Tokyo's stock market has seemed eerily immune to good news. Despite signals that the Japanese economy is coming back to life after a punishing three-year recession, the Nikkei 225-stock index has languished within a boring 1,000-point range for months. Now, with consumer spending, industrial production, capital expenditure, and corporate sentiment all showing modest signs of recovery, the Nikkei is headed due south. What gives?
Many investors and analysts blame the government. A series of huge, expensive initial public offerings of shares in government-owned behemoths--endorsed by the Ministry of Finance--is soaking up limited liquidity and enraging investors who overpay for the new shares. And the august MOF has come under attack for sticking to an ambitious IPO schedule that the market can't support, causing unnecessary volatility and battering non-IPO shares. "This is a big shame for Japan," says Kiyoshi Imai, senior managing director at NCB Investment Management Co., an affiliate of Nippon Credit Bank Ltd.
BIG DROP. The impact of these mega-issues can't be missed. On Sept. 6, the government floated 34,000 shares, worth $1.73 billion, of Japan Telecom Co., the country's third-ranking domestic long-distance carrier. Sure enough, by Sept. 14, the Nikkei 225-share index fell from 20,409 to 19,919, its first dip below 20,000 since May 10. Now, investors worry that the next IPO--more than five times Japan Telecom's size in yen--will drag the market down even further. The government on Oct. 27 will issue 666,666 shares in Japan Tobacco Inc., priced at 1.43 million yen per share, or $14,444.
The September flotation was bad enough. Japan Telecom shares are down more than 11% since they were listed at a rich 4.7 million yen per share. The Nikkei is still up about 15% so far this year, but an avalanche of costly new shares could lop off much of that gain.
The pattern isn't new, suggesting that Japan's approach to IPOs of state-owned companies may be innately flawed. Consider the government's first big privatization, Nippon Telegraph & Telephone Corp. Its first tranche, issued in November 1986, went well and netted the government $20 billion. After all, the Tokyo stock market was soaring during most of that time.
STRAIN. But the MOF released its second tranche just one month after Bloody Monday in the U.S., when the Dow Jones industrial average plunged more than 500 points on Oct. 29, 1987. With the Tokyo market under serious pressure, the MOF floated scads of NTT stock at more than twice the price offered the previous year. Tokyo fund managers still grumble about the extra strain those new shares put on an endangered market.
Then, as recently as last October, East Japan Railways went public at 600,000 yen and plunged to 389,000 yen by late November, helping to pull down the Nikkei by almost 4,000 points. The stock now trades for only about 503,000 yen.
Why hasn't the government learned its lesson? Some observers say the ministries just want to make money. For example, Japan Telecom is affiliated with several railway companies still largely owned by the semi-governmental Japan National Railway Settlement Corp. This entity, in turn, remains saddled with enormous leftover debts from the formerly state-owned Japan National Railways. So the MOF and the Transportation Ministry want to clean up the books by getting as much money as they can for the assets. "MOF is just greedy," sniffs a fund manager at a U.S. insurance company in Tokyo. She thinks now is the wrong time for big IPOs, especially with large corporations such as Matsushita Electric Works Ltd. announcing plans for mammoth convertible bond issues in coming weeks. "There's not enough money in Japan for both," she says.
Others see arrogance in the MOF's approach to IPO pricing. "Within the Ministry of Finance there's the `coercive idea' that because it's the country's property we should sell it high," the influential economic weekly Toyo Keizai opined recently. "But the market's declines after these IPOs make us wonder which is better for the nation's economy."
A LOT OF HYPE? MOF officials say their critics are impossible to satisfy. Used to be, everyone complained that IPOs were priced artificially low, soaring as soon as they were listed. This allowed brokers to get cheap shares into the hands of privileged clients, who scored big gains. The shares-for-favors scandal that toppled Prime Minister Noboru Takeshita in 1989 was a prime example, notes an MOF official.
But the new system has just as many problems, critics charge. NCB Investment's Imai places considerable blame on Japanese brokers, who, he says, hype gullible customers on the new issues. That's easy to do, because there's minimal information available about the new listings. Japanese regulations allow only a prospectus, and no independent research or pricing advice, to be circulated before a privatization. "A prospectus isn't enough, and it's too tough for most investors to understand," Imai says. So investors rely on signals from their brokers and the government-influenced mass media on pricing.
Also, the Japanese system suffers from a touch of xenophobia. Foreign capital isn't tapped to the fullest because the companies prefer friendly Japanese shareholders, and the conservative MOF dislikes facing the rigors of international equity markets. Other governments, from Singapore to Mexico, court foreign capital aggressively when privatizing big companies, staging elaborate "road shows" to ensure a broad sales base. By contrast, only 7,000 shares of the total 34,000 Japan Telecom shares sold this month were reserved for sale overseas.
Another culprit, some investors believe, is the unusual way IPOs are priced in Japan. In most major markets, new-issue prices are negotiated by the issuer, potential investors, underwriters, and advisers. In Japan, half the new shares are auctioned via sealed bids; the rest are offered to the general public several weeks later at a fixed price derived from the weighted average of successful bids. "Most participants in the auctions believe in the old myth that IPO shares will always go way up" so they bid high, says Thierry G. Porte, a managing director at Morgan Stanley Asia Ltd., which helped distribute Japan Telecom's shares overseas.
Change may be afoot. Nomura Securities is pushing for talks at the Japan Securities Dealers Assn. about reforming the IPO system. And if the flood of Japan Tobacco shares next month sends the Nikkei into a tailspin, it could cast a pall over Japan's fledgling recovery. Such a debacle might be what it takes to prove that the new shares truly aren't worth their price.