Japanese Company Posting Big "Mark-to-market" Losses on Cross-shareholdings

As I have pointed out before, Japanese companies often have sizeable equity stakes in other companies through cross-shareholdings. The biggest cross-shareholdings fall into a grouping system called keiretsu (South Korea also has a somewhat similar system called chaebol). This system works well for the benefit of a few when things are rosy (as was the case in Japan in the 70's and 80's; or 90's in Korea); but they are highly inefficient and work to the detriment of shareholders when things aren't going well. (It's not clear to me why such a system doesn't dominate USA or Canada. Was it was more prominent in the rolling 20's and 30's (anyone know?). Or did it never take hold due to the "individualistic" culture in several European and European-descendent countries? Anyway that's a curious aside.)

Marketwatch mentions in a story that Japanese companies will be posting some big unrealizes losses on their cross-shareholdings.

Japanese listed companies' unrealized gains on stockholdings plummeted 47% to 7.19 trillion yen ($69.12 billion) in the fiscal year through March, according to a published report...

Nikkei compiled the data on unrealized stock gains based on the earnings summaries submitted by 1,704 publicly traded companies that closed their books at the end of March, excluding financial and start-up firms.

Japanese companies typically hold shares in one another to cement business ties, with an implied agreement not to use voting rights to oppose management decisions. But the arrangement leaves companies exposed to the risks of fluctuating stock prices.


Supposedly Japanese accounting can require unrealized mark-to-market gains/losses to be posted as profit/loss:

Japanese accounting rules require firms to reflect latent gains and losses on their securities holdings in shareholders' equity, and if the market price of stocks they hold falls far below the purchase price, they need to post the difference as an unrealized loss.


I'm not an accounting expert but the Japanese accounting system looks like it is only marking the assets on the balance sheet and not on the income statment (I'm not too clear since I don't know anything about Japanese accounting). This is actually helpful to shareholders and seems to differ from what the American accounting profession is trying to accomplish with respect to marking credit assets held for the long-term, where financials post derivative losses to the income statment even if they plan to hold the asset for the long-term or until maturity. I'm not a fan of marking assets held for the long-term or to maturity (in the case of credit instruments) because it confuses investors. It may help the accountants but it hurts investors. The way things are going in America, the income statement is going to be completely useless for investors pretty soon. Even a conservatively-run organization like Berkshire Hathaway is going to see wildly fluctuating earnings which do not reflect "real" income. But I see why accountants, who generally could care less about investors except when getting paid to audit, would do that. The system, as is, can be gamed by financial institutions and they are trying to solve that problem.

I'm writing this post mainly to point out that Japanese companies may have sizeable cross-shareholdings that are not valued properly by the market. It may be very hard to unlock that value (as Martin Whitman has encountered with Toyota Industries, which holds a big stake in Toyota Motors) but it is something that investors should look at when considering investments. When the stock price of the company that is held on the balance sheet drops, it can seem much worse than it really is. It can actually possibly turn out to be a double benefit to invest in the company with the passive investment that has sold off. For instance, if Toyota Motors drops, for example, Toyota Industries may also sell off because its holding declined. But if you are bullish on Toyota Motors and if Toyota Industries is doing fine on its own (the weak stock price reflects its hodling rather than itself) then investing in Toyota Industries may be attractive. But as I mentioned, it is hard to unlock this value (in some cases, one should assume these companies will never sell their cross-shareholdings) so one needs to discount this heavily and simply use it as an additional benefit if the investment works out.

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