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SCMP Reporter

MIKI Sugimoto, a keen student of the financial world, hopes she is witnessing Japan write its own unique chapter in the annals of history.

 The assistant fund manager at Newton Investment Management has seen the beginnings of Japan turning itself from a stodgy, bureaucrat-led economy into a dynamic free market.

 'I guess I lead quite a sad life in the sense that my [pastime] is reading financial books, I don't read any novels. I'm afraid I'm boringly fully dedicated to my job,' said Ms Sugimoto.

 While she has been based in London for years, Ms Sugimoto keeps in close contact with her home in Japan through calls to family and friends, as well as through reading financial reports.

 They all tell her about the many different ways Japan is going through the sometimes painful changes in the way it does business. But those changes should reward long-term investors, she believes.

 'For me it is all tied to the bank credit cycle,' Ms Sugimoto said. 'We had a huge credit bubble in the 80s. It was so large the banks spent most of the 90s trying to fix it. Unless that gets fixed I don't think the economy can go to the next stage.'  But the banking mess was at last being slowly fixed, she said, after years in which bankers and the Ministry of Finance were in denial.

 During the earlier part of the 90s, Japanese banks tried to grow their way out of trouble at home by extending loans to the rest of Asia. But that strategy blew up in their faces with the Asian crisis.

 'The banking sector problems reached a climax when Yamaichi Securities [one of the big four brokerages] went bankrupt in November 1997. Since then there has been a 180-degree turn on policy,' said Ms Sugimoto, who manages the US$136 million Newton Japan Fund along with Martin Batty.

 The wheels of change have ground slowly but last year's formation of the Financial Supervisory Agency (FSA) has been another turning point.

 Analysts were sceptical about whether the FSA would be anything more than a paper tiger, given that its rank and file was largely drawn from officials at the Ministry of Finance which had been rapped for too-cosy ties with bankers.

 But Ms Sugimoto had an insider who saw it differently. 'He said they didn't want to repeat the same mistake as happened at the Ministry of Finance,' she said.

 'The agency was set up a year after the Ministry of Finance had scandals and a lot of people arrested. They have done quite a good job in terms of whipping the banks into shape. Two of the larger trust banks have been nationalised and this has put a sense of emergency into the bank managements' attitude.'  Now that the taboo of the takeover or the shutting down of banks has been broken, minds have become focused on the need to compete and make profits to survive.

 That new thinking has also been gradually erasing the concept of the bank as a 'utility' company which dishes out loans whenever it is told to by its crony companies in the real sector.

 More attention is being paid to credit risks as banks finally face up to dealing with a hefty burden of bad loans.

 The Ministry of Finance, once scorned by analysts for the 'ridiculously' low figures it put out on non-performing loans (NPLs), is now seen as a credible institution again. Industry-wide it puts NPLs at 16 per cent of all lending, a formidable task to deal with. But Ms Sugimoto believes steps are being taken.

 '[The solution] to the problem is far from complete, it is just starting to be addressed, but the stock market is a discounting mechanism, so in some ways a first step is very important,' she said. 'If you waited until all the non-performing loans problems have been [solved], you will have probably missed most of the best part of the market.'  With banks more tight-fisted, companies are learning they have to 'pretty themselves up' for investors and sell themselves on the market. Said Ms Sugimoto: 'Not all the companies but some of the very clued-in companies have realised that they don't have unlimited access to the bank now for loans, and they are learning to see equities as a very important source of funds. Now it is very logical for them to restructure.'  Ms Sugimoto was fortunate enough to buy into ailing car-maker Nissan before it did the ultimate in restructuring by bringing in a foreign equity partner, Renault.

 'I'm quite keen on Nissan actually. We bought it right at the beginning of the year. In terms of the engineers, they have top quality, but they have very poor financial management,' she said.

 Even though Newton has reduced its position by taking profits after seeing the stock double, Ms Sugimoto thinks the Nissan recovery story is just starting, with the man who turned around Renault, Brazilian Carlos Ghosn, starting work in Tokyo.

 It is not just older companies restructuring that make the Japanese market attractive, she said, but the new companies which will spring up in the next few years as the country catches up in the service sector.

 The number employed in the sector in Japan grew to exceed that in manufacturing only in 1995, a full 10 years after it happened in the US.

 Ms Sugimoto highlighted growth areas as the gradual privatisation of health care, the software and Internet industries, and companies providing out-sourcing services.

 Perhaps most interestingly of all, she can see the changes going on in Japan at an individual level, with winners and losers and big changes in attitudes.

 '[People] like my father, 55 upward, they have really mostly retired, they don't have any mortgage any more. They are enjoying the benefits of their pension and they have large sums of savings. For them, if the economy is getting slightly better and sentiment is improving, they are ready to spend,' she said.

 'But the guys who are in their 40s and early 50s, they are really suffering. They are in mid-career and their company is being restructured and they haven't paid off the mortgage.

 'The people below 25 have a very different mentality. [They] have seen their parents being restructured or made redundant. They do what they want to do and don't feel they have to work in a large company for a lifetime.

 'I think it is quite encouraging in the sense that they are willing to take risks and initiate their own businesses and investments. The entrepreneur spirit has been lacking in Japan but it is getting there.' 



Banking on the new face of Japan