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Forests, floods, fish and consumer prices -
stories too good and data too bad to be true
Finnish friends keep complaining about cool weather continuing there, but I would take it any time instead of Tokyo's hot and humid summer. Happily you don't have to wear tie and jacket any more here for business, but looking at commuters sweating in tightly packed trains early morning or late in night, takes your mind back to Finland, where people looked so relaxed and happy. Despite horrendously expensive prices, numerous restaurants, many with outside terraces across Helsinki streets and seaside in summer, were all packed with tanned, wealthy looking patrons for lunch and again soon after 4 pm when they seemed to sneak out of office. Add to that packs of foreign tourists, many Chinese and Americans, and you got impression of an international tourist spot, not the business city it is in winter.

Another surprise for me was that, for the first time in 20 years, biggest business topic was my old forest industry, not some mobile internet start-up or new game earlier said to lead to nation's economic future. They have coined it new fashionable names like "bio products" or "bio economy" and many new advanced applications are under development, but, in essence, it's the same old idea: to use Finland's only ample – and constantly growing – domestic raw material source: the wood fiber from the forests. The center piece in the news was the approaching start-up of Metsa group's new big pulp mill - oops sorry "bio products factory" - and how many more similar big projects could follow. Not many seemed to know that the USD 2 billion investment – biggest in industrial history – was brought about by USD 500 million input from Japan or that building more similar, possibly with Chinese money, would likely raise the demand and price for fiber wood to new heights that would ruin the good economy of the Metsa mill and, in fact, all existing pulp, paper and saw mills in Finland.

In big numbers, it looks like there is plenty wood available in Finland. With good export demand for sawn goods and pulp, annual cut rose last year to all-time record 62 million cubic meters, yet the growth was estimated at 110 cubic meters. In other words, hardly half of the growth was cut, just like several decades already. There is more wood in Finland's forests than ever before and thanks to good care it grows quicker than ever. Yet, whether it's commercially available is another question: most of it is owned by private people, who make their own decisions when they like to sell any. In contrast to the past, those owners are not any more farmers, who need to augment their farming income with forestry, but their city dwelling children and grandchildren. As my industry friend put it: a typical forest owner is an aged widow living in Toolo, Helsinki's Azabu. To persuade her sell some of her growing forests or do regular "thinnings" that are needed to maintain healthy growth, is a question of life for the forest industry, old and new alike.

Importantly for the industry and for the national economy, the sales have proceeded smoothly at steady prices in recent years: last year forest owners earned EUR 1.8 billion from their assets, record level again. That's a lot of money into private consumption and shows how important forest industry - or "bioeconomy" if you prefer that word - is for Finland.

Japan's area is about same as Finland and it is equally 70% covered by forest, yet Japanese forest industry was written off here already decades ago when steel, ships, machines, cars and electronics took the central stage in industrial development. Today, however, its best parts are as advanced as any in Finland with many inventive products and new applications including so called "nano" products. Recently, government has put effort to also try reinvigorate traditional saw mill and plywood industries to better serve Japan's big building industry that is now 50% supplied by import wood, not least from Finland and Sweden. How ironic it was then that this caused much of the damage this month in Kyushu's rain soaked mudslides and flooding. With hills covered by pine and cedar forests, the inner areas of the island are a center for sawmilling and it was the countless piles of recently felled logs that the rains drove down the mountains into the rivers where they piled up under village bridges and caused the sudden flooding that took population by surprise. The violent mudslides also uprooted full grown trees by thousands – with trunks measuring up to 50 cm - that added to the debris that the rescue crews are now cleaning up while trying to find lost bodies. More than 30 lives were lost and the economic damage is estimated at USD 1,2 billion.

In contrast, in northern Akita and Niigata last weekend, even more violent rains of 350 mm in a day caused floods in open, flat farming land and what ended up under water was mainly rice fields. While few lost their lives there, the economic damage might be even bigger as Akita's Komachi brand and Niigata's Koshi Hikari are considered the best and most expensive rice in Japan. Trust there will be enough crops elsewhere, though, that we don't have to suffer next year the same lack of availability in shops as potatoes have been this year following last year's typhoon damage in Hokkaido. There might be a political damage in Akita though: it turned out that the local governor missed the emergency meeting on Sunday because he was playing golf elsewhere.

Repairing political damage is not easy, but if anybody can do it, it's Shinzo Abe. This week, it looked like we had a brand new Prime Minister in Diet committee hearings of the school scandal: not the overconfident bossy ruler but a humble man who apologized for causing fusion and patiently tried to explain that he never touched the license process for his old friend's university project. In fact, he claimed he did not even know that the friend was applying any even if they played golf 7 times together last year! His Cabinet Office manager equally vehemently denied an Education Ministry ex-bureaucrat's testimony that he demanded approval of the application on behalf of Prime Minister as "PM could not say aloud such things". Few people believed the stories, but neither could opposition prove them wrong, so the Diet test is over and technically the Prime Minister is now off the hook.

Surveys will show voters' verdict of Abe-san's performance and his new humble character. Last weekend his popularity hit a new bottom when a survey by Mainichi newspaper claimed his cabinet's public support fell another 10 points to mere 26%. Meanwhile in Sendai, another popular lady backed by opposition parties grabbed the Mayor seat in front of the LDP candidate just like Koike-san did it in Tokyo. It does not help either that Abe's self-selected BOJ Governor Haruki Kuroda admitted last week that his JPY 60 trillion "bazooka" will miss its 2% inflation target again. Originally set at 2 years from the 2012 start of the gigantic financial easing campaign, BOJ now says it won't be reached until 2019. The Japanese people's "deflationary mind set" has proved stronger than all the money Kuroda has launched on the markets and he's been running out of ammunition what to buy from the markets: there simply isn't enough JGB's available. One alternative has been shares, but even Tokyo Stock Exchange chief joined now in criticizing BOJ for buying them as it artificially depress market volatility, the basic essence for investors placing money there. As result, the volume of trading in TSE has fallen below all previous experience and BOJ now owns a hefty share of the stock market's capitalization. In some selected companies BOJ's ownership has grown worrisome big. For instance, at end of FY2016 it owned 13% of Uniqlo and will own 75% by end this year if it continues same buying rate.

It is not only private consumers, who don't believe that prices will go up: it's also corporate managers, who lack guts to raise prices in fear of losing sales. Or to raise salaries to workers even they desperately need to get more staff and their corporate coffers are bulging with money. Notoriously risk averse, Japanese managers worry that business will turn bad again one day and rather choose to forego profits by cutting business hours or number of branches than raise wages. It's another proof that the basic economics they teach us in school don't always apply in daily business – at least not in Japan.

Despite these financial oddities, there's no doubt the economy is doing well. There's been constant growth already for 5 quarters - the longest uninterrupted period since 2007 financial crisis - and IMF just lifted its GDP forecast for Japan and China while cutting that for USA. First half year trade logged JPY 1 trillion (USD 9 billion) surplus, third straight six-month period, as exports rose 9% especially to China and SEA with shipments of semiconductors, auto parts, iron and steel. In fact, Japan must be the only country to sell more steel to China than buy because the huge auto industry there needs its high quality! The trade balance with China was negative because of big imports of electronics and other consumer products made by Japanese and other foreign companies there. Same for Arabian oil and gas producers, yet all deficits were well covered by the JPY 3 trillion surplus in US trade. This has become a political worry now during Trump and from that point of view it was good imports from US grew 5 times more than exports there so the gap got a little bit smaller. This is something Aso-san will try emphasize to US in the forthcoming bilateral trade talks this autumn.

All along, the consumer demand has been the only one that has shown little sign of waking up – at least according to official data that is now being suspected even here. As in Finland, restaurants and bars in Tokyo are constantly full and any attractive new place opening creates long lines. Department stores and boutiques are swarming with shopping ladies and trains and planes are full of holiday travelers. That there's so little uptick in data, must start from the fact that the level of consumption is high already. As well, the data collection has not been modified to take in shift from durables to daily consumables nor sufficiently include the huge online shopping at Amazon, Rakuten and countless small web shops. Japan Statistic Bureau plans to launch a new consumption index next year and BOJ already has its own data collection as it is so unhappy with the current one. Why not use Nowcast, a tech start up from Tokyo University, that samples data from JPY 17 trillion purchases through 81 million credit cards issued in Japan? Because such simple system is beyond the grasp of tacky bureaucrats.

As for CPI data showing no inflation, it's been long said that's also based on wrong sampling where durables like televisions and cameras all coming down in price with new technologies are given too much emphasis in comparison to consumables and services. In reality, these days, you don't buy new gizmos every week, month, even year, but your daily visit to any food shop show that fresh food - not included at all in the CPI index - shows wild swings seasonally with long term trend clearly up. Veggies and fish especially are easily 20-50% up depending on type and season and in processed food packs what you get for same price is getting smaller – a hidden price rise. For long term impact, fish stocks in the surrounding waters have been depleted when Japan's traditional appetite and big catch has been matched by neighbors like Korea, Taiwan and China. For instance annual catch of popular "samma" mackerel is now only 1/3 of what it was and tuna has become so expensive here that your everyday sushi shop does not serve the best parts any more. On traditional "Unagi" Eel Day this week, I saw 2 small pieces of the miso smoked delicacy selling for JPY 1500! To comfort myself, bought instead 4 pieces of "nama harumaki" rolls for JPY 150 recalling how just one was priced EUR 4 in Helsinki. There's still value in Japan, but you have to find it. Generally speaking, there is no doubt that prices are increasing.

As for services, just look at what the tourist inflow has done to hotel prices: with Tokyo occupancy rate at 90% they are now double to what they were just a few years ago. And the inflow just keeps growing: in 2016 the inbound tourist figure reached 24 million (20% up from provious year) and in the January - June period this year 13.8 million, another 17% up again. Tourist spending has become a valuable input into the economy and brought about improvements in service that help also foreign residents, who have not yet acquired sufficient language skills. These days, almost every restaurant has some kind of English menu, some even Chinese and Korean. As well, back 30 years ago there was hardly any Romaji signs at stations or streets and buying correct ticket was guess work, but last month found that with a machine at Metro station you can do it not only in English, Chinese and Korean, but also French, Spanish, Portuguese, Malaysian, Vietnamese and Arabic.

On Monday it was exactly 3 years to the opening day of the 2020 Olympics and ex-PM Mori, who has been given the chairmanship of the National Organizing Committee, appeared in "yukata" on stage at Roppongi Hills with well-known athletes to launch the official theme song and folk dance. Both are remakes of the old "Tokyo Ondo" used for 1964 Olympics and it was reported the official version will be performed by Kayama Yuzo and Ishikawa Sayuri, both idols from the 60's. This might please Mr. Mori and the old generation who watch Kohaku Uta Gassen on New Year Eve, but hardly attracts today's international audiences. Yet, Mori could not help using the opportunity to attack Governor Koike for delaying Olympic road work plans with her Tsukiji move play. This smells national politics: after losing an election, you use other ploys to smear your opponent. Mori-san should stick to dancing in his "bath robe".

In fact, the energetic Koike-san has left no stone unturned to cut costs remarkably and rethink all construction plans instead of just rushing to pour money to construction companies knowing some of that will turn back to you. Moreover, she has to think of Tokyo people's health even after Olympics: it was not OK to move the fish market to its new location before ensuring it can be made free of contamination just to have the Olympic Avenue plan with tunnel under Tsukiji ready by 2020. There will be other routes and methods to ensure the athletes' travel from their Village to the Stadium in time if time runs out for the tunnel because of one year delay.

In contrast, construction of the new National Stadium is progressing now well: the base work looks half-finished already, so the woodwork will start before too long. Japanese companies are also doing their own preparations to make most of the Olympics on sustainable basis. Telecommunication industry is testing the new 5G, in hospitality business new hotels and restaurants keep cropping up in big numbers and Tokyo Taxi Association says its members plan to have 1/3 of their 100,000 old standard taxis replaced by big vehicles that accommodate groups. As importantly, the law allowing "minpaku" home rental business was passed 2 months ago and big real estate companies are now joining the business in addition to small specialized companies and private home owners. US AirBnb company says it has now 53,000 listings in Japan, its fastest growing market. Toyota is working to have its FC cars plentiful on the road and their filling station network in place by 2020. If road safety rules can be mended, we are likely to see a good number of self-driving cars and buses on Tokyo roads then, too.

Last but not least, the Olympics is also used to push companies to allow "teleworking" from home, something common elsewhere but still frowned at here. This week Monday was the first Telework Day which 900 companies and organizations joined to prepare do same 3 years later and help transport system accommodate the expected tourist masses. It was deemed a success: out of 5800 participants 1/3 worked at home, 1/3 changed working hours and 1/3 simply took a day off. According surveys only 13% of businesses across Japan allow employees telework and government target is to make it 30% by 2020 and much more in Tokyo. If Olympics can be used to help such cultural shift in Japan's corporate sector, they serve another useful purpose.

Three years is a short time to wait. We'll see what will come out of this all.

Timo Varhama  
Tokyo, July 27, 2017   

Previous Columns

21 July 2017
"From Cool Finland to Hot Tokyo: A Round-Up of Recent Happenings"

26 June 2017
"Anniversaries and Memories: Finland, Japan, USA."

19 June 2017
"Rainy Season in Japan, Political Storms in Europe"

8 June 2017
"Trump impact spreads - Japan struggles with workforce issues"

30 May 2017
"Taormina to Tokyo: Heavyweights and fashionable ladies"

"New Missiles, Diet Debates, Yet Big Business in Big Profits - Down on Ground Challenges Remain Basic and Simple"

9 May 2017
"Golden Week, Special Trains, Luxury Spending, Even North Worries Makes for Good Business"

20 April 2017
"North Korea, USA both worry Japan - Koike worry Abe and LDP even more"

5 April 2017
"Spring, Sakura and New Year Start in Japan - Commotion, Tensions Rise Around the World"

27 March 2017
"Questions Unanswered, Unasked – Lifestyle and Surveys Bring Light"

21 March 2017
"Finland in Focus: Friendship, Dictionary, Music, Food - Even Elevators?"

13 March 2017
"Uncertainty Increases Around Japan - At Home Rebuilding Uncompleted in 6 Years - Abe Popularity Takes a Hit."

3 March 2017
"Book Readers, Police Jokes, Nerdy Napoleon and Poison Scare"

24 February 2017
"Populism, Ignorance and Isolationism Leads to Mayhem and Mess"

16 February 2017
"Golf Diplomacy, Chocolate Festa and Hokkaido Deams-Come-True"

9 February 2017
"Tokyo overcoming winter, business changes, political battle and Trump threats "

2 February 2017
"Warm Feelings in Japan, Wild Winds from USA"

20 January 2017
"Ready for Rooster? It will be a wild ride!"

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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