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Anyone
who has visited
Japan
in recent years may find the scene unfathomable.
The
economy is in depression, the yen is in freefall, swarms
of homeless people trudge the streets of
Tokyo, crime explodes and some families turn to selling organs to
put food on the table. Leaders dither and vacillate,
letting
China
eclipse Japan.
Far-fetched? Absolutely. Yet the outlook presented by
Tokyo-based economist and author Peter Tasker in his
2003 novel Dragon Dance came up in London last
week at a EuroMoney panel discussion titled “Japan in
2028.”
The
event took place days after an eyebrow-raising cover
story in the Economist, headlined “Japain,” highlighted
big questions about the trajectory of Asia’s biggest
economy.
As even
Tasker, chief investment strategist at Arcus Investment
Ltd., will tell you, the future isn’t necessarily bleak.
And the idea of ignoring Japan seems unrealistic in
itself. It is home to some of the world’s largest
markets and prints Asia’s only truly international
currency.
One of
Tasker’s long-term concerns is still worth exploring:
the growing political and economic vacuum in
Tokyo.
“We have
reached the stage when even Japanese are ignoring
Japan,” said Garry Evans, a strategist at HSBC Holdings
Plc. in
Hong Kong. “But what makes us particularly pessimistic is that many of
the recent problems represent not short-term issues but
a deeper underlying malaise.”
BOJ
replacement
Only on
March 7, exactly 12 days before Bank of Japan (BOJ)
Governor Toshihiko Fukui’s five-year term ends, did
lawmakers propose a replacement. While the nomination of
Toshiro Muto surprised no one—he’s Fukui’s deputy—it has
been held up for months amid political wrangling that
made headlines around the globe.
With its
overnight lending rate at 0.5 percent, it’s reasonable
to wonder what the BOJ could do to help
Japan’s
flagging economy anyway. Even so, Muto’s appointment can
still be blocked. The brouhaha speaks volumes about the
lack of economic leadership.
Things
hardly seem dire at the moment.
“Unemployment is still relatively low and employment
growth strong,” Julian Jessop, chief international
economist at Capital Economics Ltd., said at the
EuroMoney event. “The hard data suggest that spending is
picking up.”
The
question is more about 20 years from now. Here, many
observers have their doubts as fast-rising competition
from China, India and Southeast Asia puts aging Japan on
the defensive as never before. A major concern is the
continued aversion to foreign capital and fresh thinking
in an economy that suffers from an antiquated and rigid
business model.
Financial hub
“This is
not just a question of deregulation and inward
investment policy, it also relates to the strategies of
their nonfinancial companies,” said Louis Turner,
London-based chief executive of the Asia-Pacific
Technology Network.
Added
Philippa Malmgren, president of Canonbury Group in
London: “Japan’s demographics alone mean the government
needs to be acting aggressively now to prepare for the
future. There’s little evidence that’s happening.”
For
example, Malmgren said,
Japan’s
tax system still favors huge companies over
entrepreneurs. More broadly, the emphasis is on raising
taxes, not making the system more pro-growth. That’s
denting Tokyo’s hopes of one day rivaling London, New
York or even Singapore as a financial center.
Japan’s
$4.3-trillion economy is far ahead of
China’s
$2.7-trillion one. Yet Japan needs to act fast to
maintain its place in Asia. It’s not clear that
politicians realize it.
Japan years
We have
all heard of “dog years,” or the theory that for every
year a human ages, dogs age by seven. Stephen Green,
senior economist at Standard Chartered Bank Plc. in
Shanghai, for example, postulates that China seems to
transform itself annually. As such, we are living in the
age of “China years.”
Turner’s
view is that political change in Japan happens at a
glacial pace. While well-intentioned, Prime Minister
Yasuo Fukuda isn’t focusing enough on jump-starting
innovation, raising productivity and improving corporate
governance.
“You
have dog years,
China
years and Japan years,” Turner said. “Is 20 years enough
time for
Japan
to reinvent its economy and corporate culture? I have my
doubts.”
The slow
pace of change explains why the Nikkei 225 Stock Average
is down more than 16 percent this year, almost twice as
much as the Dow Jones Industrial Average. Slowing
US
growth and turmoil in credit markets get some of the
blame. The return of Japan Inc. since reform-minded
Prime Minister Junichiro Koizumi stepped down in
September 2006 gets more.
Takeover
defenses
The old
practice of cross-shareholdings between companies and
takeover defenses made a roaring comeback.
Japan
boasts an impressive stable of globally competitive
enterprises such as Toyota Motor Corp. and Sharp Corp.
Yet progress in the private sector can only go so far if
government efforts don’t keep pace.
One
“saving grace” for Japanese stocks is that a large and
growing proportion of profit comes from overseas,
especially outside the US, said Arcus’s Tasker. Even so,
Tasker told me last week, “It’s hard to get too upbeat.”
If Japan
wants to retain its status 20 years from now, it needs
to roll up its sleeves now. A leading role in the
world’s economic future is Japan’s to lose. |
