As this is the September monthly, I should focus on what happened in September. But the last few days have been so much more interesting that September seems daft by comparison. Anyway, we had yet another strong month for Japan. There wasn’t much cap bias but there was a slight value tilt, though nowhere as significant as August when Value outperformed Growth by +5~6% depending on which index you use. But what stood out for me was the N/T ratio, which compares the Nikkei 225 and Topix. This ratio rose +3.1% in Sep, the second highest move in over 2 years (the highest being June of this year when it moved +4.7%) which means that the outperformance of the Nikkei 225 was very significant. The N/T ratio is often used as a quick and dirty way to see sector dispersion is. For example, Topix has a much higher weight in banks and industrials. The Nikkei 225 is more loaded with IT and Communication Services. The latter, which sounds like telcos, is actually mostly Softbank with a few gamers like Konami and Nintendo. Here’s the breakdown as of Sep end:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In a nutshell, tech drove Sep. In fact, the top 3 names by attribution, Advantest, TEL, and Softbank, accounted for nearly 85% of the Nikkei 225’s massive +5.2% price return. Similarly, the top 5 names by attribution, Disco, Softbank, TEL, Sony, and Advantest, accounted for nearly 65% of the +2.0% price return of the 1,700-name TOPIX index. The N/T ratio has continued to run upward in October by yet another +3.8% in the first 4 days alone. While we still have a long way until October ends, I don’t think I’ve ever seen a reversal this acute in such a short time horizon. The early COVID market reversal in 2020 and post-GFC in 2009 are 2 periods that come to mind that might have had similar magnitudes (the Koizumi rally and Abenomics rally wasn’t driven by tech and the Nikkei 225 underwent a massive change right before the IT bubble burst so the N/T ratio represented something very different pre-2000 … tells you how long I’ve been in the industry …)

And therefore, our timely addition and build of a couple of tech names during the past few months helped our performance, although it would be an exaggeration to say that I had preempted this. These were simply names that we’ve always had in our wishlist universe that were too expensive in 2023~2024 compared to the fundamentals at the time, but whose valuations have become more reasonable when channel inventories were at or approaching floor levels, i.e. the downside looked limited while the upside looked attractive. These additions are a direct consequence of our thematic view on increasing labor productivity demand, and therefore, I do not expect to move portfolio exposures around excessively from here except some rebalancing depending on price action. As usual, I’m not going to speculate where we might end the year, and I think it foolhardy for anyone to think they can (despite all of the sell-side strategists who attempt to do so at the start of the year). However, I do predict high volatility for the markets which, for those who have high conviction, low turnover, and a long-term mindset, is an opportunity. And with our new and exciting prime minister, we’re sure to get another dose more.

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Masaki Gotoh​​

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“The fact I’m the third female Prime Minister, I never grew up believing my gender would stand in the way of doing anything I wanted” –    Jacinda Ardern, former Prime Minister of New Zealand.

 

I moved to the US in 1975 at the age of 3 and spent my entire childhood there. When we first arrived, the currency was still 300 yen to the dollar, so we were forced to live in a very modest neighborhood, especially since the company that my father worked for in Japan already paid much lower than its peers. We remained in, at best, a lower middle-class lifestyle until the late 80s. After a few promotions and, more importantly the yen strengthening to the 150 handle, we finally upgraded to an average middle-class life. Furthermore, until our move to the west coast, we often lived in neighborhoods that had few Asians, if any. So, needless to say, I experienced first-hand what it was to grow up as a minority. It didn’t help that I attended 3 different elementary schools, 2 middle schools, and 2 high schools due to our frequent moves – I never lived under the same roof for more than 3 years until 2002, exactly 10 years after graduating from college. Having skipped 2 grades, I was generally the shortest and definitely the youngest, which did not help my social stature. Furthermore, this was the age of GenX where one basically had to fend for themselves. And so, I learned playground rules very quickly. Throughout my childhood, I had to put up with the derogatory slurs, physical bullying, and outright racial discrimination. Thankfully, despite much higher crime rates than the present, the worst that had happened was a few cuts and bruises. But I still remember Dec 7 vividly because it is the day that Japan attacked Pearl Harbor and, therefore, the day I needed to stay particularly alert. Even until the late 80s, our house was often vandalized on that day. The only time I think I felt “safe and normal” was probably during my 2 years in LA and college where, of course, diversity thrived.

 
But to be honest, I never thought much about it. We were visitors in an Anglo-Saxon controlled country, and this was just a fact of life. It was, as Red put it in Shawshank Redemption, a “routine”, though, of course, I didn’t see it as prison life as Andy Dufresne did. For the most part, I generally enjoyed my childhood. I’m truly thankful for my upbringing in the US. But, still, one never forgets the discrimination.
 
Because of this background, I have somewhat of a different take on diversity and minority rights. I am 100% for equality (which, I would point out, is different from equity). I strongly believe that diversity improves any organization by providing varying, often conflicting, views and ideas, inherent from being a minority, even if they were brought up in similar backgrounds, i.e. two persons that had an identical background would likely have very disparate standpoints due to differing gender, race, or any other diverse characteristics of the individual. As such, would I prefer to choose a candidate that contributes to diversity? Absolutely. However, only if all else equal, meaning it must be merit-based. I would not lower the bar because the candidate was a minority. It is a secondary aspect that I would consider, just like I would take into account cultural fit within the organization or soft skills (which I feel is equally important to intelligence and hard skills). You shouldn’t get a free pass because you are a minority.
 
And so, for example, I believe that the often-cited requirement to have a minimum number of women on the board in Japan does not entirely fit with where Japan stands societally at present. It is terribly unfortunate that women have not had the opportunities that men have had in Japan. My mother, for example, wasn’t allowed to apply to college simply because she was a woman and my grandfather thought women do not need higher education (she ended up going to nursing school). Back at my Hitachi days, the only women on the floor were administrative assistants (though I do remember one female engineer who stood out whenever she entered the meeting rooms back then). In the 90s, the House of Councillors (the upper house of the National Diet) didn’t even have women’s bathrooms and female Diet members were forced to use men’s toilets.
 
But slowly, as Japanese society became more accepting to women in the workforce, they have been moving up the ranks. An acquaintance at the Nikkei newspaper tells me that, since they changed to a 100% merit-based employment just a few years ago, over 70% of new hires for reporters are women (in his words, “[they] are simply smarter”). Still, there are, as of yet, not enough women who have the experience to become board members. I’m sure there will, say 10 years from now, but in the meantime, because some code or proxy advisor or voting guideline picked a number, we suddenly need a huge supply of experienced women that we simply do not have currently.
 
And so, due to the lack of highly qualified women, they are often on too many boards. Alternatively, I see unqualified board members who were most likely chosen due to gender alone. Even more commonly, we see many firms that convert their firm to a “Company with and Audit and Supervisory Committee” which replaces the historic corporate auditor role with a board member who is on the audit committee. Such companies often use this audit committee board member role to fill the independent, non-executive director (“INED”) minimum requirement to increase “independence of the board”. This is where they often reach their quota of INEDs with lawyers, accountants, and/or professors, often times of both genders in order to fill the gender diversity quota as well.
 
I am super thrilled about our new Prime Minister (caveat: this is a personal view and not necessarily the firm view). But this is NOT because she is a woman. In fact, leave it to Japan to select a hard-right, ultra conservative woman as our first female Prime Minister; as always, change in Japan is gradual. But, as I mentioned in a previous monthly, my favorite US president was Ronald Reagan. I, like Sanae Takaichi-san, was a fan of Margaret Thatcher. And, of course, I was a huge supporter of the late Prime Minister Abe. The media speaks of Takaichi-san as an Abe protégé and the next Iron Lady. But there are obvious differences between Reaganomics, Thatcherism, Abenomics, and the recently coined Sanaenomics (don’t worry, I can’t pronounce it either) because the environment is different. Reagan and Thatcher were escaping the inflationary world of the 70s. While we are currently suffering from high inflation as well, it is mild by comparison. Takaichi-san is against monetarist policies to control it as she believes our current supply-led inflation can still risk a return to deflation should input costs start to fall. Personally, I disagree because wage increases are, in my view, a structural change, not a temporary gesture, because the working population is declining so fast. Her monetary and fiscal stance has already caused the yen to weaken above the 150 handle which would likely flame inflation further (and why I suspect she’ll tone down her anti-tightening rhetoric). Unlike Thatcher, Takaichi-san is probably less concerned about our deficit, similar to Abe-san who supported aggressive fiscal stimulus. And, unlike Reagan or Abe-san, she takes a tougher stance on immigration which, like many other nations, was a major issue in the LDP race amid the rise of the anti-immigrant Sanseito party who apparently took a significant portion of conservative LDP votes. Unlike Abe-san who supported “womenomics”, Sanae Takaichi is a hardline conservative with old-fashioned views about women and upholds traditional family values and patriarchal norms; if anything, womenomics probably took a step back not forward. Given her ultra-conservative stances (and perhaps because she’s a woman?), traditional media has already started their typical bashing of our yet-to-be-installed leader. But she’s no neo-fascist as some extreme media are trying to portray her.
 
What I like most about all 4 leaders is that they are tough, hardliner neo-liberals with very strong views, willing to take on differences of opinion. Like Abe-san, she doesn’t flinch from the harassment from media or her opponents in the Diet, both within and outside of the LDP (she was the underdog in the race because she has many foes). I didn’t support all of Abe-san’s views nor hers. I thought they are both too hawkish on China, and I question whether the Yasukuni Shrine visit is worth angering our neighbors every year. I’m definitely more liberal-minded when it comes to social views and domestic policy than either of them. I couldn’t care less about the imperial family’s patrilineal succession as they did. But I embrace their neoliberal economic policy. I, too, am less concerned about our fiscal deficit and that an economic revival should be our first and foremost priority. And, outside of their stance on China, I also support their foreign policy and believe in a stronger military. And they are both pro-nuclear power as am I, a stance unpopular among most of Japan.

But most of all, I like their strength. I haven’t seen such an energetic, strong-willed Prime Minister since Abe-san’s second term (he seemed more timid in his first term, perhaps because he had big shoes to fill from his maverick predecessor). But she is still pragmatic about her win and appointed Aso-san, who supported her election and is probably the most influential and powerful kingmaker in the Diet, as Deputy Prime Minister. I can see her standing tall, side-by-side with President Trump at the G-7, just as Abe-san did (I can’t remember Suga-san, Kishida-san, or Ishiba-san in any photo op …). It’s too bad she doesn’t play golf (I think).​​​

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I’m sure I won’t agree with everything she does. I was devastated when Abe-san was assassinated and had little hope in Japanese politics. But I am now very excited about our political future … and not because she’s a woman. It’s because she’s a strong person with a background that I admire and views I share. Admittedly, there is a part of me that likes her because she, too, was an aspiring musician and a biker as I was; I had to give up my Ducati when I got married and she gave up her bike when she entered politics. But she’s apparently still a rock and heavy metal fan! Maybe she has a little of Junichiro Koizumi in her too, another neoliberal reformer whom I liked very much.

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