did phoning them, lunching with them and drinking with them. Selling the information wasn't half as rewarding as acquiring it. Aware that I was not likely to succeed as a top-ranked analyst, I made a fateful decision in 1996: I went into management.


TWO YEARS LATER, I was rapidly approaching burnout. I had now moved firms twice since 1988, a mercenary with an Excel spreadsheet, and was head of a department of about forty analysts and support staff at yet another European investment bank. I was a resource allocator, dispute mediator, recruiting agent, kindergarten cop, bum-wiper and whip-cracker. I hated it, weary of the politics, appalled at how much certain individuals thought of themselves and how much the bank felt it needed to pay to retain them.

‘And so,' I said as the door of my little office clicked softly shut, ‘this year the bank has decided to award you a bonus of two hundred and fifty thousand US dollars.' Kohno sat motionless but I could tell his mind was working. His dark eyes were unmoved behind thick-rimmed glasses. He was doing the maths. Was it more or less than he was expecting, more or less than he could get from a rival bank, more or less than he wasentitled to? Should he appear aloof and unimpressed in the hope that he would get more? Perhaps the bank would cough up a bit extra if it thought he might defect to a competitor, but was it worth alienating the firm? How much was he prepared to piss me off?

After a moment, he mumbled, ‘Uh, okay,' and permitted me a small smile before leaving. I realised he had not thanked me, and felt unutterably depressed. Money emboldens, strokes your sense of self-worth, especially if you have little of either to begin with.

I felt my sense of reality dissolving when I was required to mediate a dispute between a Japanese analyst and her assistant. Seated beside each other, the women despised each other so much they communicated only by email. Neither party wanted peace, only victory.

‘Stop whining,' James would tell me over beers after he left the finance industry to run his own internet and media company, in 1996. ‘Get your nose back in the trough.'


LIFE IN TOKYO in the late 1990s hadn't changed all that much, but the smaller regional cities that I would occasionally visit for company interviews were withering on the vine. Bridges had been built to nowhere, international airports erected in tiny regional towns linked by four-lane highways, but now the expenditure was petering out. With property prices in freefall, land-owners no longer needed to hang signs on their houses to ward off greedy yakuza. Golf clubs across the country were going bust. The Iranians had vanished almost overnight from Yoyogi Park, deported en masse after demand for their labour evaporated.

My partners and I quit our investment-bank jobs and established our own money-management firm in 1998. We were tired of bank bureaucracy and, despite the risk, preferred the eat-what-you-kill simplicity of working for ourselves. I loved the solitude, and company interviews were more fun now that I wasn't writing reports for publication.

The internet boom came and went; another head fake, another rally, another decline to a new low in 2003 before Prime Minister Koizumi pumped two trillion yen into Resona, putting a floor under the banking system.

In my little office in Kamiyacho, I was forced to hang up the phone when the ultranationalists charged south along Sakurada-dori, headed for the Russian Embassy, unintelligible propaganda blaring from the loudspeakers atop their huge black trucks. The middle-aged barber in the basement made me uncomfortable with tales of his sex-tourist jaunts to coastal Chinese cities, his sense of entitlement unsettling me. Each month, the fawning representative of the landlord would stop by, ostensibly to hand-deliver the rent invoice but really to keep an eye on me, his enquiries about the likely length of my stay masking a desire to replace me with a tenant in a more familiar or respectable line of work.

By the time Koizumi sang ‘Love Me Tender', in 2006, Japan looked as if it had finally shaken off its post-bubble blues. Many Japanese companies had at last begun to realise they were better off engaging their shareholders. I began to feel empowered.

Over the four years to early 2007, corporate earnings rose to a high, and the stock market more than doubled from its 2003 low as exports boomed on demand from China and the US. Corporate governance improved; dividend payouts and share buy-backs achieved record levels. Company balance sheets piled up with cash after years of restructuring, and foreign ownership of Japanese shares hit a historical peak of 28 per cent.

By then I had my hopes up again. It was the last time.


IN OCTOBER 2008, the benchmark TOPIX stock-price index skidded to a twenty-six-year low, down three-quarters from its peak of nineteen years earlier. Then, I had believed stock markets in developed economies experience peaks and troughs but generally trend upwards over time. Japan turned out to be an exception, with the nadirs of 1992, 1998, 2003 and 2008 all lower than the one before, the market smouldering endlessly but unable to ignite. And no economist or stockbroker can quantify the spiritual rot that set in somewhere along the way.

Our little company – small but perfectly formed, my business partner and I used to joke – had seven employees at its peak but by last year was reduced to the two of us. In October, the decision to liquidate our sole fund was made for us: after ten years' slog, we had to salvage what we could. We resolved to distribute what was left of the money to unit holders, and let the screen go blank.

In March 2009, the Tokyo stock market ebbed to yet another low for the quarter-century – below even the level recorded last October – before rebounding a little. GDP growth for the first quarter of 2009 was minus 15 per cent, the worst result since World War II. The OECD is expecting Japan's gross public debt to increase to double its GDP in 2010.

The Nobel economics laureate Paul Krugman wrote recently, ‘Japan's lost decade – yes, growth was slow, but there wasn't mass unemployment or mass suffering – is actually starting to look pretty good.' True, depression was averted; but mass unemployment and mass suffering still lie ahead if Japan can't address its low return on capital, ossified political institutions and anaemic domestic-consumption growth. An American friend – a long-time Tokyo resident now married to a local – told me Japan has become a ‘can't-do culture'. He's relocating to San Francisco to ensure his infant son has more opportunities than Japanese boys.

Six months have passed since I ended my association with Japan. I'm puzzled by an absence of emotion: some of the stoicism and resignation of the Japanese has rubbed off on me. I am desensitised to crisis. Whatever regret I might have felt is offset by relief that I'm back home and not broke. I'm out.

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