An Insider's comments on Japan's high tech business world

* * * * * * * * * TERRIE’S TAKE – BY TERRIE LLOYD * * * * * *
A weekly roundup of news & information from Terrie Lloyd, a long-term
technology and media entrepreneur living in Japan.

General Edition Sunday, Nov 18, 2018, Issue No. 970

– What’s New — Imploding “One-Man-Shacho” Listed Companies
– News — Bank Of Japan assets exceed nation’s annual GDP
– Upcoming Events
– Corrections/Feedback — The real story behind Mitsubishi Regional Jet?
– Travel Picks — Plum blossoms in Takao, Montsuki outfits in Kyoto
– News Credits


+++ Imploding “One-Man-Shacho” Listed Companies

One distinctive feature of many Japanese publicly listed companies
that are still run by the founder or someone who has the same level of
autonomy, is the tacit “permission” those leaders get, to use company
money as they wish, with very little objection from shareholders,
staff, or other stakeholders (e.g., the government or business
regulators). Usually the diversion of funds will be modest initially
and be connected to a pet project of the CEO, such as a new business,
a countryside company property, investment in a friend’s company, a
girlfriend, or something similar. If everyone is lucky, the amounts
remain modest.

Given that it’s so common, most stakeholders see the spending as
almost therapeutic (for the CEO) and thus inevitable, so long as it’s
not materially damaging to the company. Of course, the bigger the
company, the higher the pain point and thus the bigger the numbers on
the spending can be. In the end, the practice is a trade-off with the
CEO so as to keep him/her engaged in the primary business, and is a
function of the fact that not many founders sell their companies here.
This aspect of Japanese stakeholder pragmatism is an anathema to
foreign investors, and perhaps is one of the main reasons why foreign
funds have been pushing to get proper corporate governance rules
passed in Tokyo. Unfortunately, while such rules have been legislated,
they have no teeth, and so corporate captains continue to run their
businesses as if they were personal play pens (and personal piggy

The worst kind of founder spending, though, is that performed by a
leader who thinks that they are actually helping the company, usually
for a business that isn’t growing, by directing corporate funds into
unrelated “rescue” activities in order to increase overall revenues
and profits. This was a feature of the financial bubble in the late
1980’s, when the leaders of a number of well-known but struggling
major companies either personally or through their immediate offices,
engaged in “zaiteku” or financial speculation to prop up their P&Ls.
One of the best known examples was at Olympus, finally ending with a
foreign CEO blowing the whistle on the decade-long cover up of the
resulting losses.

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[…Article continues]

Privately, we saw a similar example about 10 years ago, when the
Systems Integration giant, CSK, was being run by an ex-Nomura
executive, Masahiro Aozono, who had assumed control after the death of
the company’s founder a few years before. Mr Aozono was not only not
interested in the essentially boring business of IT, but he also had
ambitions of becoming one of Japan’s celebrity CEOs. Because CSK’s
senior management had under the by-then-dead founder, Isao Okawa, been
used to letting the CEO do his own thing with company money (actually,
often with good results), they also sat back when Aozono decided that
he’d turn CSK into a securities and investment firm instead of
continuing with just IT.

As a result, in 2008 CSK acquired Cosmo Securities and Aozono
redirected a huge sum of CSK funds, said to be around JPY40bn, into
investments that blew up in aftermath of the Lehman Shock. CSK’s
balance sheet was devastated, and Aozono, a proud man, was forced to
fall on his sword in 2009. Barely two years after that, CSK was sold
off at a fire sale price to Sumitomo. Had there been a decent board of
external directors practicing diligent corporate governance, maybe
Okawa’s legacy would still be alive and well today.

Why are we pointing this out? Well, in the news this last week a
listed Gym operator called Rizap announced that it faces a JPY7bn loss
due to bad M&A deals. Out of interest we started researching this
company and found that it checks all the boxes for rampant spending by
an out-of-control CEO. Now, we’re not saying that the CEO, Takeshi
Seto, is in fact out of control because we don’t know him personally,
but it is pretty clear that he has a huge ego and that he has been
supplementing his under-performing core business by practicing the
modern equivalent of Zaiteku. Therefore, in the absence of good
external corporate governance, the result has been the same as if he
was out of control.

Backing up a bit, Rizap started off as a health food mail order
company in 2003, then moved into body shaping and gyms over the
following decade. Somewhere along the way, Seto discovered that he
could pump up the revenues and profits of the business by taking over
weaker competitors and (we suspect), by doing some financial
maneuvering by bundling into the purchase price some of the initial
future operating costs of those acquisitions, while booking them as
healthy assets on the balance sheet. This is a common tactic for
companies focusing on frequent M&A, but it only works if you have a
strong source of cash, because the restructuring has to be funded from
somewhere. In Rizap’s case, the funds came from stock market
placements – which depended on high stock valuations, which in turn of
course depended on investor demand and a good story to tell those

Then, a bit later, in 2016, the company hit on an even better strategy
to boost its public image (and stock price), by accounting the
difference of an asset’s purchase price (Seto would buy “low”) against
the stated book value, as paper profits – described as “negative
goodwill”. This formula worked really well, and while the company was
still nominally in the health business, in fact 60% of its profits
were coming from these questionable acquisitions. Unfortunately, so
many of the assets were actually impaired, the M&A window dressing
[Ed: by “window dressing” we are using the figurative sense and not
the legal definition] became exposed.

The big problem with Rizap is that the CEO was really running an
investment company, but probably rightly assessed at the start of his
journey that he wouldn’t get support from his management team and
investors if he came right out and said so. Instead, he created a
loose strategy of a customer “self improvement” industry, and saw to
it that his M&A activities would all be logical progressions of the
strategy. Unfortunately, without the restraints of effective external
directors and proper corporate governance, the illusion of his
emperor’s clothes approach became ever more elaborate, until finally
something had to break.

Well informed and empowered external directors would have particularly
protested some of the more senseless acquisitions. For example, the
free paper Pado. Seto’s rationale for buying the paper was no doubt
that it allowed cross-marketing of the many businesses that Rizap was
in, targeting consumers directly. However, as anyone who has been in
the paper publishing business could have told him, publishing is an
expensive business, and producing a paper magazine in an age of
digital has broken many a CEO. The mere fact that Seto was so tempted
to buy Pado, which is a famous brand with nominally millions of
readers (no one really knows), tips us off to the likelihood that he
is probably ego-centric, and thus unable to restrain his own impulses.

Another point that suggests Rizap’s management is self-delusional is
that the company doesn’t seem to understand the science of its own
stated business – consumer “Self Investment”. Rizap has long argued
that customers will spend far more with Rizap to take its
high-performance programs rather than sticking with the much lower
fees of competitors. Indeed, Rizap tries to charge 5-6 times more for
a slick work-out course that you can easily get at any competent
ordinary gym.

As evidence of what we believe is their lack of basic understanding of
their own business, on Page 20 of a Fisco (the research company)
report at the start of this year, there was a Rizap-supplied diagram
with Maslow’s Hierarchy of Needs on it. Readers will know that we are
strong believers in this framework, and sure enough, Rizap is using it
incorrectly. The company says it is helping customers to “self
actualize”, but in fact, its marketing methods clearly target the
layer below, which is the Self Esteem layer. In fact, as far as Maslow
is concerned, self actualized people are unlikely to even be
motivated by self-image marketing, so there would hardly be any point
in targeting them.

Our assessment of Rizap is that while the CEO probably has been a
shrewd investor, he’s also a one-man (or two-man) zaiteku operation
with 7,000 un-involved staff. And in this respect, he appears to have
led his company and its investors on a flight of fancy. The company’s
shares had a stop-loss on them last week after falling 50% in 3 days,
and we imagine that this is just the start of the rout. We would not
want to be shareholders of this firm as it tries to deal with the
fall-out and in particular when it finds that many of the “assets”
that it has acquired are probably worth even less than book value when
it comes to selling them.

Will the company survive this? Maybe. It depends on whether some of
the genuinely good hires the CEO made (such as the COO) will stay
after the current turmoil.

…The information janitors/


+++ NEWS

– Post Office is mortal after all
– Tests and degrees for farmer, fishermen visas?
– Long-lost Oswald Rabbit movie found in Japan
– Bank Of Japan assets exceed nation’s annual GDP
– But the banks are still doing fine

=> Post Office is mortal after all

Japan Post, a semi-privatized company favored by law over private
delivery companies because of its “national infrastructure” role and
network, has started to pull back from its public responsibilities, in
an effort to make a profit. One of the first noticeable restructuring
moves has been the changing of a law requiring the Post Office to
deliver physical mail 6 days a week. The new situation will be mail
just 5 days a week. The reason being given is that the Post Office is
struggling to find delivery people (as is everyone else). ***Ed: If
this law modification is passed, and the Post Office no longer can
hold itself up as providing essential public services, then it should
also lose some of the privileges it has enjoyed as well. One that
comes to mind is the permission to park in no-parking zones while
pickup up and dropping off parcels. For regular delivery companies
trying to use the same zones, parking fines are the result.** (Source:
TT commentary from, Nov 17, 2018)

=> Tests and degrees for farmer, fishermen visas?

The government is working on the administration and processes that
will be used to recruit blue collar workers into its new Type One
working visas. This is presumably to avoid creating opportunities for
people traffickers looking to cash in on the anticipated demand. The
basic idea is that work visa applicants will have to pass a
trade/skill proficiency test, meaning that only those who’ve actually
worked or studied in a particular line of work will get visas. ***Ed:
In the case of fisherfolk, this probably makes sense. Had to laugh,
though, at one think tank’s suggestion that blue collar workers should
also be required to be college graduates as well. Although people in
the farming sector do study for agricultural degrees, the number of
graduates willing to do manual labor jobs in Japan will be just a
fraction of graduates, and thus would defeat the purpose of the
easing.** (Source: TT commentary from, Nov 16, 2018)

=> Long-lost Oswald Rabbit movie found in Japan

Bet you didn’t know that before Mickey Mouse at Disney, there was
Oswald the Lucky Rabbit? Apparently Disney started his animation
business with the rabbit and produced 26 short movies before losing
ownership of the character to a defecting senior manager, to Universal
Studios. In fact, if it wasn’t for the loss of Oswald, Mickey may
never have been born. Of the 26 shorts, which were run in picture
houses at the end of the 1920’s, 7 were lost for generations. Luckily,
a 2-minute short entitled “Neck n’ Neck” was found in the archives of
a movie buff here in Japan just recently. The avid collector, Yasushi
Watanabe, apparently bought the reel at a wholesale market just after
the War, and has had it in storage ever since. Fans can now see the
reel at Kobe Planet Film Archive. ***Ed: Fascinating background story
here. Read the original source for more info.** (Source: TT commentary
from, Nov 16, 2018)

=> Bank Of Japan assets exceed nation’s annual GDP

Ever wonder why the stock market is at a record high, and yet the
average man in the street is still pinching pennies? The answer is
that the stocks are being artificially boosted by record purchases by
the Bank of Japan, along with their buying of Japan Government Bonds
and other financial asset classes. In fact, the BOJ has been so busy
copying and exceeding the Quantitative Easing (QE) program that the US
government introduced more than a decade ago (and which it is now
tailing off) that it owns assets worth more than the value of Japan’s
annual GDP…! Think about that. The BOJ holds about JPY553.6trn of
financial paper, and in many cases is the biggest investor in each
class. ***Ed: There are mixed messages about whether the BOJ is now
planning to follow the US lead in tailing off its QE efforts, or
whether its governor is going to be obsessed with hitting 2% inflation
before giving up. Our take is that the Abe government will implement
the increase in consumption tax to 10% next year, and the BOJ will be
obliged to continue propping up the markets as consumer spending takes
a dive.** (Source: TT commentary from, Nov 13, 2018)

=> But the banks are still doing fine

One of the arguments for the BOJ to tail off its quantitative easing
program is that it is competing with the nation’s banks for bond
business, and hurting their profits and eventually even their
stability. Yet, this argument is belied by reports that all the top
banks in the nation are enjoying significant profit rises thanks to a
recovery in corporate earnings, thus creating a demand for funds for
reinvestment and for cash flow, and also thanks to contributions by
bank-group-related securities firms. Combined, the consolidated net
profits of the top 5 banks was 10.6% up in 1H, compared to the same
6-month period last year. ***Ed: And for this reason, we suspect that
the BOJ WILL continue its QE program for now.** (Source: TT commentary
from, Nov 16, 2018)

NOTE: Broken links
Some online news sources remove their articles after just a few days of
posting them, thus breaking our links — we apologize for the inconvenience.



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=> In TT-968 we wondered if the Mitsubishi Regional Jet (MRJ) is
somehow tied in with Mitsubishi Heavy Industries’ overall military
ambitions. A reader gives his take on what is probably happening
behind the scenes.

*** Reader says:

MRJ origins go back to 2002, when MHI knew for sure that it would be
making the wings for Boeing’s 787. These wings are made of
state-of-the-art carbon fiber reinforced polymer (CFRP), stronger and
lighter than aluminum. An unbroken record of previous failure
notwithstanding (ref. YS-11, MU-2, MH2000), MHI has always dreamed of
being an aircraft manufacturer (again – after all, they built the
Zero) rather than just the world’s best aviation subcontractor, which,
to give credit where credit is due, they may be, at least in terms of

MHI convinced Tokyo to green light the MRJ in 2003 – and to give them
JPY50bn of taxpayer money – for two reasons: national prestige and
keeping Japanese civilian aerospace from literally dying out. Some of
the engineers on the MRJ were YS-11 guys pulled out of retirement to
pass along what they knew to the young, inexperienced Japanese
engineers at MHI.

MHI promised, nay, guaranteed that the MRJ would revolutionize the
industry segment by being at least 20% more fuel-efficient than any
competitor. The key to this feat was making the world’s first CFRP
airplane in its class – with a first-in-service “game changing” new
engine (geared turbofan) by Pratt & Whitney as a bonus. The original
plan called for a prototype flying in 2007 and EIS (entry into
service) in 2010.

Whether these ambitious targets were wildly naive or flat-out lies
remains a hotly-debated subject in Japan’s aerospace-watching
underground. In any event, MHI set up its subsidiary, Mitsubishi
Aircraft Corporation (or MAC, but it’s really just MHI), in 2008 to
build the supposedly 100% CFRP jet. The money came from MHI, Toyota,
Mitsubishi Corp. and a half-dozen or so of Big Japan’s usual suspects.
The EIS was now 2013 and this is where the story gets interesting.

Within a year, MHI discovered that for extremely technical reasons we
won’t go into here, the MRJ could not be made of CFRP. MHI’s
technology for its F-2 fighter and Boeing’s 787 simply would not work
for a regional jet: not the wings, not the fuselage: nothing. The key
rationale for the entire program – and the only way to differentiate
the MRJ from its competitors, was obliterated. To make matters even
worse, if that was possible, it was obvious even then that someone
else, not the MRJ, would be first-to-market with the new engine (in
fact, the PW1000G engine started commercial use in January 2016, with

The only intelligent option at this point in 2009 would have been to
build one prototype and then create a face-saving excuse for cutting
losses and quietly abandoning the program. However, Big Japan had
oversold and over-hyped up the program so much, for so long, and so
globally that the MRJ had become a symbol of national pride. The
reputation of the nation was felt to be at stake, and no one would
admit failure. So without saying much to anyone, in 2009 MHI silently
abandoned CFRP and began to design a new aircraft using ordinary
aluminum. To fool the public and satisfy the bureaucrats, an
insignificant number of very small CFRP parts were left in so that MHI
could say, without lying outright, that the aircraft “incorporated
CFRP technologies.”

MHI probably thought that they could get away with this charade
because the reset coincided with the Lehman Shock. Airlines all over
the world were cancelling or delaying new aircraft orders due to
collapsing markets. MHI reasoned that the recession was buying them a
few years to do what Japan does best with a fundamental problem: kick
the can down the road for someone else to eventually have to deal
with. The EIS was then pushed back to 2014.

What followed then was a “perfect storm” of mal-administration and
mismanagement. MHI had no in-house R&D capability for this type of
aircraft (engineers joked that “MRJ” should be changed to “OJT”). The
Japanese demonstrated no comprehension of global certification, and
most critically,
certification requirements in the U.S. Hundreds of engineers wasted
years wiring the MRJ using a design that knowingly violated a 2007
U.S. rule (in the end, they had to start all over yet again). MHI’s
gibberish explanation for this was: “We were aware of the regulation
in our early phase of design, so it is not accurate to say we
overlooked the regulation. Our design was made reflecting the
regulations, but we made a subsequent decision to relocate certain
systems for a better design.

MHI was blindsided by deal-breaking industry-specific “gotchas”, such
as the part of a contract between an airline and a pilot union called
a “scope
clause.” They wildly underestimated the complexity of modern aircraft,
forcing them to use dozens of foreign subcontractors who (depending on
how you count and who is counting) supply between 50% and 90% of the
actual plane – MHI is basically just a parts assembler at this point.
However, apparently thinking that a quality flying machine can sell,
fly, maintain, and repair itself, MHI does not to this day have
meaningful sales, flight training, maintenance, or repair strategies,
oh… or partners.

MHI also put in charge, at all levels, MHI good-old-boys (old as in
“retirement home old”) with no knowledge of airplanes, no
accountability, no (or almost no) English, and no international
experience – but lots of ego and arrogance and love of control and
secrecy. Contractors could not speak to each other, and even design
engineers sitting literally in adjacent rooms were forbidden to talk
together. Everyone had to use the chain of command all the way up,
over, down, and back again in reverse order, naturally resulting in
answers that either never arrived, or had nothing to do with the
question asked if they did.

So the years went by, billions were spent, and delay followed delay.
The first flight in 2015 was eight years behind original schedule and
the current EIS of 2020 (which will not be met) is a full ten years

So what is the situation today? In a word: hopeless. Consider: 1) a
staggering number of vacancies in key areas (look at LinkedIn), 2)
terrible employee reviews (see Glassdoor), 3) the company has
essentially been bankrupt for the last several years, 4) as of
November 2018 the company has not had a single order in more than two
years – a situation that may be unprecedented, 5) rampant confusion
over which of two versions currently has priority, and perhaps most
tellingly: 6) now Bombardier is suing the MRJ folks (in Seattle) for
poaching Bombardier employees and stealing Bombardier trade secrets.
The aerospace world is a small one, and even the most brutal
competitors go out of their way to show respect for professional
ethics, quality, safety, teamwork, fair play, and overall honesty. If
any of Bombardier’s allegations are true, it’s a sign of panic and
desperation by MHI.

The national pride card, being the only card MHI has left, will be
played until the end. Already, the official buzz is openly saying:
“The important thing is not making money, it’s rather supporting a
strategic industry.” (Note to self: Yeah, money… who needs it?).

So how will the story finally end? Aviation experts expect the world
to need some 5,000 additional regional jets over the next 20-30 years.
The market is dominated by two very well-established players: Embraer
of Brazil and Bombardier of Canada. However, Comac of China, Sukhoi of
Russia, and Antonov of Ukraine are also determinedly moving in. All of
these new players are farther along in development and have far lower
R&D and manufacturing costs than Japan. MHI has plowed JPY600bn into
this project (more or less officially), meaning the real figure is
probably closer to JPY700bn now and may even reach JPY800bn by actual
EIS. Switching to USD, that’s about USD7bn! List price for the MRJ
(probably unattainable) is USD47m and the average industry margin from
2014 to 2017 of 7.84% gives a best-case profit-per-aircraft of around
USD3.7m (MHI will be lucky to get half of that since it will have to
discount heavily to sell any aircraft at all).

So even assuming best-case profit margins, MHI needs to sell 1,900
aircraft, about 40% market share, to break even… which is a total
impossibility. An analyst at Teal Group opines that even MHI’s dream
“probably brings us to 1,200 jets, and they’ll never get there.” A
more realistic but still incredibly optimistic number would be closer
to 750 aircraft over 25 years at maybe USD2m profit per plane, giving
MHI a return of USD1.5bn on the USD7-8bn invested over the life of the

So what does MHI – and the rest of Japan – get out of this? The answer
is pretty much nothing. Every class of aircraft is unique, which is
why the entire world has only a tiny handful of aircraft manufacturers
in each class. There is no synergy, no technology crossover, no useful
lessons that might be applied to missiles, helicopters, or any
existing or known future subcontracting for other commercial aircraft.
The full story of the MRJ disaster would make an excellent book, but
given the veil of silence that already shrouds the entire program, I
suspect that in thirty years all
of the notes will have been burned and everyone involved will pretend
that nothing ever happened.



=> Plum Blossom Trail in Takao
Enjoying early spring in Tokyo

Climbing Mount Takao in autumn (or perhaps at cherry blossom time) is
an extremely popular activity in the Tokyo area for both locals and
visitors, but Takao’s plum blossom trail is less well known. I love
plum blossom, so when I heard about the plum blossom trail I took the
train to Takao Station one weekend in mid-March. From the station we
headed west into a rural-looking area where there are four separate
plum groves planted with some 10,000 plum trees. The blossoms were
every shade of pink to red, and of course white as well. One reason I
love plum blossom is that it smells so wonderful, and it was a delight
to wander through the trees breathing in the exquisite fragrance.

The trail was an easy walk of 4.5 kilometers, suitable for any age,
and ended up at Kogesawa Plum Grove, a hill planted with 1,400 plum
trees. Narrow paths zigzagged up the hill through the blossoms. People
were picnicking and enjoying the pleasant weather. Kogesawa Plum Grove
is only open on the weekend, and it was the most beautiful site, so
Saturday and Sunday are the best days to go.

=> Kyoto Black Montsuki
The colour of nobility

It was the most unexpected of homecomings. Over a decade ago, I
literally put on the family crest, in the most formal embodiment of
Japanese attire called kuro montsuki, in a wedding a block away from
where I met my wife. And now, I am at the home where this garment was
made. Little did I know, but I may be a witness to a dying tradition.
As recently as thirty years ago, 3 million of these black Japanese
suits were made, but now there are only 7,000 produced annually. Where
there used to be 15 companies, there are now only two, and one of
these is under threat of closing.

The word montsuki does not refer to the shape of the garment, for when
you hang or fold it, it looks nothing like when you wear it. It only
takes its shape when you put it on. Actually the word means the
putting on of a family crest. When you put it on, you become the
embodiment of hundreds of years of tradition and lineage.



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