Why I’m bullish on Japan

By Jesper Koll

The media loves to harp on Japan’s “lost decade” and use the world’s second-largest economy as a negative example. Yet while corporations in other countries are still gaming the government for handouts and freebies, corporate Japan has learned the hard way that government actions tend to merely delay the inevitable. This time, Japan Inc is restructuring for real and a leaner, meaner Japan is poised to rise back to the top.

As the global crisis deepens, it is back to basics. No more excuses, no more cushion from fancy financial products. The future winners will be those who focus on their core competence and redefine their competitive edge. Japan’s core competence is clear: superb technology and a proven track record of applying technology to bring innovation and better products to global consumers and producers.

The facts speak for themselves: Japan’s focus on investing in R&D has been relentless. Currently, almost 3.5% of GDP is invested on R&D, by far the highest in the OECD. The U.S. is about 2.6%, and China is barely 1%.

Most importantly, Japan’s R&D investment has steadily increased over the past decade. Japan’s competitive edge may be hidden by the current gloomy cyclical news. But structurally Japan is in pole position—whether energy efficiency, medical devices, construction machinery, cars, electronic components, the world cannot do without Japanese suppliers.

Global patent-applications data confirms Japan’s undisputed lead in Asia. Her engineers filed 28,744 patents last year, which is about 18% of the global total, second only to the U.S. China is often touted as the next intellectual property superpower, but the facts suggest Japan has nothing to fear from the Peoples Republic. Last year, China filed 6,089 patents, not even one-fifth of Japan’s total.

Moreover, over the past four years (2004-08), Japan added 8,480 patents to its annual total—more than twice as many as China did over the same period. Remember, Japan barely produces one-twelfth of the engineers that China does, so clearly Japan’s got a sizable productivity advantage.

Also, Panasonic and Toyota alone registered 3,093 patents in 2008-two companies alone doing more than half of what all of China achieved. Japan’s top six companies exceeds China’s total. Also interesting, in China Huawei Technologies alone accounts for 29% of all of China’s total patents. Japan’s leader—Panasonic—is barely 6% of the country’s total.

Sure, Japan is a developed, advanced industrial economy while China is still in the development stage. However, the diversity, depth and number of intellectual property patents produced by Japanese companies is still overwhelming. Make no mistake—the immediate future will be designed and invented in Japan, not China, nor elsewhere in Asia.

Technology is a powerful asset, but in the end the most important asset for any economy is its people. Here, it is fashionable to lament the decline of youthful vigor in Japan’s younger generation, but this is more an indication of the older generation not willing to let go, rather than the lack of new, creative and forward looking ideas from the younger generation.

In the corporate world, the current crisis is acceleration the generational change. Already, the leading car company, under new, younger leadership, is pushing through changes that the older generation would have thought impossible. For example, steel is now being sources from lower cost Korea and the entire supply chain and merchandising chain is being radically restructured.

Rather than crying to the government, Japan’s companies are making hard but forward-looking decisions to ensure future global leadership and competitiveness. The government is seen as an obstacle, not a solution, to help corporate leaders size the opportunities created by the global crisis. This perhaps is the biggest contrast between Japan and America today: Japan is rediscovering its capitalist roots, while America is gaming the public sector for all it can get.

Japan’s most powerful asset, however, is its people. Highly educated, diligent and hard working, Mr and Mrs Watanabe still possess a basic power and discipline that build a strong foundation for future recovery. Everywhere global consumers face harsh adjustment, with unemployment rising and debt repayments mounting. Japan is not spared the former, but has nothing to worry about from the later.

Household balance sheets are very strong, since Japan’s deleveraging already happened during the 1990s. Prudent borrowing and spendthrift financial management is nothing new to the Japanese people, and the current crisis is not a financial and balance sheet crisis for Japan’s consumers.

Indeed, if there is one household sector in the world that has the financial wherewithal to invest, it is the Japanese households with their huge liquidity base—almost two-thirds of Japanese household financial assets are in bank deposits/liquid assets. Just as in management, the generational change of these assets from old into the hands of the young, will unfreeze this capital. A young generation will take risks, in fact is eager to do so sooner rather than later.

Finally, Japanese politics is much better than its reputation. It’s fair to criticize the lack of leadership in the current government. But let’s not forget that Japan is a functioning democracy. The opposition Democratic Party of Japan (DPJ) has a real chance of winning control of the government, not just because the ruling Liberal Democratic Party (LDP) has made such a mess of things, but also because their ideas are actually forward looking, new and credible.

Heath-care reform, pension reform, tax reform, reform of the technocracy—all the hard-to-tackle policies at the core of Japan’s problem are right at the top of the DPJ agenda. Where the old-generation LDP just waffles, the young DPJ wants to make real changes—just as the young corporate leaders are actively building a new, leaner and meaner corporate Japan.

Of course, there is much that needs to be done. Most daunting, perhaps, is the task to reform public finance. It’s well known that Japan’s fiscal deficit is more than 180% of GDP. But its real problem is that the tax system is terribly inefficient—the tax multiplier is barely 0.5, while in most OECD countries, including the U.S., it’s about 1.

But every country faces harsh fiscal realities as the cost to combat the crisis mounts. In the end, public debt will have to be paid back by the people and by the returns generated on national assets. Japan’s technology base and its powerful diligent workforce should bring high returns.

With the stock market, land prices and the level of production all back to levels last seen in 1983, it’s certainly been fashionable to “short” Japan and treat it as a has-been. But Japan thrives in times of hardship and global turmoil. This time, in my view, will be no different. A new generation of Japanese leaders in business and politics is poised to emerge and, together with the strength and creativity of the Japanese people, will prove that it is by no means a lost generation.

Jesper Koll, former chief economist for Merrill Lynch Japan, is the president of TRJ KK, a Tokyo-based investment-research firm.

Far Eastern Economic Review

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Latest 15 of 48 Total Comments Show All

WMD at 05:08 PM JST - 28th March

Japan,with it's rapidly aging population is, as we all know, sliding rapidly downhill. It had its heyday in the eighties. It feels as though this article has been written by a starry eyed newbie.
Seiharinokaze at 10:45 PM JST - 28th March

taniwha,

To be honest, imperialism was not Japan's speciality though I don't think there were plenty of resources to snatch from our neighboring countries compared with other great empires. Since earlier on the century before last, Russia tried to come down southward to the Indian Ocean in the Central Asia and also through Manchuria to the Korean peninsula in the Far East. Whereas Britain conquered India and was encroaching China from Shanghai and Hong Kong. In this Great Game, Japan was picked out perhaps for her ingenuity and drive as a promising chessman for Britain to contain Russia in this region. The Meiji Restoration was even realized with backup from Britain. And halfway through the game the U.S. joined by setting Japan against China and eventually pulled down Britain from its position. Postwar Japan then became a chessman or chest for America. Should Japan be proud of herself for being picked out two times or should know better?

At least it's high time anyway we knew that Anglo-American style management doesn't fit or save this country as there are scarcely any business corporations that have not come to a dead end which had introduced globalism and by-result management in the last decades after the bubble economy collapsed.
Potsu at 05:17 PM JST - 30th March

All this technology and money and living/housing conditions are still very very ordinary.
jonnyboy at 05:27 PM JST - 30th March

All this technology and money and living/housing conditions are still very very ordinary.

the widely held belief that japan is some sort of futuristic sci-fi paradise, like something out of the Jetsons, is an example of very successful PR, but a complete myth that really needs to be put to bed
Nessie at 06:29 PM JST - 30th March

corporate Japan has learned the hard way that government actions tend to merely delay the inevitable

Fovernment action and corporate Japan are indistinguishable.
taniwha at 11:28 AM JST - 31st March

Seharinokaze

I'd say imperialism is what it is, be it small or big size. The fact that Japan wanted control of access to Manchuria back before World War 2 began may in fact have had more to do with geopolitical concerns than access to minerals in the ground.

Good points about the imperialist intentions of the other nations leading up to that period I think.

Globalism was not introduced by "Anglo-American style management", it is not an attribute solely of Western big business. If you look at some of the points you have already made earlier in your post you can see how globalism has been developing for more than a century.

When Japan moved into Manchuria, followed later by its move into areas of South East Asia and the Pacific, that is also an example of the process of globalization. In this case driven by imperialist interests; that is, a Japanese elite in control of the nation state and served by and acting to serve big business interests (largely itself).

Globalism does seem to have been driven largely by the desire to trade, and that is a fairly universal desire.
tranel at 10:45 AM JST - 1st April

"But let’s not forget that Japan is a functioning democracy."

Brother, where did this come from? I agree with many things in the above article, but THIS is just laughable.
davidattokyo at 05:11 PM JST - 1st April

I am not sure there is a significant difference between LDP and DPJ in terms of policy?

Japan's politics should be privatised I reckon.
Seiharinokaze at 03:02 PM JST - 2nd April

taniwha

Globalism is what stronger world powers has to force for their own interest on lesser nations. Modern histories in Asia is full of such schemes and martial outcomes. Afghanistan is a good example. The world players often sent troops there since early 19th century all to little purpose. Will they ever learn?

The samurais of Satsuma, however, knelt down to globalism after the Anglo-Satsuma War in 1863 amidst the national movement calling for the expulsion of foreign powers, and with backup from Britain they eventually usurped the government (the shogunate) by holding up the Imperial brocade. Even the victory of the Russo-Japanese War was not feasible without help of the British Navy officers and the good offices of Rothschild. Whereas in Afghanistan and China the expulsion of foreign powers remained a chronic imperative disturbing the process of modernization. Neither the Opium War nor General Gordon's victory over the Taiping rebellion let the Chinese take "If you can't beat 'em, join 'em" attitude as easily as the Anglo-Satsuma war did with the samurais. You can call it Japan model.

So Japanese leaders submitted tamely to the trick of globalism. Anyone who opposes to selling away his souls and country to the world power is regarded as backward and excluded as a social outcast. Such is what globalism is all about. But now it's getting questionable as Koizumi's structural reform was mostly to let outflow the national wealth and monetary globalism devastate the domestic economy. Japan model is loosing its validity.
MASSWIPE at 10:26 PM JST - 2nd April

Mr. Koll has an almost religious faith in Japan, and he is entitled to his opinion. But again, one can't help thinking that he is talking up Japan to at least partially serve his own interests as a Tokyo-based investor.
Sarge at 10:31 PM JST - 2nd April

"Why I'm bullish on Japan"

Just take a look at the current Picture of the Day.
LoveUSA at 10:38 PM JST - 2nd April

Just take a look at the current Picture of the Day.

what do you have agains forklifts?
MASSWIPE at 12:42 PM JST - 3rd April

"You can call it Japan model."

Many people would prefer to call it "howling with the wolves", which is why so many people consider the actions of Japan from 1868-1945 to be so deplorable rather than heroic or justifiable in any way.
Seiharinokaze at 06:59 PM JST - 3rd April

Well, the model continued after 1945. And it tends to drift about when the world power shift occurs. But anyway I am rather bearish on Japan unless we put an end to the puppet regime of LDP and bureaucrats who are howling with wolves at their back.
TokyoHustla at 05:48 AM JST - 17th April

davidattokyo,

"I am not sure there is a significant difference between LDP and DPJ in terms of policy?"

Really? Are you serious? The LDP is the government itself, with decades of experience in government and running one of the most powerful nations on earth. The DPJ, on the other hand, is a rag-tag group of castouts and losers from other parties that rid themselves of such flotsam. The DPJ has never proposed a useful law, has never put forth any good ideas, and has done nothing but try to slow down the speed of legislation. Japanese people see through the fraud of the DPJ, which is a party based on the ego of Mr Ozawa. We will reject him thoroughly in the next election.