Interviews (Alexander Kinmont)

Alexander Kinmont
Alexander Kinmont graduated from the University of Oxford with an Masters Degree in Literae Humaniores (Latin and Greek Literature and Ancient History). He is fluent in Japanese.

Interview: March 1, 2004

You studied Classics at Pembroke (Oxford University). How did you go from literary analysis to finance?

At the time the City was a rather different place. It was considered not only natural, but in some circles desirable, that a person should be properly educated even if they were to spend their time involved with the arcana of finance. The greatest loss London has suffered as a result of the “Wimbledon” effect is the loss of general perspective that goes with having the markets dominated by people who are more or less uneducated beyond narrow competence in technical subjects.

The greatest advantage of classics—I did literature and history—is that it constitutes a perfect inoculation against the concept of progress in human affairs. This has important practical applications—for instance, all that “New Economy” nonsense was credible only to those trained in technical subjects. No civilized person would fall for it. But it is also true of classics that it breeds intellectual arrogance, and thinking oneself cleverer than the market is usually a quick route to poverty.

How did Japan become the focus of such energies? Was the country an academic interest or (at the time) just a great place to make money?

By accident. To be honest I had been interested in Japan as a child, mainly on the principle that if they didn’t teach it at school it was bound to be more interesting and worthwhile than what they did. It also helped that my father was interested in Chinese and Japanese art (he was an art historian) so we had quite a few books on Japanese art and architecture around the house. But in terms of employment, it was really an accident, a result of a Japanese company’s being the first place to offer me a job!

In 19 December 2002, you wrote a now-famous equity strategy report entitled “The irrelevance of Japan.” Could you summarize its main thesis for us?

Ah….what I intended it to say and what it has been understood to say are a little different. The main idea is that Japan’s post-1998 performance—in market terms, in the area of policy, in the area of corporate management—has been so poor that the true scale of its comparative decline within Asia is now on the verge of becoming explicit.

There is, in the mind of most people concerned with Japan, an implicit assumption that not only is Japan the centre of attention but that it ought to be. Yet Japan actually offers nothing, in the way of a “model” or in the way of an intellectually interesting or important, perspective, to the rest of the world. This is very different from the 1980s, when people did look to Japan as a model. I suspect it is now far less a source of interest to non-specialists than we realize.

As a result of this implicit bias among specialists, we tend to see Japan as separate from the rest of Asia and the rest of the world. My intention in writing the piece was to point out that a “Japan only” approach was no longer an intellectual invalid way of considering the question. Nor is it conducive to making money.

What sparked its publication?

A series of things. I spent a lot of time late last year with my colleagues who cover the rest of Asia. I also went to China for the first time since 1989. In particular, the contrast between the energy of Shanghai—which reminded me of Japan in the pre-bubble 80s—and the stagnation of Tokyo was disconcerting. But it was also a shock to see how big Asian companies more generally had become relative to their Japanese competitors.

Were you surprised by its reception? With a title like “The irrelevance of Japan” do you think its message was easily misunderstood by the majority of Japan watchers?

Perhaps, but it is a constant source of surprise that the reader’s view of what one has written is not one’s own. At the same time, stock-broking is a commercial enterprise—and the title determines whether people read further.

I’m not really sure of the nature of the reaction, beyond the fact that it appears to have been unusually widely read. This suggests in itself that some chord has been touched. If it has been misunderstood, or if a point has been missed, it is that the piece was aiming at validating a “Japan in Asia” approach and invalidating a “Japan only” approach, rather than saying anything about the absolute level of the market in Japan.

In addition, I have problem with “Japan watching” in general. Too much of it is an attempt to push an ideological line, and too little of it a genuine attempt to comprehend the country. For that reason some people have seen the piece as an ideological affront; others as a personal reproach as it appears to suggest “Japan watching” has no value and therefore they have no job prospects. It suggests a narrow view of the world not to be able to see beyond one’s own interests or ideology.

You write that “today Japan is of no general importance except as a laboratory experiment concerning deflation.” Isn’t that a bit harsh? Is Japan really “irrelevant” except for trading (versus investing) opportunities? How do you make money in Japan?

The point is that the degree of change, or fluctuation, in domestic reality is so small that one’s playing for peanuts. The only moves worth playing are those dependent on external changes. This implies that foreign investors will play the primary, external, move first and wholeheartedly in their own markets, before playing with the fag end of the move in Japan.

I don’t think the judgment is harsh. Put differently, it is only if the US now falls into a Japanese-style post-Bubble depression that Japan will recover general relevance. If Japan becomes a “model case” that can be used to illuminate the US predicament, then practically minded people will be interested again. If not, even though we specialists might remain interested, practical people will give up and move on.

As for the markets, the absence of real investing is not new. It is a natural consequence of “Japanese style management”. Management is not interested in returns, so the fluctuation in returns is essentially accidental, and based on external, macro, variables. Taking the market on its own terms is the important thing. Trying to impose some sort of view of what it ought to be is dangerous. The market is not for investing but for trading.

You compare the Japanese government’s “intellectual sterility and incompetence in elite circles” to 1960s and ‘70s Britain: could you elaborate a bit further? What specific examples come to mind?

An English childhood in that period leaves all sorts of dim memories of the trauma that attended decline—really how difficult it was for educated people to comprehend that the world had moved on. Rereading the history of the period, one is struck by how stale the debate appears. Today’s Japan echoes that period.

Intellectual sterility is nowhere more in evidence than in the debate over monetary policy. According to the current orthodoxy, monetary easing will not work at all, because deflation is allegedly not a monetary phenomenon. But the same people who say monetary policy cannot work argue that monetary easing cannot be tried because successful monetary easing would refloat companies which deserve to die. So which is it? On the one hand the effectiveness of monetary policy is being denied; on the other it is being asserted.

Another example is the absurd degree of interest taken in keeping bond prices from falling. Unless interest rates rise there can be no recovery. This does not mean that raising interest rates would engender recovery—another entirely fatuous view one often hears in domestic circles - but that a change in real growth and inflation expectations sufficient to cause bonds to be re-priced is the definition of a recovery.

The BoJ claims monetary policy cannot work; the MoF claims fiscal policy cannot work; the FSA claims it cannot force reclassification of loans. This sort of bureaucratic passing the buck is natural. But it reduces the intellectual quality of the debate enormously.

While the comparison to 1960s and ‘70s Britain is indeed a bleak picture, this seems to suggest that there are possibilities for a revival of sorts, as Britain experienced its Big Bang in the 1980s. What about Japan? Granted the country had its “Big Bang,” but given Britain’s success in reviving its financial industry, is there realistic hope for a creative and energetic government in Japan or does the comparison break down at some point?

I would like to think that Japan will recover, but I am keeping an open mind. I should also say that I hold equivocal views on Britain’s post-1979 performance. One aspect of that recovery which today receives little attention is the vulgarity in which the country has been engulfed.

There is nothing in Japanese history or culture that condemns Japan to marginalization or decrepitude. There are a lot of micro changes occurring today which, given the right zeitgeist, could be harnessed to promoting a recovery. But the obstacle remains the ruling class—a ruling class which persists in a semi-feudal view of its own populace. For instance, the suggestion that consumption is weak because “people have everything they want,” is somewhat reminiscent of the “let them eat cake” view fashionable in late 18th century France.

I hold the unfashionable view that the Japanese state (a concept separate from the nation) is weak; it is afraid of its own people, because at a fundamental level it enjoys no legitimacy. Weakness leads it into bullying bribing and cajoling its people. When I imagine the Japanese state embodied in a human form, I imagine Mussolini strutting and flouncing on his balcony. The potential positive in the current situation is that ordinary people don’t care anymore about what the state does or says. This is an important step along the way to a change, but I suspect revival is going to take many years.

What is China’s role in all this? You write that “China constitutes a force that changes Japan.” Could you elaborate?

Chinese growth will return the country to a position of dominance in Asia. It already has the nuclear weapons, the seat on the UNSC, the outer trappings of power. Economic modernization completes the picture.

It is also the beneficiary of the magic combination that Japan once enjoyed—open access to the world’s trading system and a fixed exchange rate. As Japan showed in the 1950s-70s this is an unbeatable combination. Look at what happened to the manufacturing base of old, hide-bound economies in that period.

Japan today looks like the UK of the period when Japan was today’s China. Ultimately people get upset with relative decline, but the form their reaction takes can be broadly positive, as it appears to have been in the UK, or it could be very unpleasant and volatile. Benign leadership will be necessary to allow Japan to adjust to the change in its regional status that is just on the verge of becoming explicit.

The scale of the policy challenge now faced by Japan can be likened to that which faced China when it opened up to market forces.

You mention that Brookings Institute closed its Japan operation, and that an “informed opinion on Japan is no more than a luxury.” What then, in your view, does the general investor need to know about Japan?

That the best way of making money is to do in Japan what one is doing elsewhere. For instance, if one likes steel stocks in Europe and the US, one should also buy them here. Almost all moves of significance are global or externally derived. So treating Japan as entirely different is usually a mistake.

You also write that “the justification for much of today’s inefficiency is that it represents ‘a Japanese way of doing things.’ Left unspoken is the codex to this sentence, the observation that “it is Japanese and not American.” Do you really think that it is simple “psychology” and pride that is allowing Japanese inefficiency to continue? How much does culture matter?

Culture matters to artistic endeavors. It matters not at all to the organization of the economy or of companies. Unfortunately post-1960 Japan (the Ampo Riots) was left with very little in the way of cultural totems commanding general respect and slid very easily into the slap-dash habit of thinking about economic or corporate organization as a matter of culture.

There is nothing uniquely Japanese about the current economic structure. Where in Japanese cultural history is there any suggestion that Japan’s ROE should be low? Yet people deprived of other methods of constructing a collective identity can easily be persuaded that certain forms of corporate activity have a cultural content.

It is quite easy for this to present itself as a question of them and us. This confusion has become a serious obstacle to getting companies and the economy going again. My suspicion is that releasing people to imagine themselves in terms more deeply textured than as mere contributors to the creation of Japan as an economic superpower, or as corporate functionaries, would allow for far more thoroughgoing economic reconstruction.

Running with the psychology theme, we thought we would ask a few questions to illuminate (a) the psychology of Japan and (b) the psychology of Alexander Kinmont. Our tool is the standard Rorschach test with a spin. Basically, we show you a few ink blots and you tell us the first thing that pops into your head.

Here’s our first ink blot—what’s your first reaction?
Ink Blot 1: Nikkei 225

Answer:

Despair—the absurd and unnecessary waste of a people’s potential.

Our second ink blot is this: Quickly, what do you see here?

Answer:
a) Gaijin credulity knows no bounds; b) the market always bites back;
c) the world of shadows breaks cover.

Our third image strikes a little closer to home. See anything in the tea leaves?

Voter Trunout

Answer:
If there’s nothing to vote about, why vote? The population is far more rational than many would wish to believe. Since the Ampo riots there’s been essentially nothing to discuss at the higher levels of politics. Perhaps Mr. Kim will change this.

Our fourth ink blot is a combination of two images. When you stare into these images, what do you see for the future?

bar foo

Answer:
Yesterday’s man.
A correct interpretation of the Koizumi period, however, would also give him credit for introducing the worst elements of ‘media age’ politics into Japan.

Our next set of questions are word/phrase associations. Basically, we say a word and/or phrase and you tell us the first thing that pops into your head:

-Real estate prices? The least unattractive asset class in Japan
-GDP? Stagnation
-Bond Market? Tells the truth….no chance of deflation ending soon.
-Eamonn Fingleton? Erik von Daniken
-Bamboozled? Unfortunate
-Japan Revisionism Not the sort of mistake a civilized person makes
-FSA Minister Heizo Takenaka The corrupting attraction of power. A prime example of the rule that scholars should remain scholars and leave the world of power to the politicians.
-Structural reform A political distraction – all about LDP factional squabbles. Easy to discuss in abstract, but who has the right to tell another country’s inhabitants how they should run their affairs?
-Best books on Japan? I’m tempted to say Midnight in Sicily, a book about Italy which a number of people knowledgeable about Japan have read with surprise that everything is so similar. Of the books actually about Japan, my personal favorite is The Nobility of Failure by Ivan Morris. His The World of the Shining Prince is also excellent and Ian Buruma’s work is uniformly good.

At a more professional level, I like, for a variety of reasons, the work of Ide Masakazu, Okazaki Tetsuji and 1940nen taisei by Noguchi Yukio.

At a narrower level still, the two pieces that “get it right” are Joseph Dodge’s valedictory address in the Hibiya Public Library (“the extension of bank credit cannot indefinitely be substituted for the normal processes of capital accumulation”) and Nichigin ya Okurasho no Ocho no bunsek” by Sakakibara Eisuke and Noguchi Yukio (“the preservation of wartime financial controls, together with the failure of the Occupation authorities to reform the financial sector extensively, proved to be of decisive importance in determining the pattern of Japan’s economic expansion”). That’s all you need to know, really.
-Worst books on Japan? Oh dear… .bad books are far too numerous to mention. It is still possible to make statements about Japan which are factually incorrect without fear of contradiction. Almost anything sailing under the colors of “revisionism” is essentially worthless, but especially rotten are those books which allege that we are being deceived by inscrutable Orientals.

OK—our question that we ask all our subjects. What are you reading right now?

Volume 2 of A History of Sicily by D. Mack-Smith. I am also just starting I Vicere by De Roberto, but as it’s in Italian I need a dictionary too often to call it reading.

What book on Japan needs to be written? Will you be writing it?

There are three problems that need to be addressed.

First, the great weakness of commentary on Japan is that it is written in a vacuum. When comparisons are made they are usually with the US. But given that the US is itself such an unusual case in most senses, this sort of comparison is of limited value. The more general idea that intellectual constructs found to be of utility elsewhere can be applied profitably in diverse circumstances is absent. So Japan is treated as if utterly different, even when useful conceptualizations are already available.

The correct comparison seem to me to be with Italy—that is, in so far as any comparison is valid. But I admit that this use of Italy is as a figurative and atmospheric key to unlock deeper insights, rather than as a straightforward comparison.

Second is tone. It is possible to love something which has flaws. In writing about countries other than Japan, writers convey a deep appreciation both of that country’s failings and of its qualities. This balance is absent in much work on Japan.

Third is the most difficult. I can only approach it with reference to Italy. We know, because of the work of the Palermo Prosecutors and the Andreotti trials, a very great deal about the true nature of politics in pre-1992 Italy. We know that the surface presented to the world was no more than a theatrical production.

We do not yet have the hard facts here in Japan. But, using ‘know’ in a slightly different sense, we know enough to be able, like Pasolini in 1974, to say: Io so. Ma non ho le prove. Non ho nemmeno indizi. (I know. But I do not have proof. I have no clues.)

Such is the state of affairs today in Japan. A careful observer can see from time to time where the shadow world obtrudes, and can impose a pattern upon those developments, yet can prove nothing. Without descending into the depths of dietrologia, it is hard to write usefully about Japan without reference to this facet of national life, yet in mainstream comment it is marginalized and ignored.

As for writing, the grimmer, deeper, reality of the situation can only be grasped by an artist (as was argued by Pasolini and Sciascia). While dimly aware of that reality, I am not sure I am artist enough to grasp it or convey it. Yet, at the same time, I would be unsatisfied to be able to offer a merely factual account of what we know. For that reason I have written nothing.