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Terror strikes, plenty work, sad memories wait
Shocking television pictures of two Japanese hostages in murderous terrorists' hands brought the global threat of Islamic "jihadists" straight into Japanese living rooms. Now we all understand that it is not just "fire on the other side of the river" - Japan is not a far-off peaceful island safely isolated from all danger and trouble that goes on elsewhere. While this gruesome incident might be exceptional and could have been avoided simply by not travelling to the danger zone, more widespread threats and challenges are targeting Japan's security and wellbeing on multiple levels.

Certainly the terrorists timed their shock perfectly together with PM Abe's visit to Egypt, Israel and Palestine and promise of financial help for the Arabian people, who have suffered of the ISIS rampage. The money was, of course, offered for humanitarian purposes, to help in rebuilding homes and feed refugees, not "to kill our women and children and destroy homes" as the black-clad terrorist claimed. Actually, they are themselves taking care of that job pretty well according to the news reports.

As always in the pacifistic Japan, there are also those, who say that this drama was brought on Japan by Abe's "proactive" policies and if Japan would stay quiet at home off the harm's way, any terrorist threat or other aggression would pass by the peaceful islands. In this respect, the statement from EU's foreign policy chief to welcome Japan's higher profile in regional and global security and to wish that the "EU's key ally in the region" would take on even more responsibilities "to realize our shared vision of peaceful and prosperous future for the world" was well timed. She also called on speeding up the ongoing talks on security co-operation and free trade to bring the nations closer to each other. Could not agree more.

In the financial front, the unexpected move by Swiss National Bank to unshackle its currency was a less friendly move for Japan, a new challenge to Bank of Japan. For almost two years BOJ has been trying to convince consumers and companies to leave behind their deep-rooted deflationary mindset by unprecedented monetary easing, which has same time helped to bring the JPY value down to make export business more profitable. More than printing money, the credibility of any central bank's message is based on making all believe that it has tools and determination to follow its policy until the target has been reached. We have heard Mr. Kuroda repeatedly assuring that if the current measures don't prove enough, he has many more tricks in his pocket ready to use. Now SNB's sudden "volte face" has put a hole in Kuroda's credibility, in fact "undermined credibility of all central banks" as one expert put it.

ECB's own version of "quantitative easing", long waited and finally announced last week, was bigger than expected. The initial market response was positive as the stock prices rose not only in Europe, but around the world, even in Japan. Yet, the impact on FX rates was not as big as expected because the EUR had already taken steps down earlier. The move should help keep EUR down together with interest rates and that should give some life blood for an economic recovery in the Eurozone. Yet, as Mr.Draghi himself pointed out: "For growth to pick up, you need investment. For investment, you need confidence. And for confidence you need structural reforms." For the reforms, we know, you need action from political leaders. I hope that Frau Merkel, Monsieur Hollande, Herra Stubb and other European leaders took note of this as well as Abe-san as this is exactly what Mr.Kuroda has been saying all along about Japan. We look so much like each other these days, Japan and Europe.

Taking another look back at last year, the ISIS terror rampage was one of the events that painted a sad picture of world in confusion together with Ebola epidemic, Ukraine crisis and Russia's growing aggression. In the economic field, probably the biggest event of 2014 was the rapid fall of oil prices with totally unpredicted dive from USD 100 to close USD 50 in just a few months. It also brought along unexpected demise of its currency, that put off imports and foreign finance to Russia more effectively than all Western sanctions. As result, Russian's economy is now unravelling rapidly and its citizens are back to developing country level in comparison to other Europe. Yet, President Putin remains firmly in charge as popular as ever and shows no sign of change to his aggressive politics. Americans are baffled.

These global events seem to continue paint the picture for year 2015 - the first four unfortunately, the fifth, low oil prices, fortunately for most of us. For Japan, who imports now almost all of its energy needs with nuclear power still switched off, cheap oil and, hopefully coal and gas, too, is a lucky strike that should help drive the private consumption and economy this year more than the low yen. While not all believe projections that the GDP growth could reach to 1,5% level - IMF put its new estimate last week at 0,6% while BOJ lifted its own to 2,1% - most agree lower energy prices will help growth. On the other hand, BOJ has now accepted the prevalent view that it will not reach its 2% inflation target by March 2016. Even with lower inflation this year, it looks clear that the nominal GDP growth will be higher than "real" GDP for the first time in years, good for domestic corporate sales. Many also believe that overseas business will grow even more this year thanks to solid economic recovery in USA, where many Japanese companies have bigger sales than in China.

The spring wage hike talks, that are just starting, will show us whether the "virtuous circle", a corner stone in the Abenomics model, will take place this year better than last. With good profits in pocket from FY2014 and more projected for FY2015, big companies are expected to be more generous to their staff this time. Government and BOJ have both put strong pressure again on the Keidanren members to "play the game" after receiving boost to their business from the low yen orchestrated by the central bank. Yet, many sceptics say we are not living any more in the family-like "give-and-take" system of Japan Inc as today's corporate leaders are more receptive to the demands from their increasingly foreign shareholders than from domestic bureaucrats and politicians. They also point out that even if big multinationals would feel rich enough to grant bigger pay rises, they only employ some 25% of the work force and many of the countless SME's, who employ the other 75%, often in troubled regions outside of Tokyo, are actually worse off today with demand down and costs for energy, raw materials up. Hence they are in no mood to raise wages. Certainly, any investments into domestic facilities will not take place on government request basis, but only on cold business calculations. For most of us it is clear that without any prospect for sustainable demand, new factories in Japan make little sense and few will bring them back from overseas just because of low yen today.

With the declining population, the realistic long term growth potential for Japan is put at 0,5% and with no increase in immigration in sight, that can be only raised by structural reforms, the "third arrow" that has so far proved elusive. A long list of action plans have been clear long time for energy, labor, agriculture, free trade, "womenomics" etc, so can we finally expect some action from Team Abe when the parliament resumes its session now? The Aoyama View is: "Hold your breath".

On top of multiple challenges and tangling interests on each reform front, PM must tackle several political challenges despite his big win in the December elections. These include clearing the FY'15 budget that is running late to meet March 31 deadline because time taken off parliament work for the elections, dealing with serious antagonism against LDP and government policies in Okinawa, dealing with rising farmer revolt that has gained momentum from JA's power show in Saga prefecture and dealing with the ruling partner Komeito, who has grown louder in voice since the election. Finally, Abe and LDP must also start to prepare for - can you believe? – next election. Yes, local council elections around the country will take place in April and, of course, no LDP man should lose because Tokyo has given green light to local nuclear plant start or made a trade deal with US to allow rice imports. With all such tactical troubles ahead, it is hard to believe that any remarkable progress can be achieved in the reform front nor starting up NPP's or finalizing the TPP talks before the budget has been cleared and local elections carried out successfully. In reality, this means end April.

Year 2015 will also mark the 70th anniversary of the end of WW2, a historic event that has different meaning for different countries. In China it's about finally beating the invader together with USA and other Western allies, for Korea it's independence after 30 years of rule by Japan. For Japan, it marks the country's historic surrender, a defeat that led to construction of new, democratic and prosperous Japan, as well as the memory of all the human suffering during the last days of the war, vicious firebombing of big cities and, finally, two atomic bombs, the only ones ever. Japan's leader is expected to give another official speech about what all this means for today's Japan and how the country regrets its wartime aggression on its neighbors, but as it is this time Abe, a well-known nationalist, many are concerned that his apologies to the neighbors are not as clear as those from his many predecessors. Hence, while it's still long time to August 15, plentiful advice what he should say has started pouring in from many corners, not least from China and Korea.

For Japan, 2015 also marks 20th anniversary of two big catastrophes, the Great Hanshin Earthquake, that destroyed Kobe City with 6000 casualties, and Aum Shinrikyo's sarin attack in Tokyo subway, that left hundreds doomed in hospitals for rest of their lives as "human vegetables" and broke the long held local belief of Japan as safe country with gentle, peaceful people. The first anniversary was already noticed last week with solemn ceremonies, ironically with thousands in Tohoku still living in makeshift homes after even more destructive quake and tsunami in 2011. The poison gas attack anniversary coincides with start of court trial for the last culprit, who was caught after 18 years on fugitive run. The leader and 10 other main culprits were sentenced to death already years ago and now, following Japanese practice, wait in death row for their execution.

Happily there's more positive news in hand from outside politics and history. Adding to last column's long list of fresh data, Japan had last year less suicides – third year in row below 30,000 – and less yakuza – Kudokai, the No.1 organization in Kyushu, had only 870 registered members at end year, down from 1010 two years before. Also beer consumption was down for fifth year and if you consider that negative, you can take consolation in that Suntory's Yamazaki Single Malt Sherry Cask 2013 was elected the world's best whisky. JR Tokai has started work on its Maglev train line to Nagoya and JR East is already testing its new shinkansen line to Kanazawa at Japan Sea side for official opening on March 14. About same time we will also see the first flight of MRJ (Mitsubishi Regional Jet), Japan's first ever passenger jet plane. With fuel consumption promised to be 20% lower than competitors, the company seem to have already secured a good number of orders from both domestic and international buyers.

In the global car business, Toyota was again the world No.1 maker and expecting another record profit worth JPY 2,7 trillion or USD 23 billion, more than the entire turnover of any Finnish company. Its new fuel cell Mirai has already received four times more orders than expected as Tokyo City has joined the central government ordering the car to its workers and promising for private buyers its own JPY 1 million subsidy on top of government's JPY 2 million pledge. Honda will launch its own FCV this year, too, and Governor Masuzoe says the FCV technology will be one of the central features for Tokyo 2020 Olympics.

In the global money trail, Japan is just about to gain back from China its old place as the No.1 holder of US Treasury bonds. At the last count Japan had them for USD 1,24 trillion worth against China's USD 1,25 trillion. Meanwhile, Japan's net assets (assets minus liabilities) were calculated to be JPY 3050 trillion or USD 26 trillion even at today's inflated FX rate. Net foreign assets (Japanese foreign investments minus all foreign investment to Japan) were calculated at JPY 325 trillion or USD 2,8 trillion, ie about 10% of Japan's total net. A big new addition to the score is Itochu's USD 10 billion investment in Citic, China government's giant holding company, announced last week. This gives Itochu and its Thai partner a 20% stake in a wide array of big Chinese state companies from construction and transports to communications, electronics and finance. The target is to combine skills and powers together for infrastructure projects in Latin America and Africa. That a private Japanese company dares to put this big money in China and is allowed by China government to own such big stake in its public giants, is a healthy reminder of good sense and big business interests prevailing over petty political squabbling.

The final figure for inbound tourists to Japan reached to 13,4 million, 28% up and an all-time record. As reported earlier, the biggest flows came from Taiwan (2,8 million), Korea (2,7 million) and China (2,4 million), but other Asian nationalities like Philippines, Thais and Vietnamese also grew 45-70%. Attractive shopping thanks to cool products and lower yen as well as easier visa requirements were said to be behind the explosive growth. You could not avoid seeing tourists thronging in all kind of shops from Mitsukoshi to Matsumoto Kiyoshi, Yamada Denki, Uniqlo and Don Quijote. Calculations show their spending brought in over JPY 2 trillion or USD 18 billion already during Jan-September.

One result of the big Asian tourist surge was that Haneda airport, that hosts today both international and domestic traffic, probably passed Heathrow as world's No.3 busiest airport. The final figures from around the world are not yet in, but what is clear is that the big change in Haneda's figures is result of deregulation. Only a few years ago its great location within Tokyo metropolitan area was reserved for domestic flights only while international travelers were all forced to take the long ride to Narita in the neighboring prefecture.

As always, sport comments for last. Leaving behind bitter feeling of Japan soccer team's early exit from the Asian Cup already at quarter final stage after steadily inefficient performance over four matches and a penalty shoot-out that should have been avoided with more goals during the normal play that Japan dominated all through, let us focus on great performance by Grand Champion Hakuho, who made no mistake in sovereignly overpowering all his opponents on way to 33rd tournament win to send legendary Taiho's all-time record to history. There was new excitement in the air throughout this tournament with the old Kokugikan stadium sold out many nights first time in years. This puts off all talk that this traditional sport can retain its popularity only if there is a new Japanese champion.

The Mongolian is still young enough to continue rule the ring for long time, but there is already talk that, after retirement, he aims to become the first foreign stable master in another challenge to current rules and Japanese traditions. Until now, a foreign wrestler has had to adopt Japanese nationality in order to qualify to become "oyakata".

Japan's internationalization comes in step by step in many areas.

Timo Varhama  
January 26, 2015  

Previous Columns

15 January 2015
Watching AKB, Eating Mochi, Spending JPY 96 Trillion - Japan Off to Better 2015 After So-So 2014

18 December 2014
Snap Election Over, What's Ahead? Time for Xmas, New Year Holiday

Japan: too many elections, too many politicians - Finland: Moomin power!

12 November 2014
BOJ Ups Ante, Abe's Encounter in Beijing, Election in Tokyo?

28 October 2014
Money Scandals with Ministers, Economy and Reforms Bogged Down - Abenomics is Facing Demise, Internal Political Commotion Gains Again.

14 October 2014
Water as Fuel, LED Lamps and Nobels - Japan Tech Still at the Top of the World

25 September 2014
Scotland Challenges Britain - Finland Tries to Live with Russia

11 September 2014
Sport Stars, Ministers and Managers - More Women are Needed by Japan

2 September 2014
Bad News and Panic in the Park, Putin Planes over Moomin Island?

20 August 2014
Hot Summer, Heavy Rains, World on Fire, Economy Sputtering PM Looks Tired

25 July 2014
From World Cup Fun Back To Grim Reality

23 June 2014
Soccer shows New Japan, Olympics old men business

3 June 2014
Nationalism - Good for Economy, Soccer - Dangerous in Foreign Politics

21 May 2014
Energy for Summer? More Scarce Than Politicians' Will foe Endless Ddebates

12 May 2014
Economic Outlook: Consumers Still Genki, Companies Profitable

30 April 2014
Travels, Trade Deals and Security Concerns

3 April 2014
Colorful stories and scandals, serious tax challenge to consumers

20 March 2014
Putinisms, Abeisms, Obama, XI – Global Challenges Hit All At Home

21 February 2014
Snow and Smile for People, Serious Faces for Leaders

10 February 2014
Abenomics, Abeisms, Now Abefication – He ia All Over. For Some He Was Target Even in Tokyo Local Election

23 January 2014
Three Wise Men VS. One PM, Two Ex and a Colorful Crowd
  -  Business Doing Well, Politicians Think They Know Better

16 January 2014
New Year: Horse, Sports, Budgets, Polls and Moomin

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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