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Halloween hullabaloo has become a big thing in Japan. 20 million people spent USD 1 billion on crappy merchandise for their kids and teenage revelers totally blocked Shibuya crossing at Saturday midnight, you simply could not move there. A foolish big costume party posing for selfies, yet all peaceful, different from Turks and Kurds fist fighting already at 6.30 in the morning when lining for national vote at their Embassy. Such unruliness helped again to firm up the public view of what will take place if more immigrants are allowed into Japan. You've got to maintain your cool always here: even the political leaders of Korea, China and Japan managed that in their long overdue three- way summit over the weekend. That it was done by sweeping all controversial subjects under carpet is beyond the point: all tried to look their best in front of cameras and pledged to continue talks to build for better relations, an important win for Abe-san who had been excommunicated by the two others for past 2,5 years.

Unfortunately, the reality on the ground cannot be all tidied up however world's political leaders try. Starting the review this time from Japan economy, the 3Q.GDP data that should be out this week might show another quarter-to-quarter decline filling the official definition that Japan is again "in recession". Last year it was the sales tax increase that set Japan off its growth track, this time the change is blamed on the rapid slowdown in China. All the "Abenomics" has not helped to set strong enough fire in the belly of the Japanese consumers who make 60% of the GDP to keep demand decline in the neighbor country from impacting Japan negatively. Fall in exports to Japan's No.1 market has led to growing inventories, cut backs in production and changes to business forecasts and investment plans. Construction machinery makers like Komatsu and Kobelco were first to feel the pain followed by other machinery and material makers from chemicals to steel, In USA, competitor Caterpillar already announced plans to cut its work force by 10,000 or 10% of its total because China slowdown. Japan's continued growth in exports to USA and Europe, +10% and +5% respectively last month, were not enough to compensate -4% decline in China ending the September total at +0.6% only, a clear decline from +3% in August. The domestic consumer demand started to grow again after decline in June-July, but the general mood is not good as government neglected people for over six months focusing on its unpopular defense legislation.

If the weakness persists, it will add pressure on Governor Kuroda to step up BOJ's monetary easing policy again. Another basis for new central bank action is that its official target for 2% inflation seems more and more far away: CPI was down to zero again in August. Kuroda maintains his optimistic view that the tight employment situation is bound to increase wages and boost consumption in time: across Japan there's now 1,25 jobs for each applicant, the highest figure since 1992, while Tokyoites are said to be able to choose from even 4,5 jobs. BOJ admits that the inflation will not grow beyond 0,5% this year and that the GDP growth for the year will remain just 1%. Such wage discipline and price sensitivity would be admirable in any other country, yet it only serves to keep Japan stagnant as consumers are clutching on to their purses. Even for next year, the unions plan to target just 2% general spring rise, something very conservative any other place. And that covers only permanent staff with temporary workers, who make over 30% of the total, left to look after themselves alone. Government's recent change to extend the validity of such contracts from 2 years to 3 years works against its own growth policies.

It's clear now that early on into Abenomics the consumption boost came from rapid rise in the share values that put money into pockets of those who already had some there and owned corporate shares. This week's privatization of Japan Post Holdings, Japan Post Bank and Japan Post Insurance Co., the world's biggest IPO since China's Ali Baba, follows on the same track. The offering is geared to attract private investors with shares priced low at JPY 1000-2000 each and based on less than half of each unit's book value while the main attraction is that the companies have committed to high dividend payout, 50% or more of the profits, not expectation of their value growth. News of the advance bookings indicate that the strategy is working well with over 80% reserved by private persons, the unit price ending at the top of the set range and demand exceeding the offering 5-10 times. The government is set to gain JPY 1,5 trillion (USD 12 billion) for just 11 percent of the three companies and, with more to follow, it has already pledged to spend JPY 4 trillion (USD 33 billion) of the gains for Tohoku catastrophe area rebuilding works. The banking unit, the world's biggest with JPY 180 trillion (USD 1,6 trillion) total deposits and some 24,000 branches, will be quite a behemoth once openly competing on the financial markets and bound to lead to wholesale reconstruction of Japan's big number of small regional banks that still exist across the nation. Such banks have over 11,000 branches and pride in long traditions and close relations with local communities and companies, yet they have been long time struggling to make business profit with today's low interest rates and aging, declining population. With more than twice as many local post offices turning serious competitors who can handle your banking together with your mail and insurance, you can bet there will be strong pressure for rationalization and mergers.

These numbers show again that, despite the general feeling of weakness today, there is depth and strength in Japan economy but also that there is still much to do to make business better. Another observation is how we all are now so much impacted by China, it sheer size, its sudden economic volatility and political moves. When even US central bank makes its monetary policy decisions today based on changes in China and not just how economy looks across USA, it is no wonder that Japan, closer and smaller with strong business ties, is impacted by the big neighbor. The challenge is complicated by China's opaqueness and unreliable official data that makes it hard to grasp what's really going on there. For instance, while the Beijing officials just announced that the 3Q.GDP growth was 6,9% - slightly better than the expectations, of course - many analysts put it at just 4%. The lower growth and growing difficulties to make business in China - a recent World Bank survey put it at 84th among 188 nations on how easy it is to do business - has caused many companies to reduce risks by downsizing or totally pulling out. One recent case is Suntory, who decided to give up its 50% share in Tsingtao, China's famous beer brand, ending its 34 year presence on the market in preference for focus on USA, where it this year bought Jim Beam and its group brands for USD 15 billion. Like for many other products, China is the world's biggest beer market counting for 10% of the global consumption, yet the companies there make only 3% of the global profits and after 10 years of constant growth the demand last year turned to decline as it has done in so many mature markets around the world.

Yet, other consumer related companies still see big growth potential in China. "Fast fashion" retailer Uniqlo is one: it has 360 stores in China, the most in any country outside Japan, and plans to expand that to 1000 as part of its global growth plan to triple its turnover to JPY 5 trillion (USD 40 billion) by 2020. CEO Yanai says the economic slowdown and changing consumer tastes away from luxury brands in China will serve to boost demand for Uniqlo brand that already sells more in China than its global competitors Zara and H&M. The company has tied up with opening of China's first Disneyland in Shanghai by devoting one full floor of total six in its flagship store there for Disney products.

The China-Japan economic relation is growing the other direction, too, with the huge volumes of Chinese tourists reaching new record again. August arrivals were already 590,000, which is more than a full year just some time back, making Japan now the most favorite destination for China's outbound tourists for whom shopping is as important as sight-seeing. To carry them all here 20 China flights per day to Haneda airport were last week doubled to 40 per day and that's just one airport! It looks like the collapse of the China share market did not have much impact on "normal" tourists' spending habits: they still look for value in genuinely Japanese consumer electronics, low priced toiletries and cosmetics as well as safe (!) food. With each tourist splurging out an incredible JPY 240,000 it is estimated their monthly spending went over USD 1 billion for another nice boost to Japan retail biz.

On political level, too, the preparations for last weekend's three-way summit meeting looked much easier between China and Japan than with Korea, whose leader is bound by Parliament to keep coming up with the old "sex slave" history no matter how much she would like to focus on future related topics. It seems that with relations tightening up with USA, the Beijing mandarins now seek to soften up their feud with Japan and have clearly shifted their maritime area claims from East China Sea to South China Sea where their building of giant military bases on artificial islands under civilian camouflage has finally been confronted by US Navy. Meanwhile their cyber security attacks on US business have continued no matter what promises Mr. Xi made to Obama on White House lawn two weeks ago. Clearly, China wants to be recognized as equal to USA and in that race "minnows" like Japan don't count much. In fact, the new détente with Japan is progressing so rapidly that Komeito leader Yamaguchi already invited Xi to visit Japan when he met him in Beijing two weeks ago.

Still, Japan and China political leaderships each retain their official calm distance and as happy as Japan is for reduction in tensions, it certainly is not bowing all the way down to ground in front of the new Emperor in Mao-suite as London did last week. It is seldom we can witness so repulsive "kowtowing" from leaders of a hither-to respectable country as Messrs. Cameron and Osborne showed in their talks, pomp and circumstance harnessing even the old Queen, her family, white horses and a golden carriage in return for EUR 40 billion investments and pole position for handling the future internationalization of China government money. Epithets like "new golden area" and "best partner in West" were thrown around with suaveness of used car salesmen just when their old "special partner" USA was confronting China in South China Sea. Little did they seem to care either for security risk in handing the country's nuclear plant building and operation together with other infrastructure to China government or for the 5000 British steel workers who were being laid off same day thanks to China dumping its gigantic excess capacity now around the world. For London, its City banking is its most important business and with laundering of Russian money now dried up, a new source with much bigger portions is warmly welcome.

Never to be outdone in milking money from China, Mrs. Merkel led a German business delegation to China the following day. That Volkswagen was its flagship member shows how deaf the German leadership is for global concerns about the moral collapse at its leading carmaker and damage to its "Made in Germany" brand. The details that have emerged from the VW scandal and the lack of proper follow up measures show what an extraordinary monster it is and what a long way it has to anything resembling modern corporate governance. With ownership shared 50% by a private family and the rest by local government, trade unions and an Arabian investment fund, Volkswagen does not have to face hardly any "real" shareholders and this shows in its response to the scandal. The Group CEO resigned only after long delay, yet continued to insist he "knew nothing" and to keep his place as CEO of the family holding company as well as chairman of the group sales company and the truck making company. VW management claimed with straight face that only a few runaway engineers were culprits for installing deceiving equipment to 11 million cars and any interest for reform looks small as the newly selected CEO is the old CEO's former right hand man. An internal committee is studying the matter, but it is said to take long time and no schedule has been published either for fixing the defective cars.

We don't know if Mrs. Merkel really is not worried about the damage to Germany's image around the world or if she just thinks that what happened is not anything remarkable in China, but VW's participation in an official delegation is an important sign of continued support to the tainted company. China is VW's biggest market where it makes 65% of its profit and by adding some "creative counting" there plus the "clean diesel" campaign in USA, its global sales exceeded Toyota's during the first six months of this year, a long held dream of Herr Winterkorn. Unfortunately it lasted only three months as the new 9 month statistic shows that Toyota has reclaimed its No.1 position - and this is BEFORE any negative impact on VW sales from the scandal around the world. Maybe VW and Merkel think losses elsewhere can be patched up in China. Mr. Xi certainly showed his appreciation for her with a small welcoming gift of 30 plane order to Airbus, yet that's only 10% of what he gave to Boeing when visiting USA. For China, Germany and UK, even if helpful, are minnows just like Japan. It's USA that it wants to equal and challenge.

One strange connection in the VW-Toyota run was the Japanese machinery at the US technical institute that exposed the German fraud. Small, family owned Horiba Ltd in Kyoto makes about 70 percent of the world's emission test machines and helped to tip off the US researchers to VW's scheme to hide its diesel engines' pollution. It's another example again how many unknown Japanese SME's are global key players in their selected technical fields.

Another Japan connection will help the Germans to pay the huge fines that US officials are expected to set for them: just a month before Suzuki paid it USD 4 billion to buy back its own shares that VW owned in termination of 5 year old alliance agreement that failed to work for the Japanese partner's satisfaction. VW had bought into Suzuki in hopes of benefiting from its small car know how and dominant position in India and was lucky to see its USD 2 billion input into the Hamamatsu, Shizuoka based car maker double in value in the Abenomics boom. The higher price was not a big problem for Suzuki either as the company paid it all in cash from its USD 8 billion profit stash, however it took a beating from VW's delay in buying back its own VW shares, who lost 40% of their value in the scandal. For Germans, delayed action here brought another win.

Japan has been often criticized for poor corporate governance and too docile shareholders, but comparing VW with how Toshiba handled their accounting scandal this summer says something else: current CEO and two earlier ones, who still had positions in the company, resigned immediately followed by several other executives, an OUTSIDE panel of experts was set to provide new numbers together with a corporate reform plan that was then put in motion in the shareholders' meeting. Only 3 of the old board members were included among the 11 directors in the new board, which now consist of 7 outsiders instead of earlier four, in comparison to no change at VW except Winterkorn. Last week Toshiba even sued the 3 ex-CEO's for the USD 8 billion loss in corporate value following demands from angry shareholders.

Similarly, in a recent building scandal in Yokohama, where a sub-contractor for piling work had failed to record that a number of piles were not driven all the way to firm ground resulting into 2 cm tilt in the 7 year old building, the real estate company, who sold the apartments, promised to buy them all back and rebuild not only the defected building but all four in the complex at no cost to the owners, even pay for their move and stay elsewhere for the 2 years' time it takes. If customers prefer to live that time in a hotel, even that is OK for Mitsui Real Estate. Meanwhile, the sub-contractor set to check records for all 3000 buildings it was involved in over past 10 years. More mistakes were found and reported with shame. I would not be surprised if the whole company would go under when the dust settles.

That's for thinking of how important brand value and customer satisfaction are in Japan

Timo Varhama  
Tokyo, 3 November, 2015   

Previous Columns

22 October 2015
"New Ministers, New Trade Deals, All Political Play"

7 October 2015
"Power games, ball games, trade deals and refugee misery"

25 September 2015
"Big Problems, Big Talk and Big Figures - Each in Their Own Way".

9 September 2015
"Challenges in Japan, Tougher in USA and Europe ".

1 September 2015
"Looking at Neighbors, Japan Seems Stable and Safe ".

19 August 2015
"End Summer, Ceremonies and Holidays Over, Back to Work for All".

6 August 2015
"Hot Weather, Hot Air in Politics - From War Anniversary to Whisky in Space".

23 July 2015
Greece, China, EU, Japan: looking for the lost reality

23 June 2015
World No.1 City? The Difficulty of Passing New Laws, the Easiness of Spending a Lot

16 June 2015
"Only in Japan?" - Somethings, Yes, But Others Are Same All Over

4 June 2015
Security and Finances: Pensions, Companies, Banks, Olympics, FIFA

21 May 2015
Economy Back on Track, Record Profits at Big Companies

11 May 2015
Spring Events: Odaiba Rock, Shibuya Sex, Capitol Hill, White Hall and Red Square

22 April 2015
Elections, Elections - Finland, Japan, Around the World

30 March 2015
Sakura: beautiful, but just for a short, fleeting moment

16 March 2015
Better late than never - Japan moves slowly

2 March 2015
Three struck out, three more in doubt - Abe's ministers under attack again

19 February 2015
Spring, Sibelius, Chocolate, Budget and Big, Bad Putin

5 February 2015
Reform Work Starts - Energy, Farming and Food on Wish List

26 January 2015
Terror strikes, plenty work, sad memories wait

15 January 2015
Watching AKB, Eating Mochi, Spending JPY 96 Trillion - Japan Off to Better 2015 After So-So 2014

About the Columnist

The columnist is a Japan veteran among Finnish business, our Chamber ex-president and today Member of the Board of Trustees.
After running a major Finnish industry company's Japan business for over 20 years, he is now Senior Associate in a strategic consulting company.

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