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 AOYAMA VIEW

Spring energy, child care and train travel
It's Spring Equinox so we are exactly half-way from mid-winter to mid-summer. The spring temperature is still up and down, but the annual wave of cherry blossoms should be in Tokyo any day now. Up in the mountains, ski slopes are facing their last business days, while down here in the Kanto plain golf courses are getting green and crowded again. Companies are busy closing their books for the ending FY2015 and finalizing budgets for the starting new year. It was a good year they are leaving behind, but uncertainties cloud the outlook forward. Japan's economic recovery has slowed down again and the world outside looks even more worrisome.

The good economic news this time is that Japan posted in February its biggest trade surplus in over four years ending the persistent gap that has lasted almost continuously ever since the nuclear power was substituted by increased gas and coal imports. The balance of accounts should be even bigger then once all the money from permanent business overseas is counted for. Essential part of the story is, of course, that the surplus did not come from improved exports but from 14% drop in imports, especially oil and gas when the recent rise in JPY value combined with low world prices. Exports did grow +5% to China, a small sign of something positive, yet in overall, it's clear the weak global demand is taking toll on Japan as much as the hesitant consumers at home. The total industrial production remains still below pre-crisis 2010 base level. So does the corporate goods price index following continuous price falls in oil, coal, metals and waste materials. Meanwhile, continuous fall in salary costs have made total production costs in Japan more competitive than USA or China according to a recent study. There's no doubt Japan can compete overseas if only there is demand for its products.

The other good news is that the February visitor numbers were up by more than 30% from a year ago to 1,9 million, almost same as best ever month so far, last July. Worries about decline in this important new economic building bloc proved exaggerated at least for now. As positively, it seems tourist spending is spreading to more remote corners of the country instead of just the Tokyo-Kyoto-Osaka "Golden Route" as the repeat visitors seek new variety and "real Japan". This trend is augmented by more visitors arriving on giant cruise ships directly to remote ports like Maezuru on Japan Sea side as well as acute lack of hotel rooms at economical prices in Tokyo and Kyoto. The way things stand now, I do worry how Tokyo is going to handle the Olympic travel demand in 2020.

The apartment rental Airbnb business got to a good start here, but the government bureaucrats then almost killed it out by restrictions demanded by the hotel industry in full turn of its own promises for reform and deregulation. Finally, the bureaucracy relented to accept rentals with limitations - only for regular live-in properties ruling out promising real estate investments into the business.

As we move into the new financial year, hope is also increasing that Japanese consumers themselves will speed up spending on big ticket items like cars and houses to avoid the forthcoming second VAT tax rise at the end of the year. For instance, car makers are tipping that new car sales in FY2016 will climb up 6% thanks to the expected tax, ie. about as much as they probably dropped in FY2015 that ends this month. In long term, as we know, Japan new car sales have steadily decreased already 25 years as new urban generations do not think they need own car to stand idle with little use in expensive city garage.

If only the tax will rise. The political pundits are increasingly convinced that Prime Minister will postpone the rise again in order to gain voter support for the Upper House election this summer. The usual "kabuki play" is certainly pointing to that: Abenomics' main prophets like professors Hamada and Honda have been noisily demanding cancellation - even requesting a new extra spending budget as soon as the normal budget for FY2016 has passed legislation. On top of them, pro-growth U.S. Nobel professors like Joseph Stiglitz and Paul Krugman have been invited to Tokyo to tell the same to PM and the Japanese media. Last month's Shanghai G-20 meeting conclusion that "all members should do what they can to boost growth" has also been referred to as global advice to Japan to withdraw from any tax plans for now. Finally, yes, it is true that Japan has no urgency to speed up its debt limits today when, in fact, investors pay for the fun of having their money parked in Japan. So it's really "read my lips, no tax" even if Abe says he will make the decision in the matter "after Japan G-7 meeting", something you can also read "just before the election".

As pointed out last time, the PM is under pressure to come up with some positive news to stop the constant flow of negative setbacks. Adding to last column's list of GDP decline, Tohoku rebuilding delay, nuclear restart problems, Olympic stadium designs, Okinawa base feud and potential challenges in Supreme Court for last election result and government's re-interpretation of Constitution, his pet policy of working women empowerment and better child care really exploded on his face when one mother's emotional blog for being forced to give up work when not finding day care for her child - "damn you Abe, damn you Japan!" - went vicious in the social media. Opposition attacks in Parliament spurred Abe into new action pledging detailed measures to "double up his effort" to cut the ques that last year had almost one million women citing child care as reason why they weren't able to take up work. The crux of the matter is simple: while new day care centers have been established by hundreds - despite all kind of residential regulations against them - it is increasingly difficult to hire workers for them as the salary level is low, just JPY 214,000 (EUR 1700) per month when average across all sectors is JPY 325,000 (EUR 2,600). As result, surveys show that even 1 in 5 old nursery workers is considering to quit the job. Such humble realities might be difficult to understand for the PM, who comes from a patrician family and has no children of his own.

This brings us to the biggest failure of the Abenomics model and its positive spiral theory: low salary rises. While the service sector, both public and private, is notoriously stingy to pay good wages worried about high costs and low profits, the big industries, even when they get extremely profitable, also pay extremely limited wage rises. As feared, this year is proving even worse than the limited rises two years before: despite sitting now on USD 3 trillion of cash the companies say the coming year is unlikely to be as successful and as unions seem to willingly buy that the final wage increases next month look like next to nothing. No.1 Toyota shows example: its profit for the ending year is likely to reach another record at JPY 2,8 trillion (USD 25 billion), yet it wrapped up talks with just JPY 1500 (USD 13 ) average hike for its workers, far below last year's JPY 4000. (For Finnish readers: we are talking here about monthly salary rise, not hourly or daily wages!).

While Nissan has agreed to pay same as last year, other car makers and electronic giants like Hitachi, Panasonic and Mitsubishi Electric have ended up in line with Toyota. Meanwhile at the banks, the unions agreed not to request any rise at all as they share management fears of expected losses from BOJ's negative interest rate next year. While automatic career age adjustments bring everybody more, the ongoing retirement boom of baby boomer seniors with high wages has a decreasing impact on the average and the total national wage package. Even with limited inflation, Japanese salaries have, in effect, continued to decline over the past two years despite all Abenomics.

And it's not only wages, but investments. Despite big profits, the listed companies have not remarkably increased their investments at home. In fact, the new trend of buying back your own shares "to boost value" seem to have got more money from the corporate coffers than investments into new machinery or plants - USD 79 billion vs USD 73 billion past year.

While most big companies are doing well there's a few with serious problems. Past week, there's been plenty of news from Toshiba, one "problem child", relating to its fire sale of big parts of its varied business. The medical equipment unit - MRI scans, X-rays and ultrasounds - will be now sold to Canon for JPY 665 billion ( USD 6 billion) and the white goods business - washing machines and refrigerators - are expected to go to Chinese maker Midea Group. (You might remember that Sanyo's white goods went several years ago to Haier, another Chinese, when Panasonic took over its electronic biz.) Toshiba's PC business, No.1 brand in Japan, is expected to join with Hitachi, Fujitsu and Sony/Vaio brands in a JV that was set up two years ago to compete with Lenovo, who took over IBM's and NEC's PC business. There's even talks that the nuclear reactor core business would be somehow reorganized together with U.S. Westinghouse that Toshiba bought some 10 years ago. The expectations for Westinghouse are now big as it is firing up its first new model NPP in China and expects to get a good share of the giant market there with possibly up to 100 new NPP's to be built in coming years.

For the closing year, Toshiba estimates to book operating loss of JPY 430 billion from JPY 6,2 trillion (USD 56 billion) revenue - plus JPY 146 billion more when financial corrections from its past book paddings are included - yet the company already has gall to predict it will turn back profitable in FY2016 when loss making businesses are cut off. In fact, it predicts no less than JPY 120 billion (USD 1,1 billion) operating profit from the new leaner revenue of just JPY 4,9 trillion (USD 44 billion). Could it really be that easy? Well, the structural change is not small as it means Toshiba will cut off USD 12 billion worth business or more than most Finnish companies have in total. Yet, more news of unclear past accounts seem to be cropping up even in USA, where authorities have now started investigations based on Japan's findings, while in Japan it looks now like the 3 ex-CEO's will be indicted in court for knowing what was going on. Compare that with Germany where it looks like nobody at top knew what was going on. It should not go either unnoticed that a well-known global auditing company is involved in the case: Ernst & Young Japan was sentenced to USD 17 million fine and 3 month business restriction and its US counterpart is now under study over there. It was only 3 years ago when PWC was penalized here for similar poor conduct of its profession in the Olympic management fraud case.

It is difficult to think that it was also just a few years ago that Toshiba was considered the front runner to win not one, but two big nuclear plant deals in Finland. To everybody's surprise the first deal was won by Rosatom of Russia and the second one looks now like never happening. In fact, it seems there's lots of problems to get construction started even with the first one. It seems the economic obstacles are proving today as big as the political ones before in this semi-public business. And they are not limited to nuclear power only: many of the technologies underpinning renewables are today proving economically unsustainable for the time being. One victim of this is the world's biggest solar power company Abengoa of Spain, who accounts for more than quarter of all solar power production in the world. Saddled with debt from its big investments backed up by subsidies and loans from governments, especially in Spain and USA, the company is scrambling to avoid to become the biggest bankruptcy in its home country's corporate history now that the governments cannot pay for those hefty subsidies anymore. To do that it needs to restructure USD 10 billion worth of its debt, all accumulated since 2007 when it started the world's first commercial solar power plant.

As readers will recall, here in Japan, too, solar power business grew exponentially fueled by generous feed-in tariffs until the supply far exceeded what the low-tech transmission network could handle. Countless small investors, both local and foreign, were let down when they could not recoup their money from expected sales. Since then, METI has sought to throw more cold water on small independent operators by cutting back their generous FIT rates - another 11% goes starting next month - even they still rank at top of the world. In this, the ministry plays by rules set by the old monopolies, who don't want to change their well-established business systems. So much more could be done by upgrading the ancient transmission networks, improving power links between each region and developing battery technologies which could stabilize the power output from renewable sources than depend on weather. It will be interesting to see how the liberalization of the electric retail business to consumers next month will change the monopolies' business position.

From electricity production to one of its big users: railway companies. Japan has been buzzing this month about the news expansions in its excellent fast-speed train network. Main focus has been on the extension of Tohoku shinkansen line to run all the way to Hokkaido through the 50 km Seikan tunnel - older and longer than the English Channel tunnel - that has been there largely unutilized for years. The new line does not extend all the way to capital Sapporo yet and the speed in the tunnel will be limited, but that has not stopped the travel industry from running a massive Hokkaido promotion campaign this spring. Certainly hope the Hokkaido connection will be as successful as the extension of Nagano shinkansen line to Kanazawa on Japan Sea side, to become Hokuriku shinkansen, that turned this month one year old and reported that passenger volumes had tripled from earlier. Already last year there were reports of a business boom in Kanazawa from restaurants to real estate as an example how better travel connections can enliven a remote, densely populated country region. True, it was difficult and time consuming to reach that part of the beautiful Japan Sea side famous for its fish, crab, sake and onsens with plane or car, something that the new train made possible in just 3 hours. However, a 4 hour train ride to Hokkaido that won't even reach Sapporo where you have excellent flight connections from Tokyo in just 1,5 hours does not sound that convincing to me.

Anyway, it's great that the JR train companies, that were privatized already 30 years ago, are anxious to invest big money in new extensions. The Hokuriku line to Kanazawa is already being extended south along the coast to Kyoto-Osaka direction starting with neighboring Fukui, another beautiful seaside area with more fish, crab and onsens. As always, local politicians are quick to try grab their share of the private business investments, so now there's an intensive debate which way the rest of the line should be extended to Kyoto where it will connect with the JR Central main line. Following that you will be amazed how some politicians can explain how the shortest and fastest line from point A to point B is not at all the best one.

JR Central itself is now building its own Maglev train connection from Tokyo to Nagoya with extension to Kyoto-Osaka following later on. They were also harassed by local politicians to make the 250 km tunnel go underneath their mountain constituencies, even stop under some small town and village. For Tokyo maglev terminal, our FCCJ member company is now digging deep underneath Shinawaga station. Used today by 100,000 of total 300,000 daily passengers taking shinkansen from Tokyo to Nagoya-Osaka direction, Shinagawa station has proved a successful connection hub and will grow even more with Haneda air traffic expansion and a new JR train line there added before the 2020 Olympics.

Guess we will hear more of these things from Tokyo mayor Masuzoe in one week's time at luncheon organized by EU chambers together.

Timo Varhama  
Tokyo, 22 March, 2016   


Previous Columns

11 March 2016
Five Years from Japan "3-11" - Making Best Out of Gigantic Recovery Task "

28 February 2016
"A Dig Deeper into Politics: Ignorance, Camouflage, Chicanery "

15 February 2016
"Markets in turmoil, economy in decline, challenges grow for Abe"

5 February 2016
"Minister scandal distract, economy slow down, Kuroda rides for rescue "

28 January 2016
ABE: THE REALITY BEHIND ALL THAT TALK "

20 January 2016
"Bear Outlook for Monkey Year Grows, Taiwan Votes to Keep Distance from China, but Pop Group is More Important for Many "

12 January 2016
"NEW YEAR VIEWS - AND A LOOK BACK AT 2015"

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



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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