Olympus whistleblower shoots arrows into Abenomics

It’s the first and probably only time in my journalistic career I’ll apologise for the brand of my voice recorder.

As you’d expect, ousted Olympus boss-turned-whistleblower Michael Woodford quickly brushes off the use of an Olympus device.

“I have great respect for the products and the people of Olympus it’s just certain characters [I have trouble with],” the former president and chief executive of the Japan-based multinational explains.

It’s coming up three years since the imposing Briton was sacked in a boardroom coup.

He was ousted in October 2011 when he demanded answers over acquisitions, involving companies with obscure shareholdings and shadowy directors, and involving a $US687 million advisory fee described as the most costly in history.

The acquisitions were costly and seemed highly questionable – and so it proved, as the company later admitted to falsifying their accounts to hide $1US1.7 billion of historic investment losses. (For more on the background see Friday’s National Business Review print edition)

He still tells his story on the paid speaking circuit – something which brought him to New Zealand, with the CFA Society – but says he’s not bitter and twisted.

That’s not to say it wasn’t harrowing. In those stressful, uncertain months between his sacking and the abandonment of his attempts to lead the company beyond the scandal, his Spanish wife, Nuncy, would wake screaming at night, he spent £1 million on legal fees in 12 weeks (after which he started writing his book, in case he ran out of money) and British police flagged their phone numbers for priority response, in case of a backlash from organised crime groups in Japan.

Things have settled since but he’s still seen to be somebody who shouldn’t be associated with.

“I do feel sad sometimes and a bit mournful and I spend a lot more time when I’m in the UK in London than our home in Southend because you meet somebody from the company and they literally cross the road to avoid you. That continues to this day.”

Japan's 'malaise'
The feeling over his Olympus ousting might have distilled to sadness but he gathers an enormous energy, which manifests in pointed pessimism, over what he calls Japan’s economic malaise.

“Abenomics, this renaissance of Japan, I’m an enormous sceptic of,” Mr Woodford says.

That may sound like sour grapes, the bitter words of a man corporately executed, but it’s worth listening to him – international institutions now pay for his advice on investing in Japan.

His advice boils down to this: “I think Abenomics is a classic asset bubble that’s going to end in tears.”

If you look at macroeconomic situation, Japan has sovereign debt approaching 230% of gross domestic product (GDP) – higher than any country in Europe and more than twice the OECD average.

Mr Woodford quips: “It makes Greece looks fiscally prudent.”

By comparison, the Trading Economics website says New Zealand’s government debt-to-GDP ratio was 35.9% in 2013, up from a record low of 17.4% in 2007.

To backtrack, Japanese Prime Minister Shinzo Abe introduced a suite of economic stimulus measures after being re-elected in December 2012, which is referred to as Abenomics.

His risk-taking has been compared to the Soviet Union’s economic transition under Mikhail Gorbachev.

Three arrows
The so-called “three arrows” of the reforms were: massive fiscal stimulus, more aggressive monetary easing from the Bank of Japan and structural reforms to boost Japan’s competitiveness.

Within months of the election, the yen had dramatically weakened and the Topix stock market index rose 22%. In 2013, Japan’s stock markets were among the best performed in the world.

The structural reforms in particular have been met with disappointment, however, for not going far enough and the malaise referred to by Mr Woodford is becoming more evident.

Japan’s TOPIX 500 index was down 4.62% for the year by Friday morning, according to Bloomberg. The Nikkei 225 had dropped 6.68%.

The NZX50 gross index, meanwhile, is up 8.92% this year, the S&P/ASX 200 has risen 4.29% and the Hong Kong Hang Seng is up 0.94%. The Shanghai Composite has dropped 3.02% over the same period.

Mr Woodford’s blistering assessment of Abenomics is that quantitative easing close to the scale of the United States, in an economy a third the size, is unprecedented, uncharted territory which will create an asset bubble.

“It’s not doing what it’s done in America, it’s not regenerating and creating an entrepreneurial risk-taking culture; it’s not.”

Fiscal and monetary stimulus is the easy parts – any government can do it.

The hard part, he says, is the painful structural reform which Japan needs to go through – and there’s no evidence Abe’s embarked on that.

In March of this year, strategists from UBS Global Wealth called for Mr Abe to re-think his three arrows entirely. While Abenomics’ third arrow, reform, has been widely criticised the UBS strategists said arrows one and two, monetary and fiscal stimulus, were failing to pull Japan out of its economic funk.

Annualised GDP growth fell to 1% in the second half of 2013, from more than 4% in the first half.

There is concern that accelerating public works and business initiatives, as well as cutting welfare benefits and raising the national sales tax, is putting more of a burden on the poor.

Food prices are rising as wages are falling – a concerning trend for any politician.

The latest moves are to slash the corporate tax rate and accept more foreign housekeepers in an attempt to encourage more Japanese women into work.

Surreal comparison
Before his speaking engagement in to New Zealand, Mr Woodford spoke in Australia.

The Lucky Country has one of the best government debt-to-GDP ratios in the world, he points out, but wants to return to surplus, with the help of a special “deficit tax” for high income earners.

“It’s almost surreal when you compare that to Japan,” the former Olympus boss says. “In Japan, everyone will go along with it because the maxing out on the state credit card at some point, it’s going to hit reality.”

Japan doesn’t have to borrow on international capital markets because its domestic savings rates are so high – people put their money in what is effectively the post office.

The question is, even after the stimulus and reforms, are consumer electronics companies like JVC, Kenwood, Panasonic, Sony and Sharp going to compete with Apple and Samsung?

No, says Mr Woodford, because of a lack of innovation.

In his book, Exposure, he warns Japan is on the road to ruin. He describes corporate Japan as a “large and perverted golf club” because of the country’s incestuous system of cross-shareholding, involving a cosy collective of companies, suppliers and banks.

His assessment is unchanged.

“It’s not the fraud and those sorts of issues [holding Japanese companies back], it’s the glue, this horrible viscous glue, which stops what Japan needs.

“Post Second World War they did innovate; they took products designed in other countries but then they built them and refined them better than anyone else on the planet.

“You’re not seeing that in Japan so I am very, very pessimistic.”

There are positives in the smaller and middle-sized companies. But he says many of the Nikkei “titans” are, with a few exceptions, “zombies” which wouldn’t survive in most capitalist markets.

There’s an expression in Japan: the nail which sticks up should be hammered down. It’s such a truism, Mr Woodford says, in a culture that promotes in an age hierarchy. Less than 1% of middle management in Japan are women and a lot of those will be in foreign companies anyway, he says.

It’s almost lemming-like, Mr Woodford says regretfully.

“I think the only way Japan will change is when it suffers real economic demise and the population won’t tolerate the sort of leadership and direction it’s had both with individual corporations but also as a society.”

dwilliams@nbr.co.nz