At the morning meeting of Kobayashi's strategy and trading team the only topic of discussion was the Chinese seizure of the South China Sea. Few could see any good coming from it for Japan. The nation's dependency on foreign energy supplies had been well canvassed in the press. Only 14 per cent of Japan's total electricity supply was generated by facilities totally within the nation's control clear and hydroelectric power. The remaining 86 per cent was from oil-, coal-, or gas-fired power stations whose raw-material inputs were imported. The vast majority of those imports re than 90 per cent had to transit the South China Sea. The discussion turned to the effect a possible interruption to supply or a prolonged oil-price rise would have on Japan. An interruption to supply was not seen as likely. If international shipping was barred from the South China Sea then the ships from the Persian Gulf and from Australia could travel up the east coast of the Philippine islands. This would add four to five days' extra sailing time which, while unsettling, was well within acceptable limits given the country's stockpiles of oil. It would, however, raise the price of oil on a c.i.f. (cost, insurance, and freight) basis. That would impact on domestic gasoline prices. The bigger price effect, however, was judged to come from the reaction of international oil markets to the incidents in the South China Sea.
Oil was not the only factor. Many Japanese companies were involved in the Chinese economy. In the early years of China's opening the Beijing authorities, suspicious of outside influences, had encouraged foreign investors to seek local partners and with them form joint venture companies. Latterly however China had allowed foreign companies to set up businesses on their own, without local partners. In general, the companies more knowledgeable about doing business in China preferred these `stand-alone' arrangements. Going it alone was not cost-free but it was a risk many took because management control rested firmly in the hands of the investor and profits did not have to be shared with local investors. A good, and now vulnerable, example of this was Matsushita Electric Company, best known for its National range of consumer electronics. It had invested heavily in China, especially in the north-east which was once called Manchuria or, when the Japanese controlled it, Manchuko. It was the north-east port of Dalian where Matsushita made its biggest investment $180 million to produce video recorders. For the Chinese, the Japanese investment was rich with a bitter-sweet significance. This was the trading region which Japan invaded and seized from the crippled Nationalist government in the 1930s. Earlier, however, the Japanese had defeated the Russian Pacific fleet, and showed the world that Asians could fight and win against a European superpower. But Matsushita's managers also knew that China was a country of regions where local priorities often overrode national aspirations. So it spread its largesse up and down the country. In Canton (now called Guangzhou) it had invested $35 million in a plant to manufacture electric shavers, and $28 million in electrical appliances like rice cookers; in Beijing, it invested $28 million in telephone exchange relays. The not wholly unsurprising view of the meeting was that Matsushita was sure to be hit. Kobayashi observed that Matsushita was a little like Boeing, the US aerospace company. Both had made large investments in China and both had hitched their fortunes to the success of China's modernization programme.
Even more vulnerable to selling pressure would be some large firms, like Nippon Oil, which had big investments in the South China Sea itself and was a 30 per cent shareholder of the Discovery 1 oilfield in the Paracels. This placed Nomura in a tricky position. As Nippon Oil's broker, it was honour bound not to sell the company's shares. Years ago it had floated Nippon Oil's shares on the Tokyo Stock Exchange and was the company's agent in all dealings. And the relationship, now spanning thirty years, went deeper. Whenever Nippon Oil wanted to raise fresh capital for expansion Nomura advised on the best form of financing. Indeed, Nomura arranged the billion loan which Nippon Oil issued to fund its share of Discovery 1's development. Nomura was the biggest securities company in Japan, with a 40 per cent share of turnover on the Tokyo Stock Exchange. But only 25 per cent was executed in Nomura's name. The rest was handled by subsidiary firms which traded under different names. Despite the high-tech facade, Tokyo was not like London and Wall Street. Honour, loyalty, and stamina created the Shoguns of Kabuto-cho. This was capitalism, Japanese-style. It worked. It had created the undisputed economic leader of Asia in less than a generation. But there was no way Kobayashi could be seen to be selling Nippon Oil's shares. To do so would be to tear the soul out of Japan's banking tradition. He also had to act within the best interests of his own noble institution. Kobayashi instructed a Nomura subsidiary to handle the Nomura sell orders, while Nomura in its own name would execute any buy orders that might come the firm's way. This way Nomura would be seen to be supporting Nippon Oil.
And who might these sellers be? They fell into two groups: retail and professional. `Retail' was market jargon for household investors. These were the same people Kobayashi had seen queuing for petrol on his way to work and they were invariably women and they were powerful. Retail investors were responsible for 23 per cent of the Tokyo market's turnover. The Japanese housewife was every bit as determined as her `salariman' husband. She managed the household finances, as is customary in East Asia, and was an experienced stock market investor. Having filled up the family car with petrol the next thing the formidable Mrs Suzukis of Japan would do was call their broker with a view to selling. Bitter experience had taught Kobayashi that the firm could not stand in the way of these women. It was best to redirect their funds elsewhere. With the yen under pressure, the dollar was the place to be.
Then there were the professionals. These were the big Japanese trust and investment companies that managed pension funds. They were huge and powerful but paradoxically impotent. They were so big that changing investment direction was akin to the difficulties the captain of a supertanker faced in attempting a U-turn. It could be done, but it required time and a lot of sea to execute. The professionals were to a large extent locked in. They could adjust their holdings at the margin, but not overall. They were at the mercy of the `hedge funds'. These were the money managers who moved hundreds of millions of dollars in an instant from one end of the world to the other and back again. They placed big bets on shares, commodities, bonds, and currencies, and often won, and lost, spectacularly. But Kobayashi's real concern was the US mutual funds. Their power had become awesome. During the 1990s they became the preferred means for US citizens to save. By the end of 1995 their total value was $1.25 trillion. Since then they had grown, on average, by 10 per cent a year, and on the eve of Dragonstrike US mutual-fund managers controlled some $2.6 trillion of assets. Their asset base was staggering and they had a portion of it invested in Asia. But this was mobile money. Mutual-fund managers were notorious for being driven by the requirement to make short-term gains. Here today, gone tomorrow, their presence in Asia's stock markets had added considerably to volatility in share prices. A telephone call and an investor in Kansas could sell Hong Kong and buy US Treasury bills; sell Europe and buy Australia. Individual transactions, however, did not count when compared to the decisions of investment managers. Kobayashi knew from the business Nomura had seen coming in overnight that the mutuals — for all their belief in the Pacific Century — are about to repatriate their funds. And the decision the managers had taken on the Sunday was to sell.