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 AOYAMA VIEW

Dramatic Giant Quake, Business Slowdown, Election Mode in Politics
Japan hit the world headlines again last week with dramatic news of big Kumamoto earthquake. The attention lasted just for one day as the global media focus changed already next day to another earthquake in Ecuador with higher human casualties. So most of the world missed that the quakes continued whole week, 100 every day, one of out of each five at least level M 4, something that makes even experienced veterans jump up. The persistent activity caused much more damage and tested the nerves of survivors and rescue crews alike while human toll kept rising so fast that NHK tv-news had it scribbled down with a felt tip pen for easier change. At worst time almost half million people were without water or electricity, 200,000 evacuated in schools and sport halls or sleeping in their cars on parking lots afraid to go back home in fear of new collapses. With over 20,000 houses collapsed, many roads, bridges and train lines cut and big brand name factories from Toyota to Sony across the Kyushu island stopped, estimates of the damage bill go up to USD 100 billion, more than some countries' state budget.

From national economic point of view, this was certainly not welcome in today's precarious situation. It also served as healthy reminder for us in Tokyo of the predictions for the Big One here, so hope all readers have checked again their preparations, especially how to get in touch with your loved ones once all telephone networks go down. As great place to live as this is, we should never forget that constant quake threat makes Japan one of the most accident prone countries in the world.

Following it all live on TV, what struck most of us foreigners was again the calmness and discipline that Japanese people showed facing the nature's powers, overpowering their calamities and torments as something unavoidable, just a part of life here. There was little panic or selfishness, but, instead, resignation, patience and hard work to help others. Many lives were shattered forever and it will take years to rebuild all the destroyed homes and infrastructure, but hope the worst suffering is over once this column comes out.

As always, some people used the upheaval to promote their own agenda like the anti-nuclear movement, who again demanded that the newly re-started Sendai NPP in neighboring Kagoshima prefecture should be immediately stopped as security risk followed by others that remain dozing around the country. In actual fact, NRA's checks showed that the earth movement at Sendai plant was 8 just gals, below 10 pct of the safety limit set at 80-200 gals (depending on direction) that would automatically switch off the reactors. We should all remember that it was not quakes that damaged Fukushima Dai-Ichi, but the ensuing giant tsunami and the wrongly built electricity systems, both due to Tokyo Power's negligence and slack security enforcement back then.

Government was neither innocent from adding its own spin in Kyushu when it used it as opportunity to promote the US military alliance and the new US Osprey semi-helicopters, which are claimed to be accident-prone. It arranged US Marines to fly four of them, each with 20 tons of supplies, to the worst cut-off Minami Aso area and showcased the operation prominently in NHK news. It looked very helpful, but clearly smacked propaganda.

Against this background, it is good to hear that Finnair will stick to its plan to open its new route to Fukuoka next month. I'm sure that the the Finnish company's determination to serve Kyushu people with a new direct route to Europe gets further highlighted in these dramatic circumstances and will bring the company extra support throughout Japan. Adding to that, Finnair is even bringing this week to Kyushu a donation of milk powder supplies to from Finland. We all here wish CEO Vauramo, GM Nagahara and the Finnair team good luck in their new venture. Finnair is the most publicly visible of all Finnish companies in Japan, so its continued success here will enhance Finland's image and help the rest of us in our business, too.

More than Kyushu troubles, any worry for Finnair's business should focus on what's going on in Europe. After recent terror attacks in Paris and Brussels, the Japanese tourist flow to Europe has declined by 10-20% and even if the travel agencies here work hard to tell potential customers that Finland, Scandinavia and many other EU countries are still safe, the public's perception of "dangerous Europe" is bound to impact Finnair's Helsinki Gateway strategy. Add to that the continuous flow of other negative news from Europe like the refugee problem, poor economy, Greek finances, Brexit threat and what have you and Europe sure don't look attractive today for anybody. In fact, foreign travel in general looks less attractive for Japanese than the safe domestic alternative - excluding Kyushu now. The estimate for the forthcoming Golden Week travel foresees more than 20 million multi-day travels in the home country against just half a million travelling abroad. Now, that's as many travelers in one week as the much coveted in-bound travel in whole last year, a healthy reminder where the center point of Japanese travel business lies.

There's also perceived impression among the public that their Japanese currency has lost so much value that travel around the home country only makes more sense today. Actually, JPY has been the world's strongest big currency this year rising some 15% against its main counterparts. So much so, that it has become target of new talk fest by the government officials trying to manipulate it down. Finance Minister Aso with his usual big mouth even threatened dealers with Japanese intervention only to be brought back in line by his US counterpart, who declared in no unclear terms that the recent FX moves have not been excessive, rapid or volatile as Aso claimed and that Japan had better focus on stoking up its own consumer demand as agreed recently among G-20 countries than to dream of export expansion on back of artificially weakened currency.

If only it was that easy. Keidanren says that its big member companies ended up agreeing to average 2,2% base salary rise from April 1, after all not much less than 2,4% for FY2014 and 2,6% for FY2015 - plus all extras for higher age, overtime etc - yet it seems consumers remain hesitant. While big companies open up new luxury shopping centers and even rebuild entire parts of the city as per last column - Mori Building just announced a new USD 4 billion rebuilding plan for Toranomon area with four more big towers for offices, apartments, restaurants and shops together with a new subway station - the competition for consumers' money remains hard. No better example of this than Uniqlo, the highly successful "fast fashion" retailer, whose pretax profit slumped to half during past six months after it tried to raise its prices. As result, the holding company's share price has sunk by half as well cutting off several billion dollars from Mr. Yanai's personal wealth. There's many good reasons: the unexpected warm weather in December slowed down sales of winter clothes at home, Uniqlo's overseas expansion plans have not succeded as well as expected and the rise in JPY value diminished any repatriated profits from foreign branches. The main obstacle for better business, however, is the penny-pinching "Mrs. Watanabe", whose "deflationary mind set" remains unbroken by what ever Mr. Kuroda has been throwing at her. Last year's budding inflation following BOJ's drastic moves has evaporated to zero inflation at CPI level and probably worse is on the way as whole sale prices are sinking at increasing speed every month, latest 3,8% in March.

Following economic theory, it should not work like that: much lower prices for oil and gas, the main element for deflation and rapidly improving trade balance, have led to lower prices for gasoline, heating oil and electricity that give more money for Mrs. Watanabe to spend, yet she chooses to put her extra pennies rather under her mattress. This applies especially for daily consumption like food and clothes while big ticket items, have performed better, as expected, thanks to the tax rise plan for next year. As per earlier columns, car salesmen expect a good year and white goods like fridges, washing machines and air conditioners, especially new energy-saving high-value models, are flying out of shops 10-25% faster than last year. Also real estate business continue strong with high prices for city dwellings and carpenters busy building new homes outside city centers - good for Finnish timber sales to Japan. Just wonder if all this will stop when PM, as expected, announces end May that he will postpone the tax hike again?

It is not small money that Mrs. Watanabe keeps under her mattress or in bank: the financial assets held by Japanese households hit a record high USD 17 trillion at the end December 2015. Hereof more than half or about USD 8 trillion was cash and bank deposits that would normally go to consumption in other countries. Many places households would even end up in running debt on their credit cards to maintain their spending. The corporate sector was not much behind in wealth as their financial assets also hit new record at USD 10 trillion whereof cash and deposits, that could be easily used for investments, M&A's or higher salaries and dividend payments, were USD 2,2 trillion and probably a few hundred billion more by end March book closing. As impressive - or repulsive depending your point of view - these figures are, they tell us why Finnish companies with suitable products should come here and try take their share of them!

Here's a comparison: the rapid escape of foreign money from Japanese stocks. The stock values have come crashing down this spring when foreign funds and investment banks got disgruntled with the non-performing Abenomics and BOJ's stimulus policies and pulled out USD 46 billion from Japan or about 20% of all they put in during Abe's first four years. This would be a big blow anywhere else and, as their speculative moves makes 70% of all trading in Tokyo shares these days, the reversal naturally had a big impact on Nikkei index. Yet, compared to the Japanese wealth listed above, it does not look that much.

Instead of financial numbers, the news that stood out last week for many business observers was the sudden resignation of Seven-Eleven's 83 year old CEO, an old generation dictator, who was blown off in a management revolution initiated by a foreign fund and supported by the newly organized board with outside directors. You can say it was one of the first big changes that Japan's new corporate governance rules have brought about and, happily, instead of fighting for his long time position tooth and nail like similar dinosaurs often do, the old man decided to go out graciously, shocked that for the first time in his 20 years in the job he did not get his will through. Refusing to demote the successful leader of the ever growing convenience store division, as the old CEO proposed, the board elected the man as the new CEO of the holding company. His task will be to do what the old CEO had refused: drastically cut down the traditional super market business with only 0,4% profit margin in comparison to 11% at the convenience store business that he was leading. Also, most likely, he will divest the ailing Seibu-Sogo department store business that Seven & I Holdings took under its wings some years ago. This would be natural business development instead of holding up old structures.

Positioned between retail and the traditional big industries, the big trading companies are facing another year of big write offs for their past investments in the energy and raw material business, where global prices have nosedived 40-60% more over the last year. This time, the write-offs are going to be so big that even the most illustrious names in the business will end up reporting financial loss for FY2015. First Mitsui, who used to earn 2/3 of its profit from oil, gas, metals and iron ore, announced it will book it first ever annual loss in its long history after writing off USD 2,3 billion, then Mitsubishi, who earned 1/4 of its profits from them, said it will also do same after writing off USD 4 billion. Among slightly smaller traders, Sumitomo will book off USD 1,5 billion on a nickel project in Madagascar and Marubeni, who already took USD 650 million off for its oil and gas projects in North Sea and Mexican Gulf, will book another USD 1 billion for copper business in Chile and iron ore in Australia. Still, these two are likely to end up at marginally positive result.

All this leaves Itochu, who derived all its profit from non-resource business, as the unexpected trading champion for the first time ever with USD 3 billion likely profit. Needless to say, the four others have been busy looking for new profitable business areas already through last year and we are now expecting what kind of new plans they present for the FY2016 business year once they announce their final results for FY2015.

In political field, the big news was that FM Kishida managed to get all his G-7 colleagues visit Hiroshima's nuclear bombing museum and monument after their meeting in his home town as well as to come out with a statement requiring all nuclear powers to declare clear numbers for their nuclear weapons and to avoid one-sided aggressive moves in claims for sovereign areas, both clearly hinting to China, who does not disclose any info of its nuclear missiles and has recently engaged in building an artificial island network of military bases in South China Sea which other countries claim their own. Unexpectedly, Beijing issued a protest and warning for interference in its "internal matters".

With Foreign Secretary Kerry now the first ever high level American official accepting to visit the monument for USA's own nuclear bombing - no apology was given nor asked for - the expectations are high that President Obama himself, who early on after being elected first time declared the nuclear disarmament one of his main targets and was even awarded Nobel Peace prize for it, would close his rule by visit to Hiroshima with renewed message when he comes for the G-7 Summit meeting in Ise-Shima next month. We are following that with big interest.

After G7 meeting, the energetic Kishida already managed to rush from his hometown to Moscow to set up a meeting for his boss Abe with Putin in Sochi during Golden Week. That meeting, in turn, is meant to pave way for Putin's long postponed visit to Tokyo. Obviously, the US allies do not like Japan to make its own approaches to Russia, but the bilateral relation is as important to Japan as it is for Finland on the other side of the vast country, and as the Finnish president visited Putin soon after visiting Japan, why not Abe trying to patch up the neighbor relation on this side - within limits set in the US-Japan sanctions, of course. To get proper relation established with Russia instead of officially still continuing war with it ever since 1945 has always been one of Abe's foreign policy targets - as it was his father's before him. Besides, today any success doing that would help boost his profile for the forthcoming election. As well, to look neutral, Abe just hosted Ukraine's Poroshenko here and plans to extend his Golden Week travel to Berlin, Brussels and London, too.

Abe's profile took beating in the Diet when his government gave in to opposition boycott tactics in TPP debate and withdrew the confirmation of the unpopular trade deal from its list of proposals for the ongoing session. The ruling parties feared that too much negative attention to TPP so close to the forthcoming the Upper House election in July would backfire in lost votes. To draw attention away from the issue and facing poor economic data, PM Abe shifted his focus again to stimulus policies, first requesting that the public spending in the newly confirmed FY2016 budget should be front loaded to first six months of the year, then starting to talk of preparing extra budget for further stimulus after funds in the regular budget run out. It is also widely expected that BOJ will make some new financial policy move latest in July, some say already end this week. By Sunday, Abe even proposed an urgent extra budget for rebuilding the quake damages in Kyushu, something no opposition party can publicly oppose.

More on the election prospects and recent changes among opposition parties next time. Just a reminder here that this weekend's by-elections in Kyoto and Hokkaido will give some foretaste of what LDP can expect. They are held to fill two empty seats in Lower House, one for the double-timing father-leave applicant, who was sacked from LDP following his sex scandal, the other for the LDP veteran and former minister Machimura, who passed away early this year. The first one is expected to be so big loss for LDP that the party has not even bothered to set a candidate for it, the latter is where LDP has hired help from the disgraced, but still powerful ex-MP Muneo Suzuki, as explained in last column, to beat the new alliance between DJP and JCP.

Let's see where we are by Golden Week.

Timo Varhama  
Tokyo, 23 April, 2016   


Previous Columns

7 April 2016
"Tokyo Great City, Japan hmmm...Colorful People "

22 March 2016
"Spring energy, child care and train travel "

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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