Dogs and Demons_ Tales From the Dark Side of Japan - Kerr [36]
In the West, financial gurus sometimes lament that Wall Street holds corporate earnings captive to shortsighted demands for profit, whereas in Japan, rather than paying dividends to greedy stockholders, companies retain most of their earnings and pour them back into capital investment. Even though they didn't pay dividends, stocks kept climbing throughout the 1970s and 1980s. Thus arose the myth that stocks in Japan were different from those in other countries: they would always rise. When in 1990 Morgan Stanley began issuing an advisory that included warnings of which stocks to sell, MOF viewed this as an ethical lapse out of tune with the moral tradition of the Japanese stock market.
Concentrating only on the benefits to companies that need not pay dividends leaves out several important factors. We all know there are various standard ways to value stock. Most important of these is the price-to-earnings ratio (P/E ratio), which tells you what percent of your investment you can expect a company to make as earnings. A P/E ratio of 20 means that in one year the company will earn one-twentieth, or 5 percent, of the price of the stock, some or all of which it will pay out to you, the shareholder, in the form of dividends. These dividends will be your basic return on investment.
Calculating the true value of a stock gets complicated if you expect the company's earnings to grow dramatically in the future-which is why investors have snapped up Internet stocks in America even though many dot-coms have never made profits and have even suffered losses. But the general principle still applies; that is, the investor expects to be paid dividends, now or in the future, on earnings.
This has not been true in Japan, where the accepted wisdom held that stocks needn't pay out earnings; before the Bubble burst, P/E ratios reached levels undreamed of elsewhere in the world. The Dow Jones average, at its most inflated in early 2000, averaged P/E ratios of about 30, at which point analysts screamed that it was overheated. In contrast, average P/E ratios in depressed Japan reached 106.5 in 1999, more than three times the American level. A P/E ratio of 106.5 means that the average earnings per share of companies listed in the Japanese market is essentially zero.
A situation like this is paradise for industry, because it means that companies can raise money from the public for practically nothing. It works for investors, however, only if stocks always magically rise somehow, despite producing no earnings. That is to say, it works only as long as the stocks continue to find eager buyers. As part of the recovery after World War II, Japan's Ministry of Finance engineered just such a system, and it was a modern miracle. It worked partly because there was then relatively little stock available to the public, given a policy called «stable stockholding,» by which companies bought and held each other's stock, which they never sold. The purpose, as with many of MOF's stratagems, was not economic (which is why Japan's system baffles classical Western theorists) but political, in the sense that it was a means of control. It prevented mergers and acquisitions, which MOF could not allow: the threat of a takeover forces a company's management to manage assets to produce high returns, and this would go against the government policy of building up industrial capacity at any cost.
In order to restrict the