Businessmen fall on their swords

It's been a while since we've seen photographs of Japanese businessmen bowing and apologising for the collapse of one of their companies but Mr Kyoichi Yamada, the president of the failed Sogo department store, was on the screens last week expressing his sorrow at the fact that the store had gone bankrupt, owing nearly two trillion yen.

The Japanese government had originally planned to rescue Sogo, which had asked 73 creditor banks to waive the store's debts so that it could commence a restructuring programme. (They certainly spread their banking business around, didn't they?)

A number of years ago there is no doubt that politicians could have succeeded in their plans and public funds would have rescued a private company yet again. But the Japanese public is clearly fed up of their taxes supporting failing enterprises, and such was the strength of objections to the plan that the LDP backed down.

Sogo, therefore, was history and became Japan's second largest corporate failure (the largest was the Japan Leasing Corporation which went down the tubes a couple of years ago).

It's interesting that public opinion was enough to prevent Sogo's rescue.

Why should taxpayers' money rescue a private company anyway? If it's in the national interest is the response which is usually given by politicians, which generally means that it depends on how many jobs will be lost. In the case of Sogo, it's close to 10,000 unless the department store is taken over.

Once again, workers are the ones who suffer from management ineptitude or, in this case, management deliberately taking its collective eye off the ball. Instead of concentrating on its core business, which was selling goods to consumers, the management of Sogo spent much of the late 1980s and early 1990s buying up real estate.

They weren't alone in that. If you remember, everyone in Japan spent the 1980s buying up real estate and then that particular bubble burst.

Would things have been different if they'd spent the money on the stores instead? Not for the chairman who resigned last April. Mr Hiroo Mizushima took home an annual salary of nearly €5 million even though the stores were losing money. Obviously, his priorities weren't exactly geared towards making the company profitable again.

Although most commentators don't think this failure will have a long-term effect on the Japanese market (and many are happy to see it happen because it shows that the government is, belatedly, realising that you can't bale out companies forever), financial stocks were down sharply on the news and traders found themselves in a quandary about whether or not the Bank of Japan could implement its expected rate hike in view of the market's renewed nervousness about the country's financial structure.

In the end, the Bank of Japan left rates unchanged, although its governor has clearly indicated that the end of the country's zero interest rate policy is imminent (which means the likely date for a rate hike is September).

It's no doubt frustrating for the financial authorities which have wanted to edge rates higher for some time now. But the market is nervous that higher rates will lead to an increase in bankruptcies (without a government bail-out safety net) which would, as a result, increase the bad loan portfolios in the less-than-robust banking system.

So, more with its collapse than with its ongoing business, Sogo has impacted on Japanese economic policy.

The problem with the management in companies like Sogo is that they forget what the business was about to start with. Success in one sphere doesn't necessarily mean success in another, although there's always pressure on companies to expand. As a shareholder, though, you'd like to think they knew what they were doing. Sometimes I wonder!

Naturally, poor performance can't entirely be blamed on managerial ineptitude. But in lots of cases it has much to do with it.

As a private shareholder, it's almost impossible to have your voice heard (and, if it is, you'll just be labelled awkward, dissident or troublesome and management will look at you with a mixture of irritation and condescension).

Yet institutional shareholders seem to be afraid to rock the corporate boat. The thing is, if the major institutional shareholders are all involved in a badly performing stock, it affects the performance of all of them. So nobody is doing any better than anyone else. And with institutions, performance is all relative. If one fund is down by 5 per cent but another is down by 10 per cent, then the fund managers in the first fund have done a good job. Relatively speaking.

Not that it's of much comfort to those who have invested in the fund to know that.

An interesting case of better than expected performance was announced by JP Morgan last week when it told the market that profits from proprietary trading activities had gone up by nearly 50 per cent in the second quarter.

Compared to the same quarter last year, the numbers are phenomenal - income from trading on their own account increased from $23 million to $283 million. The bank is being coy about whereabouts in the trading room those revenues are being generated. Its chief financial officer Mr Peter Hancock said traders were taking "market neutral" positions. They were also, apparently, exploiting differences in relative values of world markets and hedging their exposures elsewhere in the company. (I'd like to know exactly where "elsewhere" is.)

In those halcyon banking days of mine, trading income was the icing on the cake. JP Morgan's cake is well and truly iced with those revenues, although whether or not they can sustain it is another question altogether. By their nature, arbitrage opportunities, which is what exploiting differences in relative values is supposed to be all about, should disappear over time.

As for the rest, I don't know how many times I've seen some sure-fire trading strategy implode. But enough to make me feel that the traders in JP Morgan will be negotiating damn fine bonuses this year and not taking the longer-term view of their cash rewards.