Ghosn’s Nissan woes pose a warning for Japanese stocks
Hard lessons from a carmaker, a maglev contract — and a stolen toilet roll
Last week as the Japanese legal ordeal of Carlos Ghosn, 64, was just beginning, the trial of Masami Fujita, 64, was wrapping up.
The former case pivots on the conduct of one of Japan’s most famous corporate chieftains and affects the balance of relations two multibillion-dollar global corporations and, potentially, of two G8 nations. Mr Fujita, meanwhile, was fined Y200,000 for stealing a Y30 roll of toilet paper from a hospital on the tiny island of Okinoshima.
Both cases, in their way, need to be grasped by the market over coming days and weeks as investors attempt to work out, first, what is likely to happen to Nissan shares and, second, to the wider Japanese equity story.
More immediately, there is the question of why Nissan shares have not imploded given the uncertainty that now surrounds the company and the man who saved it from bankruptcy vanishing into the maw of the Japanese criminal justice system. Certainly, the stock dropped more than 6 per cent on the first day the news broke. But it then rose for three and currently stands only a little way behind the Topix index so far this year.
The many hedge funds who went short in the first minutes of the news, guessing that the crisis was worth at least 15 per cent of downside in the first couple of days, are licking their wounds and wondering what on earth went right. Quite a number of analysts privately agree that Japanese corporate scandals — many of them considerably more modest than this — have historically wrought much greater stock-price havoc and that the short seemed a good bet. A few analysts have ventured out and cut their ratings: Nomura’s Masataka Kunugimoto moved from “buy” to “hold”, arguing that the hit to the Nissan brand would dent sales in Japan, and the whole debacle could ultimately result in weaker synergies from the alliance with Renault.
Some traders, meanwhile, found the lack of a Nissan nosedive unsurprising. The combination of the company’s obvious governance shortcomings, the general caution over the automotive sector as technology disrupts and the 43 per cent stake Renault holds in Nissan has strictly limited institutional interest in the stock.
The messianic halo that once gleamed over Mr Ghosn had dimmed some time ago. Nobody can be sure what will happen to Nissan but given that the best guess at what caused Mr Ghosn’s downfall was a tussle between Nissan and Renault, plausible scenarios include Renault using the turmoil to increase its stake or even mount a hostile bid for control. Everyone knows these are speculative, but are believable enough to keep holders holding and the shorts from building at this stage. Several hedge funds confirm that even the biggest downside risk — that the alliance collapses — feels too unknowable for a big punt.
The bigger challenge, however, is that Nissan feels large enough for its current torment and the woes of Mr Ghosn to be read as something more broadly symbolic and cautionary for Japanese stocks. Some have already drawn the links: the speculation that Mr Ghosn’s downfall was orchestrated by some Renault-sceptic faction of Nissan (conceivably with a government nod) evokes a resurgence of “old Japan” that some had hoped tamed by Abenomics. The anti-greed baying in local media around Mr Ghosn’s sensationalised arrest are chilling for Tokyo’s prospects of embracing the sort of shareholder-focused progress for which investors have been waiting.
A big source of distraction, however, will come from the protracted spectacle of the Japanese justice system chewing slowly on its prized quarry. The prosecutors’ investigation of Mr Ghosn will supply the market with weirdness, paradox and sources of outrage — all justice systems have their peculiarities but Japan’s feels more nakedly like a policy tool.
The fate of Mr Fujita and the stolen toilet roll has already been tied by some into the Nissan/Ghosn frenzy. To some, the harshness of the toilet-roll thief’s penalty reveals an unbending system that will inevitably find some infraction to bring down the ousted Nissan chairman. Others use it to illustrate the wild unevenness of Japanese prosecutors: a few months ago senior executives of Japan’s biggest contractors, Obayashi and Shimizu, confessed to bid-rigging on a maglev rail project worth roughly 320 billion times more than a toilet roll. Their “willingness to co-operate” with the prosecutors meant they were not indicted.
The temptation to dwell on this, say fund managers, is a distraction from the real task of the market — to use corporate governance metrics to work out precisely how many Nissans are out there and where Japan’s next crisis will erupt. As one puts it: knowing that Nissan was riddled with governance shortcomings didn’t pin-point when this puncture would occur, but did tell you that the whole tyre wasn’t roadworthy.
On that front, this week’s update from the Financial Services Agency was not encouraging. Mr Ghosn, it points out, led a company with no CEO nomination or remuneration committees, like a large majority of companies in the TSE first section.