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 AOYAMA VIEW

Greece, China, EU, Japan: looking for the lost reality
Looking at it from Japan, the impact from the financial turmoil in Greece is just a fraction of what is going on now in our neighboring China, where close to USD 4 trillion or 15 times the whole Greek economy or almost Japan GDP!! was wiped out from the bubbly stock values in just three weeks robbing 90 million private investors duped by propaganda and easy money. It looks like a new blow for economy there and an unforeseen test for the Communist party reputation as the omnipotent market ruler and benefactor of the people. With Volkswagen sales now reportedly 40% down in its biggest market, just like Komatsu and Caterpillar or Australian iron ore when the building boom fizzled, what happens next in China can send shock waves to Japan and around the world.

Yet many here have followed more spellbound the colorful spectacle in Europe with endless twists and turns. It's not just car sales or financial concern of Euro currency, but general public's amazement how such well-established area with long history can turn into such unruliness - not just Greek crisis, but also the Russia-Ukraine conflict, Moslem terror and Mediterranean refugee crisis. Many waited answers as to which way Greece will go from the crucial EU top meetings, so it was disappointing that the decision was again to avoid a real decision, but rather paper up the problems with more money and a compromise at so utterly unrealistic terms that they are doomed to fail sooner than later.

All analysts, now even IMF and ECB, agree that Greece can never pay back its debts, yet any idea of debt forgiveness remain strictly off the EU leaders' table. Historical evidence that currency changes and debt cuts have always been key elements in solving sovereign debt crisis in the past and calls for hypocrisy that Germany itself received a generous 50 pct cut on its own debt back in 1953, did not help turn the political leaders' heads. Meanwhile, the controversial Greek PM's comment that "I did not actually accept the terms, just signed to avoid our banks go bust", summed up the hypocrisy on the debtor's side.

In my opinion, the whole 5 month process and the preceding 5 years of austerity has been a tragic comedy of errors, feeding wrong medicines to an unwilling patient, who despite this was miraculously about to recover - Greece reached the targeted primary surplus last year - when he trusted a tribal medicine man's advice that skipping the painful treatment would magically wipe out all his ills. Instead, his health turned much worse and now the country seem to be also sinking into new political chaos.

From the creditors' side, after saving the German banks with the earlier loans, the new plan now focus on saving IMF and EU "face" by giving Greeks new money to pay back the old money. It also plans to rule the "cradle of democracy" like an EU colony by sending in Brussel sheriffs tasked to see that all agreed details will be followed and to search for state assets to plunder. The EUR 50 billion seize-and-sell target is just a pipe dream in a country which don't even have a functioning land registry and, as for the other targets, the creditors will surely meet resistance from uncooperative citizens as common in all occupied countries.

How the Greek story will exactly unravel is anybody's guess, but what is clear is that Europe's reputation has got seriously damaged and that will impact other coming events like the British national vote on EU membership. How things turn out in Greece might also impact EU's sanctions against Russia, Russia's eternal wish for Navy access through Bosporus Strait and its plan for a southern pipeline via Turkey to EU. Moreover, after this sad show that looked more like a case of domestic violence than a display of fraternal solidarity, as one observer put it, the member countries have certainly lost any appetite for further integration of the union and for expansion of the Euro area. In fact, the new Euro applicants earlier lining up at the door, are already cancelling out by themselves. Being a Euro member looks like an obligation instead of a privilege.

Japan's domestic politics have not performed much better with almost as much time, energy and political capital spent on debating a seemingly much smaller issue, namely a change in country's defense rules. For an outsider like myself, it is only common sense that as there is a military alliance between Japan and USA - and it's been there for 40 years now - the two sides should equally help each other when under attack and that it's wishful thinking that the US side would really help Japan when needed if Japan refuse to help them in doing that. Yet, legal experts have said such "collective defense" runs against the pacifistic Constitution and for many Japanese it looks like straight road to sending innocent young boys to wage hellish wars in far-away places for US causes. That the Constitution was hastily written by a bunch of young American lawyers commissioned by the post-war US military rule and that no other country in the world holds such self-imposed rules on how they should defend themselves, has never changed what a central place it holds for the Japanese people and their peaceful society. The Americans, who now wish Japan to take a more active role in its own defense, must find it hard to understand how devoted students they have educated here since 1945.

That majority of the voters were against the change, gave a good motive for the opposition parties to put up a furious fight in the Diet despite their outnumbered position. The target was to cause maximum damage for the Prime Minister's popularity and thanks to Abe's stubborn insistence on the issue that exactly was the result. A highly divisive character already earlier with 49% for and 47% against, a fresh poll last weekend showed Abe popularity sinking to 37% and those against his policies rising to 52%. The issue itself was cleared when government parties forced a vote after EU-like meetings for 113 hours over 2,5 months, all based on purely legalistic details like a 1959 Supreme Court decision, expert interpretations and imaginary presumptions as to what can actually happen in some distant future.

The end scene with the opposition organizing an outright melee in the final Diet committee meeting and over 20,000 demonstrators outside the Parliament adding their input into the proceedings made Japan really look like Greece. With the bills now sent from Lower House to Upper House, no delay tactics there can anymore stop the laws as automatic return for Lower House re-vote in 60 days guarantees their passage as scheduled before the extended parliament session ends on September 27. Yet, once again, must question was it really clever from the Prime Minister to waste so much of his political capital on this issue as the decline in his popularity inevitably weakens his position with many other unpopular issues that he is supposed to marshal through.

A daft politician that he is, Abe did not waste time in launching a new move that should re-endear himself with the voters: rejection of the new Olympic Stadium plan that had become unpopular because of ballooning costs and political bickering among politicians and architects. Whistling off the squabble PM said there will be a new design contest, this time including a binding cost estimate and guarantee that the resulting construction meeting public acceptance can still be completed in time for 2020.

For many including myself, Zaha Hadid's winning design was eye catching and impressive, yet a fresh start was needed as the process had become totally out of control with final plan being amended time and again and cost estimate shifting wildly from original JPY 130 billion (USD 1,1 billion) to first JPY 320 billion, then JPY 250 billion (USD 2 billion) without any clear explanation. All this in the only national project for the Olympics while at the other event sites that the City is providing for, the hard working Tokyo Mayor has come up with JPY 100 billion savings. Once again in Japan domestic politics, it looked like nobody was in charge with various ministers and architects offering each their own ideas and the few construction companies capable of doing the difficult design evidently ripping all off.

We'll see if the political bureaucracy will work better this time. The time table is tight: the new design is supposed to be concluded by end this year and construction work started by next February, otherwise the stadium will not be ready in time for the Olympics opening. History is repeating itself: it is said that it was a close shave in 1964, too. Anyway, for 2019 World Rugby World Cup Final the fans of the funny shaped ball will have to travel to Yokohama Stadium where the "round" football fans celebrated their World Cup Final in 2002.

While bureaucrats' fumbling and politicians' changing story lines are often laughed off in most places, we react more seriously to business management mistakes - and with outrage and shame to outright cheating. The scandal of deliberate book padding over several years led by three consecutive CEO's at Toshiba, one of Japan's "blue blood" industry corporations, has made many of us tear our hair. "Shame for Japan" said Tokyo Stock Exchange president. "Highly regrettable", said Finance Minister. "Letdown to Abe's reform efforts", chimed local media. "Reflects the rot in Japan's corporate culture", sneered some foreign observers. True all and makes you wonder why such leading global technology giant doing seemingly well would resort to such cheating and how could it get away with it for years?

Was it loopholes in Abe's new corporate governance law? Well, the law took effect last month, but the profit padding started six years ago and reached highest point in 2012 when Fukushima catastrophe cast a doubt on Toshiba's nuclear plant business. Was it lack of proper internal audit? Well, the corporate auditors were the internationally acclaimed Ernst & Young, yet it was the public Security and Exchange Surveillance Commission, who found the blip and a special third party committee led by an ex-public prosecutor, who exposed how widespread it was. Was it lack of outside directors in Japanese system as often claimed? Well, Toshiba Board of Directors had four of them.

It was Japanese culture of overpowering senior authority that made business unit leaders and financial accountants resort into padding numbers when top management pushed them for better results "without fail" or "any way possible", sometimes just few days before the book closing. It also reflects the perils of "anything for profit" thinking and top-down micromanagement that has become common at listed companies even in Finland. " I'm giving instructions to my managers by e-mail 24 hours a day, even when travelling", the CEO was telling proudly in a clip from a television program about himself made recently. In fact, coming just 4 years after similar case at Olympus, exposed by the newly appointed foreign CEO there, the Toshiba case looks more wide spread, yet nobody questioned it. Twisting the company motto, it was "Leading by innovation in cooking books".

The CEO and two ex-CEOs have now resigned "to take responsibility" as tradition demands and are likely to get off with a suspended sentence like the Olympus culprits did.
The Stock Exchange is likely to mete out some punishment to the company and some shareholders will probably sue for compensation for their 30% value loss. The company is looking to cover losses by selling some of its rich asset like its share in US Westinghouse and Finnish Kone. The Kone shares alone are expected to bring back more than half of the loss now booked for the wrongful accounting. What remains is the huge task to change the corporate culture and prevent similar incidents at other companies, too. Laws and rules can only provide the model how we should conduct our business and life in general, it is up to each one of us to follow them.

There's been plenty other colorful news, too, to shake us from the stupor of the dreary rainy season: the shocking self-immolation of an old man on a Shinkansen, drug scandal and resignation of Toyota's first ever female, foreign top executive, an unprecedented attack on free press by some LDP right wing MP's, acceptance of 23 more historical industrial sites in Japan into UNESCO World Heritage list, Kyoto's selection as "the world's top city for travel" following Tokyo's recent selection as "the most livable city", the start of the Mt. Fuji climbing season with Wi-Fi access on the top to send your selfie home and Japan women football team reaching World Cup final, then overwhelmingly mauled by USA team.

For us Finns, probably the best news has been the long awaited announcement of Moomin theme park project in Tokyo or "Metsä" (spelling "a" with dots) as it is now called following popular trend in Japan business to use Finnish names. In truth, it will be Saitama prefecture side a bit outside Tokyo City area, but it's just 40 minutes from city center at the end of Seibu Ikebukuro line. Looking at the photos and a drone video of the area, the place resembles very much our own little "Moomin country" in the north with plenty green forest and a big lake. The plan will preserve much of the nature for recreation while adding an impressive reproduction of the imaginary world of the stuffy characters so much loved here. The principal actor is FCCJ's newest member FinTech Global Inc., who bought the land from Seibu Railways for sizeable money and will rent it to builder and operator Moomin Monogatari ("Moomin Story"), a JV company between FinTech Global and Puuha Group Oy from Finland. That our own FCCJ president Pekka Laitinen played a central role in helping this all take place should not go unnoticed.

We are all looking forward to 2017 to see the final result. For now, let's enjoy the "real" summer that is finally here and forget for while how things will turn out for China, Greece, Abe and Toshiba.

Timo Varhama  
Tokyo, July 23, 2015   


Previous Columns

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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