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 AOYAMA VIEW

BIG PROBLEMS, BIG TALK AND BIG FIGURES - EACH IN THEIR OWN WAY
Nature tested Japan again last two weeks. Two strong typhoons brought heavy rains, serious flooding wiped away 4900 homes when Kinugawa river broke its banks, another volcano exploded in Kyushu and earthquake right under Tokyo rocked us awake one morning - it was "only" M5,3, but ominous. Stronger quake in Chile caused a tsunami that wiped across the wide Pacific and raised alarm across Japan eastern coast. Happily, it turned in pretty shallow - below one meter - by the time it reached all the way here. Seems the Man Upstairs thought we had had our share of misfortune for this time already.

The human wave of hundreds of thousands of Middle-East refugees is sweeping across Europe and reaching all the way to Far North. Escaping death and destruction at their home countries people are risking their lives to make it to safe, good life in Europe, where they are welcome, they think. The reality is rather different and the attitudes across the EU nations show big contrasts from heartwarming help in many places to cold rejection in Hungary and several other East European countries. It is another huge test for the EU nations to agree on unified policy how to share the burden, maybe too much remembering how long they feuded on how to help Greece, a much smaller problem in human and financial scale. It was telling that the last week's national vote in Greece, that sets how the country will follow its hard fought finance deal with EU, went almost completely unnoticed. The magnitude of the refugee problem is much bigger challenge for continuation of the European unity and will continue that for long time.

Germany in the heart of Europe has received already half a million people and expect to spend EUR 10 billion in helping them settle down and adjust to German way of life. On its side, it has experience of decades of "gast arbeiter" migration from South as well as integration of the communistic Eastern part to West and it clearly sees that in long term more workers will be needed in German factories and help pay taxes to keep up the welfare system in the aging society. Little Finland up North has same needs but limited experience in immigration, even less in refugees, so attitudes have to be changed and systems improvised to cope with even limited volumes of people that find their way that far up North. To Finland's credit, after recovery from the initial shock, the government and the people seem to be now doing their admirable best taking in several hundred people per day walking over the border from Sweden to Tornio town, providing them with emergency food and shelter from the unhospitable weather, then bussing them to temporary housing further south. More than 15,000 asylum seekers are expected to reach Finland and the government has promised to take at least 2400 of them on long term as its agreed share. Red Cross volunteers have been in key role providing the first help and no local government is any more refusing to provide accomodation in empty schools, unused hotels, old military barracks etc. In fact, ironically, word of mouth has spread among some refugees that Finland is better place than Sweden, so it is worthwhile to carry on there.

All this comes as Finnish society is already rocking from new government's cut back plans for salaries, holidays and social benefits, initially for public sector workers but planned to apply also for private sector once the ongoing labor contracts expire. This is naturally a red flag for the powerful unions, who see it as attack on their traditional system with freely negotiated salary agreements, while government says it has to push for the cuts exactly because the unions did not agree to any in talks during summer. Finland simply cannot afford to take on any more debt to continue provide such generous benefits any more, says government. Unions' answer to this was to call nationwide strikes and demonstrations last week. As Finland was a leading voice in EU to tell Greeks that they cannot continue with generous social benefits that they cannot pay for while Greeks just kept demanding and demonstrating, Finland has already earned the dubious nick name "Greece of the North".

It's all unforeseen in recent memory and as a Finn I feel deep concern which way my country will choose to go. Japanese readers will find it incredible that the contested issues, that the unions chose to stop the whole country for, include cutting summer holiday from seven weeks to six and not to pay 50% extra salary - so called "holiday money" - to "help" employees through such long holiday time. All this sounds like ultimate luxury in Japan but it's been a norm for Finns since the 70's based on thinking that long holidays are good for workers and living costs are high during such free time with all travel and hobbies while missing out the daily free meal at working place.

It's another sign of the times that financial markets have not taken much notice of the turmoil in Europe, yet the roller coaster ride caused by China has not settled down with Nikkei shedding another 500 points yesterday. Chinese leaders have been busy assuring the world that all is under control and their share price collapse has little impact on the economic growth there. True, consumers' share of China's economy remains small and the companies there still rely mainly on bank loans for their financing, yet more signs are emerging that growth has slowed down remarkably even without any share market impact. Privately collected indexes show that the industrial activity in "The Factory of The World" is at its lowest in 7 years, while fixed asset investments, China's work horse to boost GDP, are at their lowest in 15 years. International investment banks put the real GDP growth now at 5-6% instead of government announced 7%. High as that still sounds for many other economies, it's a huge let down in China. Economists explain that one must think that the fall from 10% to 7% is same as when growth stalls from +1% to -2% in a mature economy. Then just think if it was actually -2% or -3%! That's what is happening today in China.

As always, big money and big talk is supposed to impress and help make friends. President Xi started his long awaited state visit to USA in Seattle with an order for 300 jets for Boeing and license to start an assembly factory in China. At dinner with Bill Gates, Tim Cook and other Silicon Valley top crowd he tried to diffuse in advance any hacking criticism that he is likely to face later this week in Washington telling that "China is a staunch supporter of cyber security" so it would be good to establish a US-China forum "to study this mutual problem". This must have felt pretty thick for the listeners. News same day told of more than 3000 Chinese-made Apple apps that had to be removed by the company as they contained planted malware that can steal the user's password and other personal information. Japan, of course, expects help from USA in getting the increasing global hacking under control: internet attacks from overseas - mainly from China and Russia - reached here over one billion cases last year, mainly on inconspicuous targets like central and local governments who seem pretty hopeless in defending their systems. That Government Pension Fund lost millions of people's personal data makes citizens highly negative about the unified social security number system that is being finally introduced in Japan.

China's expectations run high for the PR value for the Xi visit, but it might not work to their liking because of cold political atmosphere in USA today and also because his schedule follows right after that of even bigger celebrity, namely the Pope. To maximize the public attention and avoid unnecessary comparison, two "rock stars" should not tour the same town same day - or even one after as in this case.

Big talk and big promises are coming now from Japan's Prime Minister, too. With the SDF laws finally passed through Parliament - it was an abominable spectacle with opposition MP's inside the House trying to block proceedings more violently than the demonstrators outside! - Abe has now donned on his economist gloves and his statesman hat in order to raise his popularity. For the latter, his travel list outlined in last column - NY for the UN General Meeting followed by detente in Seoul with Xi and Park - has been now augmented with Kazakhstan, Uzbekistan and other "stans" to underline Japan's regional reach. These will be followed by the traditional G-7 Summit meeting and special Paris COP meeting, where new environmental guidelines to follow Kyoto Protocol will be set. In other words, we will get plenty media coverage with Japan PM brushing elbows with the other world leaders. With Abe The Economist, not satisfied with just spreading "feeling of well-being all around Japan", he yesterday set himself the target of expanding Japan's GDP to JPY 600 trillion yen. You don't have to be FX expert to calculate that this is USD 5 trillion, exactly what Japan economy was in dollar terms two years ago before the decline in JPY value. In JPY terms it would mean 20% up from today, something highly unrealistic in short term at current growth rates and demographic outlook. We can conclude that Japan and China are rapidly approaching each other - at least what comes to the leaders' speeches.

On more practical grounds, recent polls show that the final phase of defense law debacle brought the cabinet support back down to 39-40% level, where it was before rising temporarily to 44-47% in July when the debate was subdued for a while. The conclusion is that voters' memory is fickle and short lived and it is not impossible that big talk, some showmanship and a decent new minister line-up next month could lift the cabinet rating again.

In order not to antagonize voters any more, the government is unlikely to make any new concrete moves based on the new legalized SDF roles. It has to worry about SDF personnel, too. It is said that the soldiers themselves are very unhappy of the change that increases the risk that they have to do exactly what they are supposed to do: take military action to defend the country. While generals might be happy to plan for refueling USA Navy in Indian Ocean or having Japanese UN troops defend themselves in Sudan instead of asking others to do that, it seems most of the SDF staff see their role more like an extra fire brigade at home helping out in natural catastrophes and the like. Being tasked to build roads building and dig wells in Sudan is already stretching their presumed role. It is rumored that 20-30% of Japanese soldiers have now reported themselves "emotionally distressed" and contemplate resignation. That would be interesting result of the new laws: expanded roles but no staff to perform them!

Let's see what happens on this front on Oct 10 when North Korea shoots away its new ballistic missile that can reach USA to "celebrate" its ruling party's anniversary.

No big missile has hit the economy and the corporate news continue mainly positive despite the fall in share values. As there's plenty money in the corporate coffers, many companies have used the lower prices as an opportunity to buy their own shares: share buy-backs in August reached a new monthly high. It was even rumored that Masayoshi Son was contemplating to buy out privately his multi-tentacle Softbank conglomerate as its share value was down to USD 13 billion, but its ownership in other companies was worth USD 23 billion. Shrewd businessman that Son is, he sold off big part of his 30% ownership in Ali Baba, China's wonder child, just before its value collapsed by spectacular USD 120 billion. Next big move in Tokyo market will be Japan Post Holding's minority IPO, expected to fetch USD 11 billion, that has been now set on Nov 4.

Notwithstanding these impressive figures, the award for the biggest and most negative financial event this week goes to Volkswagen's scandalous admission to years of willful deceit in its diesel emission measurements, a complete let down of customer trust and a corporate brand catastrophe. The company lost USD 35 billion or almost 40% of its value in just two days and US Environment Agency is threatening it with USD 16 billion fine. With quick apologies and best possible US lawyers hired now - same that defended BP in its gigantic oil leak accident on Mexican Gulf - experts think the fines could be minimized to around USD 1 billion, close to what GM just paid for its long time neglect and what Toyota voluntary settled for with private claimants for its unproven brake problems. However, VW is also exposed to claims by many US states for unlawful exhausts and private claims for financial damage and health risks as well as similar fines from other governments around the world as it looks like that the case involves 11 million cars sold worldwide, not just 400,000 in USA. Hence, the total cost for the company could be ten-double the US fine or even more, the experts say. After that comes the expected long term losses in sales volumes from the tarnished brand image. Whether the CEO, who quickly resigned, is entitled to his USD 32 million pension after all this value loss under his watch, remains to be seen.

You can compare the VW scandal to the Toshiba accounting scandal that rocked Japan in June. There, too, the company share value took 30% immediate hit and the CEO was removed. As with VW, the deceit in profit accounts on the divisional level had proceeded for years and it took until last week for Toshiba to come up with the corrected figures. The total write down of the net results for the past 6 years was JPY 224 billion (USD 1,8 billion) with the first deceit year in 2009 counting for the biggest part of it.

No doubt, this was a tarnish on Japan brand as much as it is feared that VW will tarnish the "Made in Germany" brand, yet the financial authorities and Tokyo Stock Exchange have not announced their punishment and no share holder has sued Toshiba for investment loss so far. You might even say that the fired CEO, who had just taken office, was made to pay for his two immediate predecessors' crimes. Yet, in difference to VW, no customer, community or entire country had been wronged or put under health risk. One can only imagine what would have happened if Toshiba had given out wrongful information about the security of its nuclear reactors. It seems investors only shrugged their shoulders and started re-assessing the company on the basis of the corrected financial figures. Their losses were no concern for the society and hence the reaction was different.

Right or wrong, you can decide.

Timo Varhama  
Tokyo, 25 September, 2015   


Previous Columns

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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