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CUNDILL INVESTMENT CONFERENCE
PETER CUNDILL, SETH KLARMAN ET AL.
(continued from preceding page)
Today, it's Japan doing the soul searching.
Cundill: But when you look at Japan, it doesn't know what route it's going to go. Commercially, it's had a number of bad years. And they've had a bank crisis that the government hasn't been able to deal with as effectively as the Americans.
The Japanese banks look as if they are out of the woods on the credit stuff. But they're still badly run institutions with no returns on shareholders' equity. So we don't own or want to be near a Japanese bank - at least at this stage.
The non-life insurance companies though are a different kettle of fish.
And Japan does have a huge problem....
Cundill: I'm not sure that the position [of the U.S. and Japan] 7 years from now is going to be reversed. However, I believe that there will be some movement toward a reversal of roles - whereby Japan will be stronger than it is today and America less strong in relative terms. So I expect more parity will come into play as Japan regains its composure.
Where are the seeds of such a reversal? Well, Japan has a big problem - a very extreme demographic problem. By the year 2025, 42% of the Japanese will be retired. And although that's true of all developed nations [to a certain extent], it's a much greater problem for Japan because a much higher percentage of its population will be retired than that of any other industrial nation.
But raising already high taxes could kill the golden goose.
Cundill: That 42% figure, incidentally, was from an article in The New York Times.... And I sat in an office with a senior economist of one of the Japanese banks ... who serves on a committee which advises the Japanese Ministry of Health which, in turn, manages the Japanese pension fund - which is about $1 trillion....
And she pointed out to me the same thing that this article points out - that Japan has three policy alternatives: First, they can tax the young more. Second, they can reduce pensions to older people who are already receiving benefits. But that's not likely since that 42% of the population votes....
So they face a classic political struggle. If they don't do something about it, the young will simply have to pay for the older people. But their tax rates - both individual and corporate - are already very high....
SOME SUNSHINE (EVEN A LOT) MAY NOT SOUND BAD.
Given the other choices, reform doesn't sound so bad.
Cundill: But there's another alternative. Today, Japanese pension funds are invested in JGBs (Japanese government bonds) at an interest rate of less than 2%. So a third alternative is to get their rate of return up. And, in fact, the whole thrust of the initiatives happening today is exactly that. They're based on the premise that Japan has to get its investment returns up. If they don't, as I've described, they have one very big problem.
Therefore, many of the initiatives for change come out of the bureaucracy - which is both MITI (which oversees trade) and the MOF (which is the Ministry of Finance).
Page 6 of 12
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