Wealthy Nations Daily Update - Japanese IPO’s

Shares of the Japan Post trio finally began trading today after a decade old political promise of privatisation and months of hype. The USD 12bn IPO was the largest since Alibaba’s record USD 25bn issuance in September last year. Eleven major underwriters and countless local brokerages have been focusing on this deal along with swathes of domestic savers who are keen to move some of their mountain of savings into something safe, familiar and slightly less unspectacular than JGBs. Likewise government officials are relieved and see this as the beginning of further privatisation in order to reduce wasteful public spending and raise circa USD 33bn for reconstruction funds, primarily to help rebuild in the northeast areas damaged by the 2011 earthquake.

The Japanese government has been keen to encourage local savers to invest more in shares and earmarked around 70% of the deal for domestic individual investors. The 144 year old postal company issues were more than 5x oversubscribed and priced at the top of their ranges; giving a combined market cap of USD 116bn. Yet this morning saw the value of Japan Post Holdings (JPH), Japan Post Bank (JPB) and Japan Post Insurance (JPI) surge to around USD 145bn (a similar combined market cap to the likes of Intel, Cisco or PepsiCo) after the stocks climbed 26%, 15% and 56% respectively. Such privatisation gains in Japan are not unheard of; in 1993 East Japan Railway rose 58% on its first day of trading and on 10th February 1987 the even larger scale privatisation of Nippon Telegraph & Telephone (NTT) saw its stocks rise 34%.

The success of this IPO could catalyse greater public interest for investing in Japanese stocks with the safe household name of Japan Post acting as a steppingstone for the bounty of risk averse and first time investors just as the privatisation of NTT did 28 years ago. Alignment of the global demand for safe alternatives to government bonds along with governments’ desire to raise funds has already led to similar recent privatisations of UK’s Royal Mail in 2013 and Poste Italiane’s landmark offering last month. Japan plans to eventually sell all but a third of JPH and exit the bank and insurance arms entirely. But before that China will also have joined the party with the privatisation of its Postal Savings Bank of China (PSBC) next year, expected to be double the size of the Japan Post combined IPO and possibly break the record currently held by Alibaba.

Japan is well known to have government debt levels in excess of 230% of GDP but many forget that around 90-95% of this is held domestically; it was these savers that flocked to today’s IPO. When accounting for household and corporate assets the country is a strong creditor with Net Foreign Assets around 62% of GDP. As such Japan is one of the countries we include as we pursue value investments; more recently we have only held a small allocation to the region as such value is scarce. But with the current dynamism in the market, as one of the largest pools of private savings in the world is compelled to adapt, and new privatised entities such as Japan Post Bank (which at USD 62bn is now Japan’s second largest bank after Mitsubishi UFJ Financial Group (90bn) and fifth globally in terms of customer deposits) make plans to increase their global business, we will continue to be on the lookout for worthwhile investments wherever they may be found.

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