As Japan struggles to protect its population from the radiation risks of the nuclear crisis at Fukushima Daiichi, it might seem strange to suggest that Tokyo should be trying to to reap more profits from carcinogenic cigarettes.
But the idea is not as absurd as it sounds. The ministry of finance already makes many a pretty yen from its slightly more than 50 per cent holding in Japan Tobacco, the world’s third-largest publicly listed tobacco company by sales volume after Philip Morris International and British American Tobacco.
In the year to March alone, JT paid more than 30 billion yen ($370 milion) in dividends to the finance ministry, money made in large part from the 135 billion cigarettes it sold to domestic smokers, whose pleasure in tobacco’s fragrant fumes comes at the price of higher cancer rates.
Such dividend income is particularly welcome given a yawning fiscal deficit and the huge cost of dealing with the March 11 earthquake and tsunami and resulting crisis at the Fukushima Daiichi nuclear power plant.
But some people think the pay-out should have been much bigger. In a feisty letter sent this month to Yoshihiko Noda, Japan’s finance minister, an activist UK hedge fund suggested shareholders in JT were being badly underserved.
While JT has handed back an average 25 per cent of earnings in dividends and share buy-backs over the past three years, The Children’s Investment Fund complained, British American Tobacco had returned 70 per cent and Philip Morris International a hefty 120 percent.
To close the gap, TCI suggested JT’s chief executive, Hitoshi Kimura, should be fired for “destroying shareholder value” and a share buy-back scheme implemented that the fund believes could double the tobacco group’s share price.
In its defence, JT says it has been making steady progress toward its target of returning 30 per cent of net profits in the form of dividends, and that if existing Y20bn buy-backs are taken into account the real rate would be around 36 per cent.
Yet even JT accepts that expensive acquisitions aimed at expanding into food and pharmaceuticals have yet to pay off.
But while TCI’s complaints deserve a hearing, few analysts expect them to have much impact, for the moment at least. The finance ministry, a famously haughty body whose bureaucrats have long been seen as Tokyo’s most influential, has been satisfied by JT’s “steady” performance, says one official, waving aside TCI’s interjection as just one of “many different views among shareholders”.
Such complacency looks irresponsible, given Japan’s urgent need to show that it can balance its books. Gross state debt is this year set to soar beyond 200 per cent of gross domestic product, while income from new bond issuance will outstrip tax revenues for the third year in a row.
If the finance ministry hopes to persuade a hard-pressed population that tax rises are needed, it would be wise to demonstrate that it is squeezing the best possible returns from existing state assets.
Yet the real scandal is not that the government may be earning too little on its tobacco shareholding, but that it has one at all. Though privatisation began in the 1980s and the market is now basically open to imports, legislation for the latest round of sell-offs early last decade left Tokyo with a stake of 50.01 per cent.
The result is a mass of moral incongruities and conflicts of institutional interest. A government that on one side is spending vast sums to minimise risk of exposure to potentially carcinogenic radiation leaked from the Fukushima Daiichi plant is at the same time profiting from selling the same people cancer sticks.
The irony is compounded by the fact that cigarettes themselves are a known source of radiation exposure, containing lead-210 and polonium-210 that, according to the US Environmental Protection Agency, “can accumulate into very high concentrations in the lungs of smokers”.
Health activists say finance ministry reluctance to strangle its golden goose has slowed anti-tobacco efforts in Japan, where male smoking rates remain well above those of other developed nations. A thick fug still shrouds Irish bars in Tokyo, for example, seven years after Ireland banned smoking in such places.
Support for state ownership rests in part on a related arrangement under which JT is required to buy Japan’s entire tobacco crop – a reflection of past opposition from agricultural interests to market opening. Yet only 10,000 farmers in Japan still grow tobacco leaf and kowtowing to such a minor interest group can only undermine the cause of badly needed farm reform.
JT itself wants the government to sell down its stake to make it a “more normal” company, even though that could give pesky investors like TCI a bigger say. Achieving full privatisation will require legislation and will not be easy, but it is long overdue. The government could even use some of the proceeds to fight cancer.