Dragons, Samurai Warriors And Sushi On Wall Street
Since China first emerged as a less restricted market, the West has been taking a serious look at how Asian refinements of American business practices have allowed the East to catch up with the West so rapidly. Additionally, despite current economic bumps and bruises, Japan still holds the record for the fastest economic regrouping and industrialization following a military defeat (World War II). Therefore, its not surprising that we find the wisdom and the mystery of the Orient seeping steadily into our investing terminology. Here we look at a few key terms with an Eastern flavor.
Sushi Bond
Japan, by virtue of being an island, learned early in its development that seafood was going to be a big part of the Japanese menu. Rather than going through the unnecessary steps of battering and broiling and slathering and frying seafood like other countries, the Japanese decided to skip the cooking altogether. Despite, however, the initial reluctance some people may experience when first trying raw fish, sushi is now enjoyed around the world; first it was a delicacy and now its common fare in most major cities.
Becoming an international food rather than one firmly rooted in a single country, sushi appropriately lends its namesake to the sushi bond, which is a eurobond issued by a Japanese company. What is a eurobond? Its a bond that is not within the jurisdiction of any one country and, consequently, is offered to investors in many countries. The advantage to the Japanese issuing company is that sushi bonds dont count against the Japanese institutional limit on foreign holdings. The aforementioned flexibility is the reason sushi bonds have gained the same international appeal as the food after which they are named.
Chinese Wall
The ancient emperor of China, Qin Shi Huangdi, wasnt a fan of the Mongol hordes who were persistently ravaging the land and slaying his subjects. His simple solution was to unite the walls that had been built by various warlords to protect their borders. After 10 years and the labor of over 800,000 soldiers and peasants, China had a wall stretching more than 3,000 miles. It wasnt absolutely foolproof, but it did cut down the number of visits from marauders on the other side of the wall. Despite some notable threats, one being Genghis Khan (who generally defeated everyone), the Great Wall of China has stood as a symbol of power, permanence and protection.
The investing worlds pared down version of the Great Wall refers to the division in a brokerage firm that hinders the flow of insider information. At first glance, insider trading doesnt look as bad as having a Mongol horde trample and maim you, but it is actually very damaging to the market, which can operate properly only if investors have equal access to information for making investment decisions.
The U.S. government faced its own version of the Mongol army with the crash of 1929, to which insider trading contributed. Like the early emperors of China, the government wanted to protect its people, so it created a Chinese Wall between professionals and the opportunity to exploit their privileged access to information. Legal (and ethical) barriers deterred people from engaging in insider trading and punished people who cross the line.
The later gangs of inside traders were comprised of analysts and investment bankers who would manipulate and control information to guarantee the successful IPOs of some companies. Under the increasing pressure to find the next big thing, the analysts and brokerages faced the lure to break the rules. In the short lived dotcom craze, for example, the next big thing was nicknamed the new paradigm or the new economy. As we now know, the new economy was built upon a new paradigm that turned out to be baseless. Regardless of the cautions from respected investors (like Warren Buffett), many people followed the herd into a market that the analysts had hyped out of nothing. Unfortunately, no wall, no matter how great, is impenetrable, so industry insiders have continued to slip over the Chinese Wall just like Genghis Khan did almost 800 years ago.
Samurai Bond
Samurai were the warrior caste of ancient Japan. A samurai would pledge himself to the service of his lord until death or dishonor. Sadly, peace and the evolution of weaponry rendered these warriors obsolete. The samurai way of life ended when Saigo Takamori, upset with the imperial order that soldiers could not carry swords, led an army of samurai wielding the traditional katana against an imperial army carrying Dutch firearms. The new Japanese warrior, who was of the Imperial Army, would march into the 20th century using the weapons of foreigners.
A samurai bond is only related to the traditional samurai in a minor way. Samurai bonds are bonds issued in Japan (on the Tokyo Stock Exchange) and in Japanese currency (yen), but the issuer is non-Japanese. So, the neo-samurai (the Imperial Army) were supported by foreign weapons in the same manner that samurai bonds, while foreign, are purchased with Japanese yen.
Ichimoku, Keiretsu, Japan Inc, etc.
From 1960 to 1980, Japan went from a nation characterized by mass production of unreliable products to one on the cutting edge of technology, business and global economics. Skyscrapers rocketed up all over Tokyo, and Japanese companies began to take advantage of their $30 billion trade surplus with the U.S., purchasing American assets like the Rockefeller Center. For the first time in history, industrialized countries were coming to Japan to learn. This had two very interesting effects:
• A massive industry based on pleasing visiting businessmen with large expense accounts sprung up. In Japan, five-star dining and hotels materialized as quickly as the skyscrapers.
• The businessmen, exhausted by the indulgences of Japan and needing to justify the enormous expenses, used as many Japanese words possible in introducing new management techniques (new paradigms?) to curious bosses. For the most part, the cultural gap between North America and Asia prevented the techniques from having a positive impact, but the love of Japanese words in business has continued unabated.
The first such term we find in the investing world is ichimoku, which translates into one look. So, an ichimoku chart is simply a one-look chart - that is, a chart from which the pertinent information can be gleaned at a glance. Plotting historical highs and lows, the ichimoku chart provides the equilibrium prices of a specified security. Also in the world of charting stocks are harami and doji, which are Japanese terms heard in technical analysis. Both describe the appearance that a stock price takes in candlestick charting. Harami in Japanese means pregnant, so it refers to the large middle of the candlestick that was named after it. Doji means little boy, and the candlestick to which it refers is, not surprisingly, relatively small in size. (To get a sense of how these charts are used, check out An Introduction To Ichimoku Charts In Forex Trading.)
The term Japan Inc. was coined by North Americans to refer to the huge amount of collusion between the Japanese government and private businesses. Politics and business became so entangled that corruption ran amok. In Japan the government would change laws to make businesses happy, raising tariffs on imports and loosening environmental laws. Many of Japans economic problems originated in the days of Japan Inc., including pollution, corporate crime and a general lack of competition in some business sectors.
Keiretsu describes the good things about Japan Inc. It has no direct English equivalent: the closest we have is the verb to link together, but we must add the phrase without becoming entangled to translate accurately the terms connotation. Keiretsu is one of the only two Japanese words to have made it into the Oxford English Dictionary (the other is karoshi, or death by overwork). In a business/management sense, keiretsu refers to a loose conglomeration of firms that are held together by a robust corporate structure (by cross-holding shares or contractual agreements), but the companies dont necessarily need to own equity in each other. One of the premier advantages to keiretsu strategies is that they toughen the conglomerate against takeovers and drastic losses.
The Dragon Bond and Asian Options
Dragons have roots in all countries and cultures, but the dragon is ingrained too deeply in the Asian consciousness to be scrubbed out by any cynicism of the modern world. China and Japan have dragons for everything: seasons, weather, luck, knowledge, lakes, astrology, and so forth. The dragons of Asia also act as both the grantors of life (celestial breath) and the ushers of dead souls into heaven. Despite having a nature that encompasses the good and bad of any given characteristic, the dragon represents a force of stability that continues to anchor Asian culture.
Dragon bonds act as a force of stability in the Asian market. They are, however, denominated in U.S. dollars, which has proved to be one of the most stable currencies in the world, a fact that the issuers hope will attract more foreign investors.
Another Asian investment opportunity that exudes the stability of the Orient is the Asian option, whose payout depends on the average price of the underlying asset over the life of the option rather than the price at maturity. This is in stark contrast to a European option, which can be exercised only at the end of its life, meaning that the payout depends completely on the price of the underlying on the day of maturity. An Asian option protects you from the volatility risk that comes with the market.
Asian dragons and Asian options share a trait: they both have handy tails that help them out of trouble. The tail of the Asian option kicks in if the option price falls below a specified average. Once the tail is activated, the options strike price becomes a reference (set) price to save the investor from an asset that may continue to fall in value.
The Bottom Line
Well, thats our look at how the mysteries and intrigues of the Orient have invaded Wall Street terminology. We hope you find more time in your life for the finer things these countries have brought us as well, such as sushi and sake.
