What a start for New Year! First, China's stock market imploded again spreading financial damage around the world and making everybody worried what's coming next from the economic giant, whose ascent to world top seemed unstoppable before. Then, Finland's "Young Lions" claimed U-20 Ice Hockey World Championship cheering up the depressed nation with sagging economy, strained politics and big challenge how to accommodate its 30,000 refugees. Next, North Korea, never accepting to be neglected, detonated what it claims to have been hydrogen bomb, a move without any warning that embarrassed its mentor China and upset the rest of the world, especially South Korea, Japan and USA. At home in Tokyo, the political play started again in Parliament with the 190th session that will last until April following quiet autumn when Prime Minister said he is too busy for domestic politics with so many overseas trips and events.
Not held back by endless debate in parliament Abe government achieved some important steps at end of the year. Most visible was the new National Stadium plan by Kengo Kuma and Taisei Corporation that an expert panel selected out of two final candidates. The Pritzker winner's plan is to build mainly in wood material, so it is as unique as the earlier giant structure by Zaha Hadid, yet Taisei's building budget is less than one third of where that ended up after realistic negotiation with construction companies. It has a quaint Japanese feeling to it, not unlike old traditional temples that use same material, and it's quick to build as the wooden parts can be all pre-cut to size in specialized factories. My
worry is that it will be more expensive to maintain, especially the plentiful garden of trees and bushes that the plan calls around the building and on every terrace. Knowing Japanese summer, also doubt these will serve as a nest for plentiful mosquitoes.
Old contacts in timber and housing industries tell me that my expectations for some of the business go to Finnish products are overblown as government will surely insist for domestic wood. Yet, they assure me that there is plenty demand for Finnish products now in the normal market. "My feeling is that it's strongest I ever experienced in my long time in this business", said one local saw mill veteran in NHK the other day. The No.1 obstacle now is to find enough professional builders for the stadium and other big projects as well as for the close to one million new homes that Japanese want to buy.
While the stadium choice was not Abe's personal achievement, the wide reaching co-operation pact with India comprising business, economy and security including military ties, industrial investment and infrastructure building, nuclear power plants and a shinkansen line, is more credited to his consistent Japan sales. Earlier, nuclear technology exports to India were forbidden since its adoption of nuclear bomb. The train deal, for its part, serves to heal Japan's hurt pride from suddenly losing out a similar deal in Indonesia to China, who agreed to finance the full cost without any guarantee for pay back. It's Japan's first shinkansen project overseas ever since jumping in to save Taiwan's fast train project that did not work well on French and German technology more than 10 years ago. The next one looks like materializing in Texas where a private consortium is sold on Japan's superior technology and safety record to build a fast connection between Lone Star State's two biggest cities without any public help. In many other places with budget limits the low prices from China seem to trump any technological concerns.
Even more surprising and at least as meaningful achievement from Abe government was the sudden new conclusion on the "comfort women" issue with South Korea that was negotiated in just 5 days after Korea showed good will to release a Japanese journalist accused for libel against President for repeating what was reported in local media. According Korean law it is not the content, but the supposed intent that is decisive for such cases. Hopefully same will apply for the pact as the content itself was nothing world shattering: same personal apology from the Prime Minister as from many PM's before him and a renewed compensation fund, this time from Japanese public funds. In return, Korea promised to stop its constant criticism of Japan on international forums as well as to remove a "memorial statue" erected in front of Japan Embassy in Seoul.
Unfortunately, it looks like the supposedly "final and irrevocable" pact has immediately met with implementation problems as Korean government says it is legally restricted from removing the offending statue and Japan declaring that, in that case, it cannot pay the agreed money. The latter seems understandable at this end: it must be difficult for PM to commit tax payer money to overseas if the recipient keeps clearly holding up his middle finger. Behind all is that both leaders are dependent on continued support from their voters, always highly nationalistic in Korea and many right wing groups in Abe's case.
Anyway, the deal is an important political step to the right direction for both countries as well as for "Big Brother" USA, who surely pushed its two allies to clean up the table so it can move to implement planned mutual defense plans. The timing was also perfect in that it came just before North Korea's bomb provocation that now helps to tighten up the alliance further. The three partners all vowed "strong action" against North, yet in reality it does not seem to amount for much. Japan parliament voted 209-0 to condemn North action, USAF sent one 60 year old bomber to fly over South's air space and South restarted its loudspeakers at DMZ border to blast North with K-Pop music (!), all moves hardly enough to disturb Young Leader and his people in their celebrations for the bomb and his 33th birthday. In fact, it looks like Mr. Kim even managed to drive a wedge between USA and China in handling his escapades: China Foreign Ministry spokesman was clearly red faced in trying to explain how the bomb happened without any warning from their friends and when US Foreign Minister blamed China for "failing in its policy", it quickly retorted back that the North's unexpected action was actually all USA's fault. Some of us are so touchy!
Looking forward, it looks like China, its economy and its policies will be the biggest global worry in 2016 - the slow down last year and the initial stock market implosion in September were just an overture for the main opera this year. What makes it especially difficult is China's opaqueness: its policies seem to change quickly every time it meets new challenges and few analysts any more really believe its economic data. Only two directions in China policies seem clear: the focus on aggressive power expansion in overseas and equally aggressive tightening of social control at home. The de facto overtaking of the whole South China Sea with manmade island bases is a done deal now and the massive finance of "New Silk Road" through Asia to Middle East and Europe combined with more naval bases all the way to Africa is the next step in the first exercise. Giant machinery to control people, internet and media, even business and finance, are all part of the latter. The North Korean style labor camps might be discontinued now, but sudden arrests of people without any given reason have increased and spread from liberal individuals and party politic foes to business leaders, first state company executives fallen out of favor and recently even private business leaders no matter how big or rich they are. It makes it hard for foreign business to make any deals in China when your contacts can suddenly disappear in thin air. Not even Hong Kong seem safe anymore from CCP's grip, whatever independent Western legal system it is supposed to have.
Foreign companies continue to be harassed for any reason beyond imagination as well with Microsoft the latest case. Only four months ago it was all smiles and photo-ops hosting President Xi in Seattle together with other Silicon Valley heavies, now it's being accused for "unfair competition" after it announced it will stop servicing its 14 year old Windows XP system that is still widely used in China including government offices. It does not change anything that similar message in all other markets was taken as just part of normal business nor that Chinese XP systems are mainly illegal copies. Whatever, you are supposed to keep servicing clients once you have business in the Middle Kingdom.
With decline in confidence, the finance business is always the most sensitive. Deutsche Bank is the latest international bank to decide give up operations in China leaving HSBC the last Big Boy standing the ground - not unexpected as, after all, its very name includes both two financial capitals there. In smaller scale manufacturing industry, the traffic out of China is speeding up, too, as the earlier benefit of low labor cost is disappearing. Recent analysis has put "expensive" Japan on par or lower in salary levels with China's affluent eastern seaboard, so no wonder that even Finnish consumer product companies shift their factories back to home or to other Asian countries. Of course, those international companies whose business target is to sell in China, remain there to avoid high import tariffs and other protective measures, yet now must worry about increasing government interference.
My hunch is that these new market realities and economic problems will prove the best impediment to keep President Xi's power policies in check. Having given little finger to "free market" it is increasingly difficult for Beijing central government to maintain its grip on economic developments any more. It is said to have spent already over USD 100 billion public money to maintain stock values and currency rates and its resources for another massive spending spree to prop up the economy are much more limited than in 2008-09 when it "saved the world" with USD 650 billion public spending. In fact, China has already passed Japan as the most indebted country with total debt around 270% of its GDP which itself is double in size to Japan's. What makes this gigantic debt even more dangerous is that it's not clearly defined and spreads to private, corporate and local government sectors, all more difficult to control than Japan debt that is held by the central government and clearly documented. The way back to growth in both countries is economic reforms, but these are even more difficult in China as they endanger central governments grip on the society. Hence, it seems, the party leadership is bent on further public investment despite increasing debt load in order to avoid social upheaval. Reforming lossmaking state industries would mean massive unemployment in the poorest parts of the big country. The pollution that many of them create is an additional dead weight in the calculations.
Looking back at 2015, most of us think that Syrian war, IS terror and refugees were the overwhelmingly biggest global problems and we must expect they will all continue to figure big this year, too. Despite all the tragedy, one commentator dryly reminded us, Middle East makes only 10% of world population and the other 90% enjoyed actually rather peaceful times. OK, there was one war in Europe, but even that remained "cold" for most of the time. Some 400 people died for terror in Western countries, but most of them were Russians in one airplane bombing and even then it was little in comparison to thousands and again thousands in Syria, Iraq, Yemen etc. And while one million refugees in Europe sounds big, it is peanuts when compared to total population of 500 million, even less burden to many countries as Germany has taken on 3/4 of them, the loudest complainers nothing. I might add that even Germany's share in relation to its population is clearly less than what Sweden has taken and not much more than Finland.
Acclimatization of such big number of immigrants from totally different culture is a huge task for the hosting nations - even more for Finland who has little previous experience - and first signs of friction have already emerged. We must all hope that the process will become smoother when the troublesome black sheep have been separated from the genuine refugees and sent back home. Personally, still believe many of the new immigrants really wish to learn how to "act Finnish" or Swedish or German and wish to start work in any job at any salary as soon as possible. No doubt they are getting bored with being held in cramped holding centers with little activity than just a few hours of lessons every day.
In Japan, 2015 was another year of population decline and haphazard economic recovery from the April '14 tax rise. The prospects for government vows to raise birth rate look dim: studies show that no country has ever managed to recover a birth rate that fell below 1.5 and Abe's promises for improved child care etc are still far off what most European countries provide. With practically full employment and corporate coffers full of money, what is needed to speed up the economic recovery is continuing rise in salaries. Keidanren has again promised to push its members to grant generous "base up" in the coming spring wage negotiations, but this will offer only limited help when some 40% of the workers are on part-time contracts that pay much less than permanent jobs, average JPY 96,000 per month vs JPY 352,000 to be exact. It must be difficult for Finnish readers to understand that millions here in "rich Japan" must manage to feed the family with just EUR 750 per month. Having two incomes in the family is a must, but finding child care is difficult and, in fact, single parent households are on increase with 1 in every 5 marriage ending up in divorce. Moreover, the total wage bill keeps crimping when high earning, firmly employed big generations keep retiring and are substituted by low earning young part timers.
Against all this it is almost a wonder that consumer spending has remained rather firm. There were signs of weakness during last months of last year as food, much of it imported, kept rising due to FX rate and warm weather slowed down sales of winter clothes so that even famous brand name shops started New Year sales well before Xmas. Yet, on any given day, shops seemed pretty full and so did restaurants while hotels are constantly fully booked by waves of foreign tourists. It might well be that Japan reached its 20 million tourist target set for 2020 already last year. The number of domestic tourist trips was also up close to 300 million.
All in all, it looks like the GDP growth for FY'2015 will turn close to the 1% potential growth rate and World Bank projects 1,3% growth for the new year. The global worry remains the emerging markets including China and Russia as well as Europe, the basket case of recent years.
The glowing winner is USA that is expected to continue its recovery at 2,5% - 3% rate thanks to the determined long term action by US Fed that finally has brought wished for results there. For instance, the new car sales last year reached a new record 17,5 million exceeding first time the old record from way back in 2000. While GM and Ford remain the market leaders, Toyota with its many local factories is the No.3 beneficiary. Also other Japanese makers like Honda and Nissan enjoyed brisk business in USA even if their hybrid and all-electric offerings lost ground to old gas guzzlers in line with the new low gasoline prices. No doubt, we will hear good financial results from the Japanese makers soon.
The problem children in Japan's corporate sector saved their bad news to the year end, too. Takata Corp, whose safety air bags kept exploding without warning injuring people in USA, came finally clean and promised to replace over 20 million of them after Japan's major car makers, its main (but not only) clients, finally announced to give up on its products. Toshiba, who was caught with massive finance booking fraud over several years and renewed its management systems, was forced to take further reform action in its wide assortment of various business as the money is running out. At end year it announced it will prune its money losing television, PC and white goods businesses - hard choice considering that it made the world's first laptop and the first DVD player - sell its image sensor business to Sony and spin off its mainstay flash memory chip business. It also sold off its shares in Finnish lift and escalator maker Kone Oy. Sharp, the other problem child in Japan's electronics business, is expected to sell one of its big modern LCD plans to Foxconn and spin the other to Japan Display, the government fund led joint venture where Hitachi, Sony and Toshiba already unloaded their display businesses. Finally, a new scandal broke out in medical business with a Kumamoto company exposed for putting illegal additives in its blood plasma for over 20 years. This was doubly hurtful as the blood industry was exposed some 20 years ago for selling tainted blood from import sources that gave incurable hepatitis for hundreds of patients.
Finally, finishing off the story with the domestic political agenda for the year. The government draft budget for FY2016 that starts in April and will be debated in the parliament next days and weeks, is a little bit up from FY2015 budget but financially well balanced as it does not require any increase in debt because the tax receipts are expected to continue big. As you might remember from earlier column, even the JPY 3,5 trillion (USD 30 billion) extra budget for the ongoing 3 months till April, was financed by bigger than expected tax income and unspent money from earlier budgets. So the government fiscal position will not deteriorate despite considerable spending boost for the economy. It's another thing how good or bad the money is actually targeted. As said earlier, Abe's main political target seem clear: to buy feeling of well-being for the people in return for expected support in the forthcoming Upper House election this summer. If LDP reach 2/3 majority in UH in addition to its 2/3 majority in Lower House, PM can launch his pet plan to rewrite the pacifistic Constitution drafted by American occupation forces back in 1946. Luckily or unluckily, depending on your view point, the ruling alliance needs to get 81 of the 121 available seats or average 67% of the vote, something that seems a long reach for them. In a survey last month support for Abe government stood at 46% and same for LDP at 37%. Moreover, it is not sure that Komeito, the long-time Buddhist allies, will go along with Abes ideas how the text should be changed. In fact, many even in LDP dont subscribe for his ideas. Meanwhile, the opposition camp tries to organize a common front where Communists and Socialist will join the Democrats to set up only one common candidate in each election area in order to avoid splitting up the anti-Abe vote. However, such co-operation does not seem easy to achieve because of historical antipathies. Without it the opposition is much too weak for any real resistance.
Let's get back to Japan political intrigues, more business stories and hopefully some fresh economic data in the next column.
Tokyo, 12 January, 2016
17 December 2015
"Global Environment, Food Tax, National Stadium: Historical Decisions or Political Parading? "
8 December 2015
"Challenges in Paris Conference, Challenges Back Home in Japan
27 November 2015
"Refugees, bombs, business and global warming - can we control them all?
3 November 2015
"Japan, USA, UK or Germany - China Impacts Us All Today
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
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.