Japan a rising or waning sun database uses

In the three months to March 31 Japan’s economy shrank at an annualised rate of 0.6 per cent. Whether that’s the end of this run of sunshine is debated – the weight of economic opinion is it’s not, that a rebound is already evident, and the weak quarter had much to do with a particularly bleak winter.

“The breakdown by component during this period shows that private business fixed investment and exports are the major driving forces of the growth,” he said. “With regard to the outlook, in fiscal 2018, Japan’s economy is likely to continue growing at a pace in the range of 1.0-1.5 per cent, exceeding its potential.

“This is because business fixed investment will increase, reflecting improvements in corporate profits and business sentiment, and exports will rise on the back of robust growth in the global economy.

These positive developments will then transmit more strongly than before to households through a rise in wages, which will lead to some acceleration in the pace of growth in private consumption.”

There is no doubt Japan needs reform: much of the economy, particularly the domestically focussed sectors, remain unproductive; the working population is shrinking; the nation is ageing; the economy needs to become more global to offset flat domestic opportunity.

Ironically, according to Miki Tsusaka, senior partner and managing director of The Boston Consulting Group in Japan, what the relatively long period of growth under Abenomics did was allow a certain complacency to set in – despite the enormous reform agenda still ahead.

“It is a bit unfortunate we have lost this sense of panic,” she said in a recent discussion with bluenotes in Tokyo. “The economy was being driven to change by a certain anxiety. The average Japanese companies have margins, earnings, way, way lower than their global peers.”

Her colleague, BCG partner and managing director Yasuhiro Yamai, said this focusses attention on the third arrow of Abenomics – restructuring of the economy. While the first two arrows, fiscal stimulus and monetary policy, had relative quick and measurable impacts, they are only short to mid-term palliatives. It is the third arrow which is essential for sustainable growth.

“And some say it is stuck, some say it is ongoing, it is not clear,” Yamai said. “But the government believes the future for Japan Inc. is in IT, digital – the problem is in this area we are not moving fast enough. China is moving ahead. The EU, Nordic countries, Singapore, are moving ahead.”

But the population is ageing. Value-based health care, where the costs and outcomes of different interventions are measured, shared, and used to guide the selection of therapies across the health care system, is very challenging but the firm notes Japan has every incentive to be a pioneer.

Ross Rowbury, the president and chief executive of Edelman Japan, who has lived in Japan for four decades and seen several “revitalisation campaigns”, said “looking back, I don’t think I have seen so much change as I have in the last five years – and it is real change, it is mindset change”.

Key to the change according to Rowbury is the realisation in corporate Japan the country cannot remain inwardly focussed. Not only because the domestic economy offers limited growth compared with offshore but even domestically looming labour shortages and technology demand a more global perspective.

“Now more and more companies are really happy to take these meetings, they have more English speakers, they are looking for insights. The allergy against English-speaking foreigners has gone and some companies like Rakuten (the Japanese ecommerce giant) even demand all their staff speak English.”

BCG’s Tsusaka said underlying this waning of innovation has been a loss of corporate vitality. Japan still invests heavily in research and development but the corporate world needs to recover the ability to reinvent itself, both strategically and managerially.

Abenomics does recognise how fundamental this is. The program talks of “providing grounds to drive innovation and realise Society 5.0”. While it’s not clear what happened to 3.0 and 4.0, 5.0 looks at a regulatory sandbox, open data, an ecosystem for startups and collaboration between industry and academia.

There is also a growing body of evidence to support Japan’s more outward looking mindset. Expatriate workers are being encouraged, foreign tourist numbers – amplified by the looming Rugby World Cup and Olympics – growing, there is concerted effort to sign more Free Trade Agreements and a recognition Japan can play a far greater role in bridging the infrastructure deficit in emerging Asia.

Meanwhile, even though Japan has long had an ‘open’ economy, in reality the vast majority of capital flows were internal – ordinary Japanese savings went into the Post Office bank where they were used to buy Japanese government bonds to raise debt for often unproductive domestic investment.

Now there are signs of markets opening more widely, notably in the corporate bond market. For example, S&P Global Ratings believes partially revised guidelines at Japan’s gargantuan government pension fund may pave the way for diversification of Japan’s corporate bond market, creating diversity.

Having first been in Japan with Austrade, which he later headed, then working for financial institutions, Story sees the shift not just inside Japan but in examples like wealth management and insurance giant AXA shifting its regional headquarters from Singapore to Tokyo.

“I’ve done a few books now but this time (with his latest book, Japan Sales Mastery,a number-one seller on Amazon Japan) I was really overwhelmed by the desire from within Japan to gain greater insight into what’s going on in the world – and from the world into Japan,” he said.

Ironically there’s also some upside to the ageing population according to BCG’s Yamai: it is driving intense interest in artificial intelligence and robotics – to help the elderly – while those ageing Japanese are called the “silver” generation because of their accumulated wealth. Which they are now spending.

The world will be closely watching Japan’s next set of economic data to see if the Land of the Rising (Waning) Sun has slipped back into yet another recession. But for once there is confidence that even if that is the case, the underlying story is positive.