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Japan should encourage activist investors, not tie them in red tape

Third Point's Daniel Loeb has criticized new limits on foreign investment

| Japan
Loeb is trying to look on the bright side.    © Reuters

Hedge fund provocateur Daniel Loeb is feeling underappreciated by Japan's government. And, frankly, the CEO of New York-based Third Point has a valid gripe.

Since 2012, Prime Minister Shinzo Abe has been courting activist investors. Unlike many of his peers, Loeb took seriously Abe's "Japan is back" mantra and his moves to tighten corporate governance and give shareholders a greater voice in boardroom decisions. But events since October have shaken confidence that Japan Inc is interested in real reforms.

It was in October that Abe's government presented plans for changes to the law on foreign investment, cutting the threshold at which overseas investors must apply in advance when buying shares in companies deemed vital to national security. In November, parliament formally revised the Foreign Exchange and Foreign Trade Act and cut the threshold from 10% to 1%.

Tokyo did give a rationale for this change, but in a January 30 letter to shareholders Loeb was dubious. "The bill's stated justification was to prohibit creeping foreign ownership of nationally strategic assets," he wrote. But there was "little evidence presented that such a threat exists or could not have been addressed under existing regulations."

Hedge fund folks are not altruists: they are out to make cash. Sometimes, however, the government should listen to the short sellers.

The clearest articulation of Abe's plans came in September 2013 on the floor of the New York Stock Exchange. "The traditional and inflexible large corporations might need to be roused," Abe thundered. "I would like to turn Japan into an entrepreneurial powerhouse brimming with the entrepreneurial spirit, just like the United States."

Why, then, is Japan Inc. accepting these protectionist measures? As many as 500 listed companies in sectors including gas, telecoms and railways may fall under the new rules. Could more than a tenth of all listed entities bump up against national security? Investors will not know until April, at best, which of the companies they invested in are about to be walled off from significant foreign access.

Confusion deepens with reports that some investors who meet certain conditions might, perhaps, who knows, win exemptions of a nature to be announced later.

Investors expect to confront regulatory chaos in, say, Indonesia or the Philippines, but Group of Seven member Japan? And why now, just as shareholder activism -- which aims to increase corporate efficiency and return on investment -- is finally finding a voice in Asia's second-biggest economy?

Loeb's activism is among the loudest and his bets have had mixed results. Sony, for example, rebuffed calls to spin off its lucrative image-sensor business. That is fair enough, although Loeb does have a good broader point that Sony must rediscover the innovative spirit that helped propel corporate Japan to top global status.

An earlier whack at Fanuc proved more successful. By 2015, the Yamanashi-based robot maker handed Loeb a win when it boosted dividends markedly. The opaque company even hired a shareholder relations unit for the first time.

Others are taking their own swings at Japan Inc. giants. Paul Singer's hedge fund Elliott Management grabbed a $2.5 billion stake in SoftBank. Only time will tell if founder Masayoshi Son takes Singer's advice to change SoftBank's board structure, boost share buybacks and increase transparency for the $100 billion Vision Fund.

But it is hard to argue that Japan needs less outside pressure for change. It needs far more to snap the corporate sector out of complacency.

The last few months have been brutal for Abe's reputation as a reformer. Carlos Ghosn's daring escape from Tokyo house arrest in December reminded investors of the chaos at Nissan Motor. The 6.3% fall in gross domestic product on an annualized basis in the fourth quarter cast doubt on Abe's entire reflation effort.

Nor is his government winning good grades for its handling of the coronavirus outbreak. Given its hesitant and unwilling response, Tokyo's notorious bureaucracy has not been reined in despite Abe's promises. Denial remains alive and well as the government claims the Tokyo Olympics will start as planned in July.

An alleged bribery scandal surrounding plans to bring casinos to Japan suggests the ruling Liberal Democratic Party has not learned from the myriad controversies of the past.

Why, then, toss a bunch of new red tape at foreign investors keen on buying into Abenomics? Loeb, despite his protestations, is trying to look on the bright side. In his letter, he stressed that he hoped the "application of the rule" might "do less to chill corporate governance reform in practice than it seems to do on principle."

Improved governance is vital to increasing competitiveness, creating wealth and raising wages. Now seems a terrible moment to give investors returning to Japan a reason to pack up and leave. If Japan is a "buy" in an uncertain world, Tokyo sure has a funny way of showing it.

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."

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