Japan awaits Buffett's approval

Japan has about a year to pass the Warren Buffett test.

That is when Berkshire Hathaway Inc's Eitan Wertheimer, who calls himself Buffett's "travel agent" for finding opportunities outside the US, aims to get the Sage of Omaha to Japan. Headlines about Buffett spotlighting local companies are just what Asia's biggest economy needs.

One shouldn't exaggerate the importance of one person. Yet we are talking about the world's most famous investor here - and a guy on the record as seeing little to buy in Japan. Buffett's seal of approval would be marketing gold for a nation in need of foreign capital.

Getting it will require furious effort. Prime Minister Yukio Hatoyama is starting at a big disadvantage, thanks to the complacency of the party that ran Japan almost uninterrupted for half a century. Every moment that passes without meaningful change reduces the odds of impressing investors.

Top priorities include upgrades to corporate governance, taxes, hedge-fund laws and English proficiency. Any of these will be daunting and require huge amounts of political horse trading. It is vitally important, though, that Japan's new government at least provide a blueprint and timeline for a financial overhaul. Buffett has long limited his Japan investments because of low returns on equity and a corporate culture that is unresponsive to shareholders.

The billionaire personifies why Japan's emergence from recession is not cheering investors. The sense is that even if the nation is growing at an annual 2.3 per cent pace, management traditions remain stuck in the past.

The high cost of production amid the rise of low-cost China and India still is not being adequately addressed. That leaves Japan in an increasingly unproductive position in a region where economies are moving in the other direction.

For value investors, though, the way in which Japanese companies are typically run is the key problem. The prevalence of takeover defences and poison pills to avert mergers that may benefit shareholders are a major concern.

Managers who don't have to look over their shoulders are less subject to the forces of creative destruction emphasised by economist Joseph Schumpeter. They are not on the hot seat to transform their businesses or constantly innovate.

It is the little things that say the most about what's wrong with corporate Japan. Thousands of companies still hold their shareholder meetings on the same day, limiting the risk of scrutinising questions from the floor. It is a stark reminder that investor rights remain a novel idea.

Cross shareholdings unnerve foreign investors. Japanese companies can't seem to scrap the policy of loading up on stocks of friendly businesses, and vice versa. The idea is that you protect me from outside influence, I'll protect you. It blew up in Japan's face during the global crisis. As share prices fell, balance sheets weakened.

Creating a more welcoming tax environment would help, too. It is less the level than the structure; it benefits corporate behemoths over startups. That makes Japan more about protecting existing brands, while inhibiting the establishment of new ones that would create jobs and excite overseas investors.

Making it easier for hedge funds to operate in Japan would get Tokyo closer to its goal of being a global financial hub. So would redoubling education efforts. Political incorrectness aside, English is still the world's business language.

Buffett has certainly found appealing companies in Japan. In September 2008, Berkshire acquired Tungaloy Corp, a maker of tools for cars and planes. Berkshire's Wertheimer told Bloomberg Television on September 10 that he hopes to talk Buffett into visiting Tungaloy "in a year from now".

A Japan visit would be about looking for buying opportunities. Wertheimer says his main role is to accompany Buffett on trips and facilitate the Omaha, Nebraska-based investor's deals and expansion abroad.

Getting a "Good Housekeeping" stamp from Buffett will require some heavily lifting. It is unclear if Hatoyama's Democratic Party of Japan is prepared to do much of it when it takes power this week.

Japan has much to do, and there's not a moment to waste.