Note: I hope the Globe and Mail does not send their team of lawyers to Tokyo and waive a stack of papers ordering me to remove this blog post. This is a very well write article about what pains the Japanese must face in the near future. As a fellow Canadian residing in Tokyo, I have had the pleasure/displeasure of seeing how badly the politicians have nearly wasted away an entire decade of the country's wealth. Here is the entire article in full. I have added my comments in [ ].
Japan's collision course
MARCUS GEE
From Saturday's Globe and Mail
May 9, 2008 at 9:08 PM EDT
TOKYO — It all comes down to the two inevitables, says Kenneth Courtis: death and taxes.
Mr. Courtis, an investment banker and veteran observer of Asian economies, is at his usual table in his favourite Tokyo hotel, the Okura, talking about the troubles that threaten Japan's future – and by extension, the world's.
Those troubles don't get much press these days. Distracted by the spectacular rise of China (and now India) and frankly bored by the endless Noh drama of Japanese politics, the world has lost interest in Japan's progress, or lack of it.
Japan has passed through its valley of the shadow of death, surviving the burst of its asset bubble and the resulting economic slump that once threatened to pull down the global financial system like Samson.
Over the past five years, its nearly $5-trillion (U.S.) economy has even enjoyed a modest rebound, growing at an annual average of 1.7 per cent. Japan will host the annual summit of the G8 countries July 7 to 9.
Looks are deceiving
Tokyo in spring, 2008, has every appearance of prosperity, success and order. The streets teem with fashionable young women and neatly dressed salarymen. The shops and department stores of the Ginza overflow with Prada, Ralph Lauren and Luis Vuitton.
[The large number of young men and women lugging large bags of designer clothes in the spring is an annual rite of passage: Each April, a new legion of recent university graduates join the labour force. As a result, they have access to a new found wealth all for their own. Since many young people still reside with their parents, they do not have to face the normal costs of paying rent nor paying down a mortage. Ergo, lots of disposable income. These shoppers are the saving grace for large swaths of retail stores up and down the toney areas of Ginza, Harajuku, Shibuya and Omotesando. Heck, if I did not have to pay rent on my rather small but expensive apartment, I, too would be filling my closest with Hugo Boss and Calvin Klein suits. Such as life is, I shope now at The Gap and Uniqlo.]
At the Okura, an elegant grande dame of Tokyo hotels, a middle-aged man and his much younger wife settle in at a table, parking their infant in a designer stroller, while four wealthy-looking elderly women take coffee in one corner.
[Nice hotel, but I still prefer Teikoku.]
“When you have cancer, the stages of remission feel pretty good,” Mr. Courtis says over a bowl of berries and yogurt.
The aura of comfort is deceptive. Japan's recovery has begun to falter as the ripples from the U.S. downturn spread west across the Pacific. Much more serious troubles lie ahead – troubles that, if left unaddressed, could cripple the world's second-biggest economy and affect every industrial country including Canada, which counts Japan as its third-largest trading partner.
[Exactly, if left 'unaddressed'.]
The inevitables
That is where Mr. Courtis and his inevitables come in.
Canadian-born, educated in Toronto and Paris, he has lived in Japan for 25 years, advising clients about investing in Japan and other parts of Asia. As an executive with Deutsche Bank and Goldman Sachs Asia, he was once one of Japan's biggest boosters. Now, he spends just a quarter of his time in his adopted hometown of Tokyo, travelling instead to China and other Asian countries with greater allure for investors.
“Japan is on a massive collision course between two fundamental realities,” he says, scrawling figures on a paper placemat to make his point.
On the one hand, death. Because women are having fewer children, Japanese are dying at a greater rate than they are being born. Result: an aging, shrinking work force.
[The Japanese government needs to take decisive actions to increase the birth rate by considering the following steps: (1) offer parents lump sum one-time payments for each new child born, (2) pass legislation ordering companies with more than 100 employees to create their own in-house daycare facilities, (3) make English the official second language, (4) stop building more bridges and highways and spend more money on mass transportation infrastructure, (5) offer more government academic scholarships to both Japanese and non-Japanese, and (6) work with its Asian cousins to create an Asian-super currency.]
This is the Year of the Rat in the Chinese zodiac. By the next Year of the Rat in 2020, Mr. Courtis says, 43 per cent of adult Japanese will be over 60. They will be retiring or getting ready to retire. Who will work while they play golf? Who will pay their pensions? Who will provide for their health care when they get old and sick?
[Nothing wrong with more old people. Just drop the retirement age and allow people to remain in the workforce much longer.]
The working-age population is expected to fall by one-fifth by 2030, when there will be just two workers for every pensioner.
Now consider taxes. When Japan was trying to dig itself out of its big economic hole in the 1990s, it spent hundreds of billions of dollars on public works and other pump-priming measures, a vast Keynesian exercise that made Roosevelt's New Deal look like a high-school car wash by comparison.
[Actually, I strongly recommend raising the national sales tax from 5% to 10% immediately. And if the pension coffers do not improve, bump the tax rate to 17% from 10% within 10 years.]
The after-effect is what Mr. Courtis calls a “Himalaya of debt” amounting to 180 per cent of gross domestic product, by far the highest among major economies and indeed the highest ever recorded by a modern industrialized country. Who will pay it back?
To illustrate how hard it will be, Mr. Courtis jots down a few scenarios. Even if Japan stopped adding to its debt tomorrow and recorded annual economic growth of 4 per cent for the next dozen years – both highly optimistic “ifs” – it would still have a debt of 115 per cent of GDP by 2020, as high as struggling Italy's today.
Mr. Courtis's death-and-taxes realities are converging at a remorseless pace. An aging population means a need for higher government spending; a high debt means less government money to spend.
Time for reform
Japan has perhaps a couple of decades to bring in the fundamental economic and social reforms that are needed to make it productive and resilient enough to survive the collision. Can it muster the will to remake itself one more time?
Until recently, the prospects for change were looking up. There has been real progress since what Mr. Courtis calls the near-death experience of the 1990s.
[The Japanese can recover but nothing can change until the old LDP Guard (OB) resign/get voted out of office/die of old age/resign in scandal. Until the young turks take over, don't bet the farm that Japan will change in the near future. Give it another 5-10 years before anything happens.]
Japanese banks have cleaned up their bad loans and clawed back from the threatened insolvency that frightened the world in the 1990s. Japanese companies have straightened out their balance sheets, paid off their debts and started turning robust profits again. Toyota is vying with General Motors for the title of world's leading auto maker. Nintendo has reconfirmed Japan's genius for innovation with the wild success of its Wii game-playing device.
[If Toyota were smarter or had a larger team of smart advisors, it would withdraw very slowly from the global auto markets and return to Japan. Nothing good can every come out of Toyota's dream of being the global leader in auto sales. Nothing good. I just hope the Toyoda family come to their senses before it is too late.]
While the world looked the other way, Japan actually enacted some reforms that foreign critics have recommended for years. New accounting rules make it harder for companies to hide bad results, requiring them to report the performance of subsidiaries instead of just consolidated earnings. Revised labour laws make it easier for firms to hire temporary workers so that they can respond to shifting conditions. Shareholders have gained new rights to challenge inept corporate managers.
[Here, here. Job well done.]
In politics, the five-year star turn of reforming Prime Minister Junichiro Koizumi (2001-2006), Japan's most successful politician in decades, showed that the public was hungry for change.
“Japan has changed a lot over the past decade and half,” says University of California professor Steven Vogel, whose 2006 book Japan Remodeled documents the reforms. “The economic crisis was a real shock to the system.”
[The economic crisis was not really a true crisis in my opinion. The 1990s and the economic problems were created by "the wise" in Tokyo. Japan needed to change from its old ways and needed to nearly kill the country in order to save herself. The self-inflicted medication was a good, first step but more needs to be done.]
But just as things seemed to be getting better, doubts have begun to gather about whether Japan is really willing or able to remake itself.
Mr. Koizumi's successors, Shinto Abe and Yasuo Fukuda, have been a crashing letdown. Mr. Abe resigned last September, ill and unloved. Mr. Fukuda, 71, has seen his approval ratings fall to near-historic lows. As he appears on television daily with his sober cabinet colleagues, Mr. Fukuda seems to have come straight from central casting for Japanese prime ministers, with the charisma of a bank clerk and policies as opaque as a sliding paper door.
[This is one of the reasons I believe no person over the age of 50 should ever hold the highest office in any country. No one over 50 for obvious reasons.]
The Fukuda government is so weak that the world's biggest creditor nation found itself without a central bank chief for three full weeks this spring as the ruling Liberal Democratic Party wrangled with the opposition over a successor.
With no clear direction from the top, reform has faltered. The government's decision to block a bid by a British hedge fund to buy more stock in a Japanese electrical utility, J-Power, has confirmed the impression that Japan is allergic to foreign direct investment. The recent resurgence of cross-shareholdings – in which companies make cozy alliances to protect themselves – echoes the bad old days of inbred Japanese corporate leadership.
[I say 'remove all barriers' of foreign investments worldwide. No more illogical reasons of 'threat to national security, or other garbage excuses. If a company is so worried about being taken over by foreign barbarians, then - DON'T LIST YOUR SHARES ON PUBLIC MARKETS. For chrissakes, stop being a crying baby.]
Clinging to the past
Robert Feldman, managing director of Morgan Stanley in Japan, says conservatives in the government and bureaucracy are staging a rear-guard action to defend Japan's old, insular way of doing things.
“In the end, what the traditionalists prefer is the current system with themselves in power,” he said in his Tokyo office. “For those of us who are concerned about Japan's economy, for its place in Asia and its ability to sustain living standards for an aging population, that sort of traditionalist position is incomprehensible.”
[Another reason is that the old guard want to continue living the 'high life' while the rest of the country suffers. These OBs think nothing about the regular folks and corporate warriors. And for that, I hope these old men who sit in their smoke-filled rooms and throngs of perfumed ladies-in-waiting, all drop dead and soon. The sooner the old guard goes away, the sooner Japan can recover economically.]
A 20-year veteran of Japan's reform battles, Mr. Feldman says reform goes through a kind of “hog cycle.” When hog prices are good, farmers produce more hogs, so prices go down and they produce fewer hogs. In the same way, government hastens reform when the economy worsens, reform revives the economy and the pressure for reform eases, as it has in the past few years.
If the theory holds true, the case for reform should be strengthening again. The Bank of Japan has lowered its growth forecast for the coming year to 1.5 per cent from 2.1 per cent. Business sentiment has hit a four-year low and consumer confidence is at a five-year low.
[Keep the BOJ independent. Any time a Diet member stomps his/her feet about the BOJ, they should be forced to resign.]
With interest rates already at a minimal 0.5 per cent, the government can hardly cut rates to stimulate the economy. In any case, consumer prices are rising, so a rate cut might push up inflation. It can't cut taxes or raise spending much either, it's in such a fiscal bind.
Its place in the world
Yes, Japan still has many world-beating companies, household names such as Canon, Honda, Sanyo and Toshiba. But nearly half of Japanese manufacturing by value is performed by much smaller, less visible firms, many of them struggling. “That's the only sector we're competitive in, so it's a problem,” says Kyoji Fukao, who teaches economics at Hitotsubashi University in Tokyo. He estimates that the manufacturing sector's share of the economy is down to 20 per cent and falling. In the highly regulated service sector, meanwhile, annual productivity growth has fallen from 3.5 per cent in the 1980s and late 1970s to less than 1 per cent today.
Partly as a result, overall labour productivity, already just 30 per cent the U.S. level, is growing far too slowly – at 1.2 per cent a year, about half the average for industrialized countries.
Japanese still work amazingly, sometimes dangerously, hard. Lights burn late at most Tokyo offices and death from overwork – so common that Japanese have a name for it, karoshi – is a national health problem. But the hard fact is that they are no longer world beaters.
[I have stopped working overtime. I have drawn a line in the sand and refuse to work more than 14 hours a day. I average only 4 hours of OT a day now. I'm sorry Mr. Boss, but I really want to see my family for a few hours in the evening.]
Nor are most Japanese companies. Their return on equity, a common measure of their performance, averaged around 9 per cent, against 14 to 17 per cent in Western countries.
[ROE: It needs to be pushed way up to the 20% level in order to make up for the past decade of disasters.]
Japan trails in entrepreneurial vigour, too. In the United States, about 14 per cent of companies are startups; in Japan, just 4 per cent. Japan is even faltering in innovation, once the hallmark of Japanese capitalism. The iPod should have been invented in Tokyo or Kyoto, not Cupertino, Calif.
[The government needs to lower the hurdles on starting up one's own company. Heck, I would love to start up my own shop but, don't have the stomach of dealing with stupid regulations and political idiots.]
Wireless telecom giant NTT DoCoMo's format for Internet over cellphones, wildly popular in Japan, failed to catch on overseas, partly because its complex menus proved daunting to foreigners.
[NTT DoCoMo's only problem was entrusting its global expansion plans to a handful of idiots.]
Japanese sentiment
Japanese are painfully aware of how far their nation has fallen. Economy Minister Hiroko Ota told her countrymen in January that Japan can no longer be considered a first-class economy. Japan, she said, had fallen to 18th among the top 30 industrialized nations when measured by gross domestic product per capita. Among the G7 countries that make up the core of that club – the United States, Japan, Britain, France, Germany, Italy and Canada – it has fallen from first in the early 1990s to last today. Meanwhile, its share of aggregate world income has fallen below 10 per cent for the first time in 24 years.
To ordinary Japanese, what matters even more is the rising costs of gas, tolls, electricity and instant noodles. “The politicians keep telling us that the economy will get better, but I don't see it,” says Kaz Shinoda, 50. A high-school English teacher, he has had no pay raise for four years, yet the costs of feeding his wife and two children have soared.
[No salary increase: I know that feeling. I don't even look at my salary statement anymore. It never changes.]
His friend Takumu Kato, a retired biology teacher, has it worse. He recently started work as a night clerk in a 7-Eleven store to make ends meet.
[I, too, am about ready to take on part-time jobs in order to pay for my son's future education. Luckily, he is still young and I won't need to start handing over obscene amounts of money for a couple of more years.]
Millions of Japanese like him have moved to part-time and casual work as the lifetime employment system crumbles. About a third of all employees are now non-regular workers. The Japanese call them “freeters,” from the English “free” and the German “ arbeiter,” or worker.
[Lifetime employment ends because corporate managers failed to execute their strategies properly. End of story.]
The result is a rising sense of insecurity. “It used to be that if you were hired by a company, you at least had a guarantee for life,” says Tetsuya Iida, whose temporary employment agency recently sent him to operate a machine that picks up street litter. “Now you can get fired any time.”
Twenty years ago, the overwhelming majority of Japanese – 75 per cent – used to consider themselves middle class. Today only about half do.
[Middle class? I don't even know what that means. In Japan, we have the upper class (political families) and the rest of us - the lower middle class.]
It's a long way from the “miracle” years. After registering 10 per cent average annual growth in the 1960s, 5 per cent in the 1970s and 4 per cent in the 1980s, Japan's was the most talked-about economy on the planet, a marvel of efficiency and creativity that seemed destined to eclipse the washed-up nations of the West. Readers snapped up books like Harvard scholar Ezra Vogel's Japan as Number One to find out how the Japanese were beating the Americans at their own game. U.S. congressmen railed against Japanese companies for flooding North America with cheap cars, stereos and TV sets while buying up famous assets like Hollywood's Columbia Pictures and New York's Rockefeller Center.
It seemed as if the Japanese had invented a new and better kind of capitalism, one that combined with wealth-creating dynamism of the Western market system with the steady hand of government guidance and the security of lifetime employment.
[I arrived in Japan at the beginning of the fall.]
The beginning of the fall
It all started to unravel on Jan. 2, 1990. That day, the main index of the Tokyo stock market started falling from its dizzying peak of more than 39,000 (nearly three times its level today). The collapse of Japan's stock and real estate markets brought on the “lost decade” of the 1990s, a time of stagnating growth, rising joblessness and soaring suicide rates.
[I survived the 1990s. I survived the Kobe Earthquake. I survived the never-ending revolving door of PMs.]
The things that had been touted as Japan's strengths turned out to be weaknesses. The wise, all-seeing bureaucrats who had guided its rise to riches were, in fact, often blinkered and hidebound, sealed in an unhealthy embrace with powerful, often corrupt, politicians. The giant corporations that had so impressed the world were revealed as coddled, unresponsive dinosaurs whose faults had been covered up by friendly banks and interlinked corporate allies. Mitsubishi's corporate family, for example, included Kirin beer and Nikon cameras as well as Mitsubishi Trust, Mitsubishi Bank, Mitsubishi Chemical, Mitsubishi Electric and others.
Lifetime employment prevented companies from hiring and firing workers to account for economic ups and downs. A stock market that scorned the small shareholder meant that Japanese kept their money in the bank, earning almost no interest and producing virtually no wealth, as it might if invested in the market. Even today Japanese savers have a staggering $15-trillion that is, in effect, stuffed under the mattress.
The capacity to change
Ever since Japan's crisis, it has been clear what has to change to make things right. Companies have to break their incestuous ties with banks and allied companies and govern themselves more like North American or European companies, with independent directors, stronger rights for shareholders and transparent reporting. Government has to ease regulation in the domestic market and put a fire under companies by letting more foreign companies come in to compete.
The country has to make up for the coming labour shortage by bringing in more immigrants and encouraging more women to enter the work force.
“Japan needs the world and the world needs Japan,” says Scott Callon, head of a Tokyo investment fund who is “very much a proponent of more openness, more cross-fertilization with the external world.”
But to get there, he says, Japanese will have to defeat the forces of tradition, insularity and complacency.
“There's a fight on for Japan's future between those who want a brighter future, with more risk, and those who say ‘what we have is what we have and we should protect it.' It's the difference between looking forward and looking back.”
The good news, Mr. Callon says, is that “Japan has demonstrated a tremendous ability to change. This is a country which has proven to be very capable of keeping true to its traditions and culture yet bringing in what works for the rest of the world.”
Despite the inevitables, Ken Courtis agrees. In the Meiji Restoration of the late 19th century, he notes, Japan transformed itself from an isolated, feudal state into a modern power with a Western legal system, an all-new education system and the beginnings of parliamentary government.
Again, after the Second World War, it clawed its way out of the ashes of defeat to become the world's economic wunderkind. It is as wrong now to write off Japan as a spent force as it was to say before that it was destined to rule the world economy.
The question is not so much whether Japan can change, but whether it can change fast enough. The answer is still very much in the balance.
To escape the collision of death and taxes, Japan will need to put on a burst of speed in productivity and wealth creation like nothing since its “miracle” years. Possible? Yes, if Japan grasps the nettle and musters the will to act decisively. Likely? Mr. Courtis scribbles a to-do list for Japan, ranging from massive corporate reform and wholesale privatization of state assets to higher immigration and all-out attack on the debt.
The changes that are needed are profound. Allowing mass immigration would require a huge cultural shift. For a country that still depends on its women to raise the young and care for the aged, seeing women shift en masse into paid work would take another sharp adjustment. Companies fear opening up to a world of hostile takeovers, mergers, critical directors and shareholder revolts.
[I think Mr. Courtis is holding a few recommendations for change. Hold back now unless he wants the Japanese OB club sticking needles into a voodoo doll of his likeness.]
Mr. Courtis looks down at the list. “Now how likely do you think it is that all of that will happen?”
For a society that operates by consensus, with a political system dominated by conservative vested interests, reaching any decision can be an agony, to say nothing of a decision to fundamentally reorder a whole society. “The Japanese knew after Midway that they had lost the war,” says Mr. Courtis, referring to the American naval victory in the Pacific six months after Pearl Harbour, “But they couldn't make the decision to end it.”
Japan had its economic Midway nearly 20 years ago, in the 1990 market crash. Time to change is running out, the inevitables are closing in.
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