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 AOYAMA VIEW

SECURITY AND FINANCES: PENSIONS, COMPANIES, BANKS, OLYMPICS, FIFA
It was quite a quake last Saturday. 1000 km away south in Ogasawara islands and 500 km deep, yet the M 8.3 jolt was felt almost around the whole country from Kyushu to Hokkaido. This is very rare. Seems wide areas of tectonic plates were rubbing each other, not just one single spot. Combined to recent volcano eruptions, there's no doubt that the activity is up, so please make sure you have your normal precautions in place.

Tens of thousands people were stuck in high buildings and railway stations alone when elevators and trains stopped working, yet it seems the public takes hackers stealing 1,2 million people's private data from Japan Pension Service as more serious and more like something that government should have been able to prevent. Public fury of similar bureaucrat fumbling by the same agency in 2007, when life time payment records were lost for millions, cost Mr. Abe his first premiership and LDP its 50 year rule, so no wonder government troops are now engaged in urgent damage prevention mode. It looks unlikely that the political damage will be as serious this time, yet the case has given Opposition a good topic to talk for days, if not weeks, in the Parliament and this could cost government not being able to pull its important defense legislation through this time.

While Japan continues to huff and puff how much it can support its ally USA in traditional military matters, even just in back stage logistics, USA already announced it will include cyber security in its pledge to defend Japan. It should be helpful as Pentagon alone has 6000 internet security experts in comparison to 90 possessed by Japan government

Leaving bureaucracy and politics aside, there's lots of fresh data from business, economy and finance to add to earlier stories. Continuing the good corporate results in last column, it was not just a few good Big Ones, but totally 61 companies including 15 new ones that recorded net profit over JPY 100 billion, a magic level that corresponds to USD 1 billion Club. Going for wider perspective, totally 549 or 32% of prime listed companies reached the long targeted ROE 10%. While behind US average ROE 13%, this other magic level is slightly above the European average 9%. From the expected JPY 10 trillion total dividend payout 24% goes to private investors providing JPY 2,4 trillion consumption boost. This roughly cancels out 1% of last year's 3% consumption tax rise.

Happily, the big companies now also predict that they will use about as much for improving factories at home. This is about one third of the total JPY 28 trillion investments they plan globally according to a fresh survey. Electrical machinery industry is said to lead with global plans totaling JPY 4 trillion and Hitachi alone plans to invest JPY 900 billion. Same company says it will be ploughing JPY 4 trillion (USD 36 billion) into R&D over the next 3 years, so you if there is any lack of innovation, it certainly does not come from lack of resources. Even Sony, rising from six years of restructuring, says it will invest JPY 430 billion, its second highest annual budget ever.

While few companies need new capacity at home, where long term demand growth for most basic products remains negative due to negative demographics, you can always upgrade your machinery for new and more efficient. In fact, a fresh survey shows that little has been done in this respect over the past years and the average Japanese factory machinery is already 15 years old. As importantly, the bulk of the investments in Japan do not go today for factories, but service sector.

This comes clear from analysis of Jan-March data, that shows total business investment for new machinery, plants and shops rose up for third quarter in row to JPY 13 trillion with non-manufacturers standing for the lion's part, almost JPY 9 trillion, for their shopping malls, logistic centers, hotels etc. The rise from Oct-Dec quarter was 10 times more than it was said to have been in the initial Jan-March GDP report, so the correction will reflect positively in the final figures for the quarter. In contrast, the final US 2Q. GDP figures were revised down to near zero growth.

Another big economic boost compensating about 1% of the tax increase came last year from increased number of foreign tourists, when all transports and hotels were calculated in, not just their big retail spending which has gathered attention until now. Happily again, the inbound tourist numbers seem to continue grow nicely this year: April arrivals were already up to 1,7 million from just 1 million per month in average last year and the big spending Chinese now reached No.1 position. You simply cannot avoid their colorful, noisy crowds where ever you go and reports of their free spending on Japanese products are becoming mindboggling. They are bound to lift Japan's private consumption and economic growth further this year, something ironic when China's own economy has drastically slowed down.

The latest data on spring wage increase says the base salaries for permanent staff went up average 2,4% cancelling out similar fall in total paid salaries last year that came about when 1,6 million high paid retirees were substituted by low paid temporary workers. With employment figure now standing at 1,17 jobs for each applicant, the highest since 1992, this is bound to increase the wages for temporary workers this year as well. An early sign was already recorded last month, when the total pay package paid out for permanent as well as temporary workers rose for the first time in years. It was just 0,1% up but with consumer price inflation falling same time to flat zero despite BOJ's efforts to the contrary, it was the first month in long time when the 途eal salary rose in Japan.

With all this, it is no wonder the foreign investors are back again and Nikkei stock index keeps climbing steadily. The public entities are doing their part to add to the demand: as BOJ is now buying most of the government new bond issues, Japan Post Holdings joined Government Pension Fund in offloading their big holdings of JGB's and shifting them to more high-yielding corporate equity. In Japan Post's case, the amount to be shifted is JPY 300 trillion (USD 2,6 trillion) and the company hired a 47 year old ex-Goldman Sachs highflyer to lead its new equity investments. It's all in line with JP's expected big IPO later this year. In GPIF's case, the shift volume is even more and one third of it was already realized by end March.

The two big policy shifts are not only boosting share prices but helping to provide BOJ enough JGB's to buy and meet its commitment JPY 80 trillion per year. As the government new bond issuance is limited this year to JPY 37 trillion, the central bank must find JPY 43 trillion worth bonds to buy from other owners. Commercial banks are unwilling to reduce their big holdings, so BOJ could fall short of its target without the two institutions' help. Yet, even their big allocations of JGB's will run short of BOJ's insatiable hunger for them in about two years' time - or even quicker if government heeds to MOFA advice to reduce spending and cut new bond issuance next year. Abe government's long term finance plan says "primary balance" - that all spending is covered by tax income and new bonds are issued only to pay for interest on public debt - should be reached by 2020. Without bigger spending cuts, this looks unlikely to happen.

BOJ could also shift its purchases, for instance, to US government bonds. The latest data from Washington says China took back No.1 US creditor position, which Japan took from it beginning this year. Before China, Japan was the biggest creditor for US government for long time. Now China holds USD 1,26 trillion and Japan USD 1,23 trillion of US government's total debt USD 6,18 trillion. Foreign central banks own 2/3 of the total, so the situation is quite different from Japan where foreigners, even less other central banks, own rather small share of government debt.

In overall balance, Japan remains world's no.1 creditor with net external assets of about USD 3 trillion. At closing FY2014, Japan's gross external assets amounted to USD 7,5 trillion, up +18% and 1,7 times that of China, 2,5 times that of Germany. Meanwhile, the total external debt, mainly equity and finance from foreign investors, amounted to USD 4,5 trillion (+22%).

Once on global finances, we cannot pass commenting on China government's new AIIB venture. With 57 countries joining in as equity partners and the basic rules sorted out in Singapore last week, the corporate charter is set to be signed in big ceremony in Beijing end this month. Despite Europeans countries holding 25% share - to many Asian partners' dismay - China will hold control with 30% equity share and local Chinese managers will be leading the operations in AIIB's Head Office located in Beijing. It is said that the inclusion of Europeans could help to make the corporate governance transparent and to reach better credit rating for global finance than what national Chinese development banks have today. Time will show whether AIIB will develop into a truly international global lender for Asian infrastructure projects or just a new vehicle for China government's ambitious geopolitical targets and a neutral looking platform to assist its state-owned construction and railway companies in their business expansion to overseas.

It is clear that there is big need for both roles. According latest calculations Asia needs USD 800 billion worth of infrastructure building annually during next 20 years, many times more than current ADB and the new AIIB can even together realistically cover. Same time, it looks clear that China has already built enough highways and high speed railways, even full ghost towns, at home and the government clearly does not want to continue financing any more such folly, but faces a problem what to do with its giant companies and their hundreds of thousands of workers. Take high speed rail as an example: in just a few years China has built 16,000 km high speed rail corresponding to 60% in the world and the new lines are crossing the country connecting its big cities with million populations. Yet, when you read that the latest line will help people ride AROUND Hainan Island, it sounds more like a merry-go-round than a viable mass transit system and you ask yourself whether this is really needed.

Early on it looked, like Japan's business interests would lose out when government lined up with USA not to join AIIB, yet later studies have showed that even with old ADB finance, supposedly controlled by Japan, the construction jobs went mainly to Chinese companies followed by Indian companies as these simply made the most competitive offers. Japanese companies' offers were always much too high-tech and much too expensive for the basic infrastructure building needs in developing countries. You can see the same today when Japan government tries to promote the 都hinkansen technology for overseas projects. No matter if they are in Vietnam, Thailand, Turkey or USA, the offers from China' State Railway Company, newly merged from two to make it even more competitive, easily beat Japan on price everywhere. That its technology is largely knocked off from Japan, adds bitterness to this reality.

It will be interesting to see how European countries and companies will manage to benefit from their investment into AIIB. Obviously their big banks and other financing sector must be the main beneficial in their scheme, but even they will run counter to China's plans to use AIIB to help turn its own banks more international.

Same time, Abe's latest move to announce new finance from Japan for Asian development worth USD 110 - markedly slightly more than USD 100 billion from China and 56 others! - looks as much politically motivated as AIIB and equally unlikely to benefit Japanese companies. It looks even out-of-place at home when his promises for Tohoku tsunami damage rebuilding remain uncompleted and when his Minister for Education and Sports suddenly tells Tokyo Mayor that the central government cannot afford to pay the full bill for the new National Stadium anymore, but Tokyo City has to chip in. Until now, National has meant "national", not City Stadium, even more so when the whole establishment sits on grounds owned by the national shrine, Meiji Jingu. He even took over the design and building schedule by telling the flabbergasted Mayor that the retractable roof, one of the focal points of the winning architect design, would have to be dropped for costing and taking too much time, something he had himself checked with the building companies. "You talk like old Imperial Army" retorted Mayor, not something you expect to hear from an old LDP politician, yet must agree. It does not help that the minister himself is under police inspection for his finances from unregistered support organizations with yakuza connections. Neither that government already had appointed new Olympic Minister and 600 strong Organizing Committee led by ex-PM Mori - what are they needed for if another Minister can so easily overrule the whole process? It certainly looks like another political mess again!

Still, it's just a local feud in comparison to this week's big global "earthquake" in sport politics, namely the FIFA leadership vote and the sudden resignation of its winner soon after. For long time, Sepp Blatter and his network of global corruption has been a poison cancer in the "Beautiful Game", the No.1 sport in the world, yet all efforts to oust him have failed. After this despot again paid the minnows of this world to get himself re-elected despite strong opposition from traditional football powerhouses in Europe, it came as surprise to all of us that only five days later he voluntarily gave up his position. It seems that the money trail from US-Swiss legal action that already led to indictment of 14 high FIFA officials leads so clearly to president's office in Zurich that he had no option than to go.

Finally, there is a possibility to clean up the football's lost reputation and amazingly this happens due to strong initiative from USA. Many of us fail to understand American ideas that their laws apply beyond its borders, but as one British commentator said, for this great contribution to world football we should even forgive them calling it "soccer".

Let's wish that FBI/IRS findings will lead to many more arrests of corrupted FIFA officials including "Mr. Splatter" himself. Understand that to do this they have to prove that FIFA is not a sport organization but a criminal organization masquerading in sports, but that's just how many of us feel.

If further studies will lead to cancellation of World Cup events scheduled for Russia in 2018 and Qatar in 2022, then so much better. We'll see. But for now, let's focus on just enjoying the game with Womens' World Cup starting in Canada and Japan's "Nadeshiko" tryin to win again. Japan mens' "Blue Samurais" will start their qualification campaign one week later and two J-League teams have played their way into Top 8 in Asian Champions Cup. Moreover, the European Champions from the final in Berlin this Saturday will come again as so many years before to Japan to play the South American Champions for the best club in the world just as before. Here, too, FIFA efforts to milk more money by staging this traditional top match to some strange places failed.

Timo Varhama  
Tokyo, June 4, 2015   


Previous Columns

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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