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Noriyuki Morimoto's Blog

Is TEPCO Holdings worth investing in?

Mar 25, 2019
byNoriyuki Morimoto

Stocks can be objects of speculation, and also be assets to invest in. Then, what is the requirement for a stock to be eligible for investment? The answer is that its uncertainty can be measured in a reasonable manner. Uncertainty is inevitable for any business, but when that uncertainty cannot be rationally measured, the stock price can easily fluctuate due to arbitrary expectations: it may be interesting for speculation, but hardly becomes an asset to invest in. For reasonable measurement to be possible, uncertainty must be manageable. If you can manage it, you are obviously able to measure it. If it cannot be measured, some management method must be devised under the that premise. The risk of an accident at a nuclear power plant is not completely excluded under the highest degree of safety standards, and it is impossible to estimate the amount of damage resulting from an accident. Therefore, it is a typical case of unmeasurable uncertainty. That is why the ultimate responsibility of the government has to be stated by law. So long as the law is functioning, unmeasurable uncertainty is placed under manageability, and TEPCO Holdings could become worthy of investment. But is TEPCO Holdings still eligible for investment? Under the political uncertainty around the future of nuclear policies, it seems that the uncertainty of nuclear power projects has lost its manageability. TEPCO Holdings is a listed company: the Tokyo Stock Exchange is not an organization that determines the value of the company’s shares, but it simply had to allow listing to continue as long as formal standards were met. Being listed means it is automatically included in the calculation of the Tokyo Stock Price Index. Once included in the index, it is included in the portfolio for index investing. This shows that TEPCO Holdings rightly stands as an asset to invest in...But isn’t this a faulty logic?

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Investment principles learned from Japanese antiques

Mar 11, 2019
byNoriyuki Morimoto

There is a book published in 1953 called "Secrets of Investing in Antique Art". The author's background is unknown, and it is the type of book that second-hand bookstores sell at a discard price. However, surprisingly, it is a well written book. The impressing part is its analysis of the difference between art antiques and other assets like securities as investments: every antique item is unique without a general/objective standard of price, and they "do not generate offspring (interests, dividends, rents, etc.). It is a very logical and well organized observation. Given that art antiques do not generate offspring, investment income is simply generated from increased prices. Therefore, the question is what kinds of art antiques tend to raise prices in the market. One factor is "what rich people want". According to the book, "High artistic value does not always translate to high market price: value and price do not always match." This has to be called a fundamental principle of investment. The next factor is "general perception". Naturally, the better something is known by the public, "the wider and stronger the demand," and "that demand tends to last over a longer period." Then comes "things that are regarded as necessities". Art antiques are not essential for everyday life, so they will not raise their price due to daily necessity. However, some of them have an element of necessity. For example, tools for tea ceremonies: the tea ceremony remains a way of socializing in modern life, and vintage items are preferred in its setting. It is mentioned that there is reliable demand for old tools for use in modern-day tea ceremonies. And the most interesting part in the book is its novel viewpoint on "things with a modern aspect". Even in antique art, highly popular items are those "equipped with a timeless quality that permanently embodies modernity." In essence, the book says that art antiques can be valuable investments because they are currently backed by solid demand in the society, and can be expected to remain so in the future. This theory generally holds as the basic requirement of all investment assets. In order for something to be eligible for investment, it has to be backed by breadth, strength and sustainability of demand.

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Aging Shochu and the Essence of Investment

Feb 25, 2019
byNoriyuki Morimoto

There are many things in the world whose value rises over time. For example, shochu becomes more expensive as it ages. Suppose I am a producer of shochu whose annual shipment is worth 100 million yen. I’m hoping to get out of ordinary low-priced shochu and switch to products aged for 10 years. The simplest way for this is to stop shipping for 10 years and resume with the aged products 10 years later. However, then my sales would be zero for 10 years, and I can’t make a living. So, as I’m currently breaking even, things would work if I can finance the annual expenditure of 100 million yen including living expenses: 1 billion yen in 10 years. If I borrow 100 million yen at an interest rate of 7% per annum for 10 years, and repay the principal and interest at once, the lump sum amount is about 200 million yen. That means that even if I pay a 7% interest rate, if I can sell the 10-year-old product at least twice the original price, there is value in the business. Generally, business makes sense as long as the expected value of the asset price growth rate exceeds the growth rate of the debt. And whatever functions as a business generally can be constructed as a target for investment. No bank would lend up to 1 billion yen, under conditions as favorable as lump sum repayment of principal and interest, to a small shochu producer with annual sales of 100 million yen, with shochu as collateral without applying an assessment rate. Enter the investment fund. If the price of shochu is more than doubled in 10 years, the fund would be able to return 7% or more to its investors. The source of investment returns is the profit of time. Because time increases value, the investor must buy time. To buy time is fund procurement as seen from the shochu producer's point of view, and provision of funds from the perspective of the investor. Investment is to give the profit of time. And the price of time is the rate of return.

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The Beloved Japanese Lottery

Feb 12, 2019
byNoriyuki Morimoto

Selling lottery tickets is a crime by law. The reason why this crime is committed openly is because it is exceptionally legalized by the Lottery Ticket Act. The rationale of legalizing lottery is its purpose of financing local governments, which serves the public interest. The Lottery Ticket Act limits the seller of lottery tickets to local governments, and its purpose to financing local administration. Lottery has a long history and is widely accepted by the public as something that offers dreams to commoners, and since it is culturally established, the Lottery Ticket Act utilizes it as a way for local governments to raise funds. So, how much money is actually raised by local governments? According to the "the use of revenue and social contribution" in the official website of public lottery, the actual revenue in fiscal 2016 was 845.2 billion yen, of which 334.8 billion yen, or 39.6%, is "provided to prefectures and 20 designated cities for activities including public projects." Meanwhile, 395.9 billion yen, or 46.8%, was distributed as prize money, and the remainder was expenses etc. In other words, purchasing 10,000 yen worth of lottery tickets means that 1,300 yen will disappear in expenses, 4,000 yen will be donated to local governments, and 4,700 yen will be casted for a pure bet with zero expected earnings. A bet with no expected earnings is the same as a 50-50 chance as in cho-han gambling using dice. In the case of the lottery, the expected revenue, which multiplies the prize amount by the weight of the number of tickets, is zero. That the expected revenue is zero in the essential part of the bet means that the expected revenue is negative when considering the share of the organizer. In the case of the lottery, the expected revenue will be minus 53%. Then, why does lottery sell? According to the official website, in the survey of motives for purchasing lottery tickets conducted in April 2016, the top motivations were "winning prize money" (61.9%), "to dream big" (42.5%), "for entertainment" (32.9%), and "because it’s fun whether you win or not" (32.9%). The reason lottery tickets sell transcends economic rationality to the expectation and entertainment of "dreams".

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What’s missing in Japanese entrepreneurship

Jan 28, 2019
byNoriyuki Morimoto

Starting a business is like an adventure. Addressing danger is possible only under the belief that dangers are under control as risks, and therefore there is no danger. This belief is justifiable only when it is backed by essential resources, such as technology, to manage dangers as risks. In that sense, a startup requires a combination of different experts. By placing experts in the right places to conduct effective risk management, the entrepreneur can concentrate on work without taking excessive risks. Belief in entrepreneurship should not be blind faith. It can be established as a belief only when it is backed by solid technology and experience, and is supported by the proper composition of human and other resources. In this kind of belief, the risk is not recognized as mere danger, but is calculated as a possibility and controlled by expertise. A startup is a community of beliefs in which risks are not taken. On the other hand, a startup whose risk is not controlled, a startup which exists by taking risks, cannot avoid accidentalities. In this case, since danger is not calculated as risk, and therefore not managed beforehand, belief is just the blind faith of the entrepreneur, and in many cases, unfounded confidence, fantasy, or a delusion based on dreams. Under such blind faith, it is impossible to create a community with common belief, so the startup cannot procure human resources, funds, or other management resources necessary for risk management. It cannot establish a system that can scientifically control hazards. Therefore, in this case, the entrepreneur has to risk dander. In risking danger, success becomes mere coincidence. In order for a startup to be successful, danger must be controlled as risks, and the structure of human and other resources has to be established to control them. And only when funding such a startup is considered as the last factor can venture investment be considered in the scientific realm. One of the important elements in the success of startups is indeed the entrepreneur's human strength as a nucleus of the centripetal force of the community of beliefs. That is why we can discuss entrepreneurial qualities. But the more important factor is the composition of resources that make up community with common belief, that is, the precise preparation based on the scientific calculations under a rational project concept, and procurement of resources. Many commentaries have been made on startups in Japan, such as the absence of entrepreneurial spirit, the small number of people with the spirit to boldly take challenges, and the difficulty of financing. But in reality, many of the Japanese startups are merely taking danger, that is, going on adventures.

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Japanese companies used to sing company songs

Jan 15, 2019
byNoriyuki Morimoto

In the past, Japanese companies tended to have some extent of a religious atmosphere, singing company songs or chanting business philosophies like mantras. And actually, not only in the good-old days of Japan but also in the modern global economy, a symbol of communal belief is needed for the existence and growth of companies, regardless of whether it seems religious or not. Today, the proper name for that symbol would be brand. Customer reputation is the very value of a company, and it is represented in its brand. That is true even while the reputation of customers is actually largely unfounded, and is something that can be called a myth. The company’s ability to create such myths makes its brand function to support corporate value. And more importantly, myths must be believed within the company as well, as spreading an unbelieved myth to the customer is a fraudulent and insincere act to its customers. A myth can pass as such to outside the company because it is believed internally. Outside the company, the myth is a symbol of customer's trust in the company's products and services. Inside the company, it is a symbol of pride for the company’s products and services. When that pride develops into a responsibility to never betray the customer's trust, it is established as a brand and corporate value. Therefore, brands cannot be maintained without daily innovation and creation within the company. Given the speed of change in contemporary society, as soon as a brand becomes complacent, it will betray customers' trust, and corporate value will collapse. The commitment to never betray customer trust should inevitably lead companies to daily innovation and creation. Faith is faith because it is deepened by a new sense of devotion every single day. Brands retain their myths because they keep advancing and developing through daily corporate efforts. Myths are recalled every day, and their meaning has to be reconfirmed every day. As faith has daily prayers, myths also need daily rituals. Therefore in the past, people in Japanese companies sang company songs like singing an ode.

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Price of a Japanese gourd surging by 6000 times

Dec 17, 2018
byNoriyuki Morimoto

“Seibei and the gourd” is a short story written by Shiga Naoya in 1913. The protagonist of this story is Seibei, a 12-year-old elementary school student who is a big fan of gourds. He obtains a gourd with a good shape for 10 sen, and carefully polishes it. But this gourd is taken away from him when he is found polishing it at school. The teacher gives the gourd to an old janitor. The janitor sells it to an antique shop for 50 yen. The antique shop then sells it at a whooping price of 600 yen to a rich person. This story tells you that something can raise its price exponentially from 10 sen to 600 yen, a 6000 times difference. The biggest contribution to this 6000 times price hike is the excellent trading skill of the antique shop. The shop owner correctly understood the value of the gourd, knew of rich collectors who would willingly pay money to obtain such a good product, and was financially capable of paying 50 yen to the old janitor to obtain the gourd. At the time of buying the gourd at 50 yen, there is no guarantee on how much it would sell for. Nevertheless, the courage to go forward to pay 50 yen based on one’s eye for value is what ultimately led to a successful transaction. Essentially, what led to the antique shop’s great investment was the combination of four strengths: each for valuation, information, finance, and courage. Historical figures who rose to the top in a single generation seem to have had these strengths without exception. However, the price of 600 yen was not created just with the antique shop’s skill. At the very beginning was Seibei, who discovered a good-shaped material and put in the effort to polish it to perfection, creating the gourd’s value. The 600 yen can be broken down into the value of the gourd created by Seibei and the price exceeding its value based on the trading skill of the antique shop, which captured the created opportunity. It was Seibei who had created a valuable gourd. However, without the antique shop, the value created by Seibei would not have been realized in society in the form of a price. The economy is made from the creation and distribution of value: in the course of distribution, value leaves a trail in the form of price. By the way, how was the 600 yen distributed? 550 yen to the antique shop, 50 yen to the janitor, and zero to Seibei, who is actually at a 0.1 yen loss. Although it was probably not Shiga Naoya’s intention to accuse the injustice of this distribution structure.

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Keynes in 13th Century Japan

Dec 03, 2018
byNoriyuki Morimoto

One autumn night in 13th century Japan, a samurai named Aoto Fujitsuna was crossing a river when he dropped about 10 sen worth of coins. Fujitsuna summoned laborers and offered them 3 kanmon — about 1000 times worth what was dropped — to look for the coins, which one of them eventually found. Fujitsuna rewarded this man separately and said before leaving, “If the dropped money is left there, the country’s assets are lost by that amount, but the 3 kanmon paid to the laborers will circulate in society and would not be wasted.” People laughed at his idiocy of searching for the dropped coins by paying about 1000 times the loss. The laborers, excited with the unexpected gain, held a party. The man who discovered the coins boasted that it was actually a lie: he just handed over the coins he already had and pretended that he had found it. One of the laborers who were listening stood up and left, refusing to approve of the misconduct. After the incident, the news of what had actually happened eventually reached Fujitsuna. Fujitsuna found the man who fooled him and under strict surveillance, took away all his clothes and forced him to keep searching the coins. The season turned from autumn to winter, and on the 97th day from beginning the search, all coins were discovered. The righteous man who left the party was also found: he turned out to be of samurai origin but had been living as a commoner due to a certain reason. On this occasion, he was given back an official samurai position. The above is a story in Buke giri monogatari (Stories of samurai faith), which is said to have been written by Ihara Saikaku in 17th century Japan. This story features an advanced theory of capital circulation, as well as an active fiscal policy similar to that of Keynes’. Actually, a significant portion of public investments in Japan lacked clear necessity. However, apart from their direct effect or meaning, the huge amount of money put in the projects were assumed to lead to expansive reproduction of the economy. In that sense, their cause is nothing different from the logic Fujitsuna expressed. The 3 kanmon which entered the consumer economy through the party may have served to boost the economy. But the reproduction in Fujitsuna’s act was not that of capital but that of the class system supporting the rule of samurai. It is very symbolic that the samurai who had been downgraded to a laborer was assigned again to an official samurai position. In reality, the public investments in Japan were also something similar. It cannot be denied that there was certain economic effect as the result of leaving a massive public debt. However, what was the purpose of those countless roads questionable of their utility left alongside those debts? It may have been that their purpose was to protect the old-fashioned ruling system.

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In the past, money had a say in Japanese companies.

Nov 19, 2018
byNoriyuki Morimoto

Money can have more influence than its actual amount. A key practice of the HR department in traditional Japanese companies was to make small amounts meaningful. In other words, by devising various ways of payment based on expense items (e.g. allowances), timing (e.g. advance payment, belayed payment), method (e.g. directly handing cash), form (e.g. provision of environment, provision in kind, treasury stock), they could expect to generate an oversized or additional effect. In hardboiled novels, when a detective pulls out information from someone like a bartender, he would often flicker bank notes while skillfully playing the phycology of his counterpart. This method would definitely not work with just the promise of paying. It is essential to show the cash for it to work. What moves people is not the amount, but the bank notes in front of them. This is a typical case in which money has a say. In the past, there was the case of paying bonuses in cash. There was the idea that even when monthly salaries were paid via bank transfer, bonuses have to be handed in cash for them to bear meaning. Moreover, companies would gather all of their employees and hand the cash over to each person, in front of everyone. It is clear that this ceremony carried more meaning than the actual amount. Apart from money, there was the case of apartments for government employees. They still exist, and are probably called civil servant housing nowadays. The apartments are quite stately, and moreover, despite being in a good location, the rent is inexplicably cheap: it was a very advantageous in-kind benefit. This was possibly due to the special nature of the bureaucratic career, where workers could be relocated to anywhere in the country at short intervals, and also circumstances of housing in the past. But it seems that an even stronger aspect was to symbolize the prestigious position of bureaucrats. For bureaucrats working in Hokkaido, cold weather allowances were provided. I do not know whether it still exists. This allowance was intended to compensate for increased heating expenses, but it seems to have represented a feeling of consolation for hard circumstances. Speaking of comfort, there might be the same aspect in severance pay. In modern enterprises in the global economy, will money not say things as well? Maybe we should give money a say.

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Okinawa and Stamp Speculation

Nov 05, 2018
byNoriyuki Morimoto

There is a strange book with the title meaning The Guide to Make Money with Stamps. It was issued on November 1, 1964 by a company called Kitte Keizaisha (the Stamp Economy Company). The content is nothing of significance. If this book is to be meaningful today, it is not in the content, but in the issue year of 1964. Needless to say, this was the year of the Tokyo Olympic Games. This book opens from both sides. Opening from the back cover, there is the "1965 version stamp investment catalog", with photos of stamps and their prices. For example, the Ukiyo-e series "Mikaeri " is 2000 yen. 2000 yen in 1964 is extremely expensive. This part is called the investment catalog because of its evaluation of "investment value" for each stamp. The investment value of “Mikaeri” ranks the highest, with "triple circles", something like a three-star evaluation. Its definition is "Active buying, high popularity, shortage of stock, price has been rising but will definitely keep going up, should purchase even when found higher than the market price.” Now, when you look at online sites that sell stamps, apparently "Mikaeri" costs about 10,000 yen if it is in good condition. It seems that it was right to give it a three-star. However, looking at the whole picture, while there have been some price increases, others including Olympic stamps are lowering their value significantly. It seems that “Mikaeri” was rather an exception. Actually, in the period from the 1964 Olympic year to the 1972 return of Okinawa to Japan, there was what can be called a stamp boom, stamp bubble, or stamp speculation, which chased the price increase of commemorative stamps. This is the background of the publication of The Guide to Make Money with Stamps. And after the return of Okinawa, the bubble burst. Why did the return of Okinawa matter to stamps? Due to its return to the mainland, the Ryukyus government postal authority was to discontinue the issuance of stamps. This perceived rarity of Okinawan stamps was the reason for the inflow of speculative funds, which caused the Okinawa stamp bubble. One interesting thing is that one of the speculators that set up Okinawa stamp buyers was Kitte Keizaisha, the publisher of The Guide to Make Money with Stamps. This company apparently went bankrupt in June 1973 when the bubble burst.

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Japanese casino legalization and finance

Oct 22, 2018
byNoriyuki Morimoto

It looks like casinos are finally becoming legal in Japan. Casino legalization is a controversial issue with strong arguments on both sides. Supporters argue that developing integrated resort (IR) facilities including casinos would become one of the pillars in Japan’s growth strategy, as it will generate large consumption demand, particularly by increasing inbound visitors. On the other hand, opponents point to social problems such as gambling addiction. Gambling can cause outcomes that run against customers’ benefits, such as addiction and loss of huge amounts of money. Therefore, it is a crime. But even when the act is a crime, if there is a social benefit like financing local governments through public gambling, special laws can be made to decriminalize the act. With the same reasoning, casino legalization is being discussed. The assumption in legalization of gambling is that it produces remarkably high customer satisfaction. That is the source of strong demand, and supporters are attempting to realize social benefits by using that demand. Similar things can be said for tobacco and liquor: considering their health impacts, we cannot deny their aspect of running against customers' real gains, but there exists a very strong demand based on customer satisfaction. Therefore, they can sell even when high tax rates are imposed, which in turn creates a stream of tax revenue. In addition, it is extremely difficult to distinguish between fraud and fraud-like activities. For example, if you believe that a duvet is being sold at a price significantly exceeding its real value, even if you suspect it to be a fraud, there is nothing to be done if the person who purchased it believes the product is high quality because it is expensive. Such shady schemes also work based on their creation of high customer satisfaction. Also, in areas that support modern consumption, such as fashion, food and drinks, entertainment, and so forth, customer satisfaction is formed at a level that far exceeds their critical functions and bare necessities of clothing, shelter and living. Put bluntly, the pathology of wasteful overconsumption has become a driving force for economic growth. However, there are also established areas in this ailing modern society where it is crucial to consider the customers’ true benefit based on necessity, even against customer satisfaction. These are regulated industries including medicine, education, and finance.

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The crisis of Japan's financial industry without risk taking

Oct 09, 2018
byNoriyuki Morimoto

In finance, risk taking is easily confused with risk management. Looking at the actual business of financial institutions, the risks they take are within the scope set by regulations as banking businesses, to the extent that such risks can be taken - rather than should be taken - under such regulations, in a passive, or - by a stronger expression - unaware manner, often merely as an extension from the past. Finance is also a business, and as common business sense, financial institutions should have to determine the unique differentiated scope of their business, identify priority customers, and take the risks that should be taken to create value from the customer's point of view. Such risks have to be strictly defined, and risk-taking must be carried out with awareness. The confusion between risk-taking and risk management is particularly noticeable in Japan. It may be a result of the fact that full-scale financial regulation reform was late to be implemented. Unfortunately, there are no financial institutions that conduct risk-taking with full awareness. However, the Japanese financial industry is now at its ultimate crisis. Moreover, the crisis was not caused by external factors such as negative interest rates. As a result of fruitless interest rate competition, sales of investment trusts and insurance diverged from the customer's point of view, and cost reduction without strategy, their capability of fundamental risk-taking declined consistently. When the results materialized, it had just been a matter of time, although the external environment did certainly accelerate the crisis. Therefore, in recent years, the Financial Services Agency has been strongly demanding financial institutions to take risks with awareness. Certainly, the FSA’ sense of urgency should have been deeply and quietly penetrating the financial world, but on the surface, it seems that the financial industry is hardly aware of this crisis. It’s not easy to provide an answer on how to get out of the crisis. Because it is not easy, financial institutions have not been able to take concrete actions, and look like they have no idea of what should be done. That is the current state of Japanese finance.

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