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Opinion

SoftBank's belly flop will long reverberate in Japan's markets

Overpriced float undermines trust and efforts to re-engage retail investors

Belly flop -- SoftBank's diving debut (Source photo: Denver Post/Getty Images)

The diving debut of Masayoshi Son's big initial public offering is more than an embarrassment for a boastful billionaire. It is a bit of an indictment of the Tokyo financial market and, especially, of some bankers' readiness to promote overpriced stock to investors, including retail savers.

SoftBank's 15% fall on Dec. 19, the first day of trading, was no aberration. Collectively, the aftermarket loss of Japanese companies holding initial public offerings this year is about 10%, says Dealogic.

The $24 billion SoftBank float had the power to salvage Japan's 2018. Stellar demand for Son's mobile unit might have restored enthusiasm for a stock market now decidedly in bear-market territory. It might have lifted the spirits of retail investors heading into 2019. Instead, SoftBank priced its IPO too high. By overplaying his hand, Japan's richest man complicated life for others queuing up to sell shares.

The year 2018 opened with Prime Minister Shinzo Abe's revival scheme poised, finally, to generate results. Six years of ginning up profits with a weaker yen and moves to boost returns on investment were seen paying off as executives finally opened their wallets. A spike in incomes, Abenomics promised, would boost consumption and reflate Japan once and for all.

Not so fast, said Donald Trump. The U.S. president launched a trade war that is slamming China, Tokyo's main customer. He still threatens to impose tariffs on automakers, complicating 2019 planning for Asia's supply-chain networks.

But Japan Inc. has now also done its part to imperil Abenomics. The SoftBank IPO managed to aggrieve retail investors, a wealthier-than-average group which Japanese companies and banks hoped to re-engage heading into 2019 -- and which government officials see as precisely the sort of people who need to start spending again.

Moreover, Tokyo has form. NTT DoCoMo's float dating back to 1998, also burned retail investors, individuals who can have long memories. Son's missteps show that, 20 years on, too much of the old Japan Abe pledged to modernize remains, not least a condescending attitude to Mrs. Watanabe, the mythical Japanese investor housewife, and her ilk.

Son, like countless chieftains before him, let hubris and rigidity get the better of SoftBank's best-laid plans. Son discarded with the conventional price-range model, opting for a take-it-or-leave-it price that proved too aggressive. The big premium Son set over peers ignored the coming entry of e-commerce giant Rakuten into Japan's telecom space. It gave little thought to concerns over SoftBank's relationship with China's Huawei, a gear-maker caught up in Trump's trade war. It disregarded worries over a massive service outage a few weeks earlier. Son, like all too many CEOs of yesteryear, assumed fat cash flow and dividends would cover all manner of sins.

Retail investors have every reason to feel taken for granted. Son aimed more than 80% of his mobile sale at the retail crowd, knowing they could not resist a top Japanese brand promising hefty dividends. Mrs. Watanabe and company plowed roughly $20 billion into the tranche reserved for them, only to see shares debut below the IPO price.

The flop might be less damaging if Japan's other blockbuster IPO this year had not gone awry. In June, online flea market Mercari was heralded as the first of many unicorns to reanimate Japan's animal spirits. Instead, it fell to earth -- losing 30% of its value.

Japan Inc.'s dismal year began amid a parade of quality-control crises from Kobe Steel to Mitsubishi Materials and Nissan Motor, not to mention Toshiba's latest accounting scandal. Then came Trump's taxes on steel (25%), aluminum (10%) and $250 billion of Chinese goods (25%). Next, Carlos Ghosn's sudden and spectacular downfall as head of the three-way Renault-Nissan-Mitsubishi Motors alliance. And now the year ends with Son's "Warren Buffett of Japan" halo losing its luster.

That moniker was bestowed on Son because of his 2000 bet on a Chinese entrepreneur named Jack Ma. The $20 million Son invested in Ma's e-commerce dream was worth $50 billion by the time Alibaba went public in 2014. The benefit of the doubt investors often give Son -- including his nearly $100 billion Vision Fund -- rests on the prescience and moxie of that call.

December's high-profile stumble is a blow to investors who believe in Japan's boldest dealmaker. It also complicates life for other listing hopefuls -- from Apple camera lens supplier Kantatsu to cybercurrency exchange bitFlyer.

Now that 2018 is ending in tears, what might await Mrs. Watanabe next year?

Trouble, unfortunately. Hopes for a rapid rebound from the 2.5% contraction in annualized growth in the third quarter in Japan are belied by external events. China's prospects for keeping growth above 6% seem fanciful. The U.S. expansion that began in 2009 is showing telltale signs of wear. Uncertainty over the U.K.'s plan to leave the European Union and Italy's debt troubles augur poorly for a vibrant 2019.

Recent readings from the Bank of Japan's quarterly "tankan" survey do not exude confidence. In the latest, companies generally expect conditions to sour over the next three months amid U.S.-China tensions. Not a great omen for wage increases or household confidence. And hardly a comforting trajectory for retail investors hoping for a respite from the gloom.

Japanese stocks are still generally cheaper than American ones. The average price-to-earnings ratio of Topix index shares is 11.9 versus 16.8 for the Standard & Poor's 500. But with the Bank of Japan only halfway to 2% inflation, a bull market in new corporate scandals and global storm clouds closing in, Japan Inc. faces a turbulent year.

Topping any list of wild cards for 2019 are Trump's currency policy and demands that Abe negotiate a bilateral trade deal. Trump argues a strong dollar is "killing us" and that both the yen and yuan should rise.

As the U.S. loses momentum, Japanese exporters have every reason to worry Trump will try to manipulate exchange rates for American industry's benefit. Trump's zero-sum worldview, meantime, suggests he expects to roll Abe in any trade talks, adding to automakers' headwinds.

Japanese retail investors have long rushed into IPO's of household-name icons, expecting big opening-day rallies. That strategy mostly backfired in 2018 as the real bull market was in cautionary tales. They will be reading those stories carefully in 2019 -- and keeping their money well away from the market.

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He was given the 2018 prize for excellence in opinion writing by the Society of Publishers in Asia, for his work for the Nikkei Asian Review.

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