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 AOYAMA VIEW

ABE: THE REALITY BEHIND ALL THAT TALK
Unbelievable things are happening around the world these days. Even in Japan.

Who could have expected that Hiroshima, located safely on Inland Sea, would get 144 cm snow in one day and that it would snow even in Okinawa? Or that 31 year old journeyman "ozeki", who has won 10 of every 15 bouts just 8 times in his 26 tournaments, would suddenly reach almost perfect score 14-1, beat all three Mongolian "yokozuna" grand champions and become the first Japanese "basho" winner in 10 years? Or that the government would win a local election in Okinawa after losing out every poll there since 2014? And, come to think of it, where would you find another Prime Minister who is ready to accept that his country will lose 25 million people in next 30 years - about 20 % of its population - and still stay firmly against immigration to try substitute the loss?

It was less of a surprise that a bunch of road paving companies were exposed this week for bid rigging to maximize their profits from rich government projects in repairing damaged roads in Tohoku 2011 disaster zone. Or that a waste disposal company in Nagoya area, tasked to dispose of suspect food stocks, instead resold them back to retail for better price. Or that Economy Minister Amari, a key man in Abe government and Japan's main negotiator for the TPP deal, stands accused for taking bribes from a small building company to get better access to a public housing project. It's more surprising that there hasn't been any scandal yet within the latest minister line-up in contrast to Abe's earlier ones which experienced several casualties each during their time.

Amari case is a bit surprising in that the money involved is so small and the request for help so clearly out of the economy minister's scope and authority. The company should have used the money not to wine and dine Amari's secretaries but Construction Ministry's officials instead. At the writing moment, we are waiting for the minister's official reply in the matter - in his initial response his memory was "a bit hazy" as to what really happened and since then he travelled to Davos to hobnob with other world top officials. If forced to resign, it would be a major blow for Abe credibility as Amari, together with Chief Cabinet Secretary Suga, is one of the two closest friends to the PM and has been such a central figure in his economic agenda. Abe has had a few warning shots earlier across his path but this one would clearly hit the bridge of the battleship. The opposition is certainly trying to make most out of it.

Yet, Abe seem to continue unperturbed in his grandiose style making promises to the electorate that sound today more and more out of touch with reality. Not only he will raise Japan GDP by 20% and share the wealth to every citizen and community around the country, but he will get women to share 30% of the top jobs, make them have more children and arrange public care for children and the growing number of old people. In his policy speech for the Diet's 190th session, Abe said he will strive for "society where all citizens are dynamically engaged", whatever that means, and even achieve "equal pay for equal work" between men and women, young and old, permanent and temporary workers, something that has not been realized even in the most socially advanced Nordic countries. In addition to being such miracle maker for the economy and society, Abe also donned on his statesman hat and continued to speak of Japan as leader for the regional nations, even whole world, who "share freedom, democracy, human rights and rule of law".

The reality looks different even in that. For long time already, Abe has been criticized at home - not only by opposition and dissenters but even by many in his own party - for pushing his own way and not listening to other opinions. As said before, he continues to get away with this only because he is so popular and because there is nobody in LDP, who dare to rise publicly against him. While this might be welcome determination for many, the downside is that, like all despotic leaders, Abe is sensitive to criticism and prone to suppress in public any contrary opinions. This has become clear in his relation to media at home and abroad: the man really wants to keep it all under his control. All news and views should be positive about him and Japan - even if the two are still different from each other for most of us.

With all this background, it must have been an unpleasant surprise for the PM that The Economist last week downgraded Japan from "democracy" to "flawed democracy" in its annual global politics review referring exactly to "increased media censorship". It does not help that Japan goes down in good company: France, where police authority has been enhanced with state of emergency, first for 3 months and now extended for another three, and Korea, where reporters and historians are hit with libel suits for writing anything controversial about the government, the country and the history. China, of course, has never been even close to being considered a democracy, but some things happening here today have creeping resemblance to what's going on there under Mr. Xi, a fellow princeling leader. Of course, Abe's Japan is still far off from Beijing's brazenness, yet both men and their governments do things that let down what they talk in public for.

One example is last week's detention of Mr. Ric O'Barry, the well-known dolphin activist, who arrived to join protests against the bloody hunt that takes place once a year in Mie prefecture. Of course, every government has right to deny entry to anyone it wishes, but holding back a 76 year old man in Narita without proper explanation and probably forcibly putting him on the flight back to USA, is the worst kind of advertisement for "open democratic" Japan with "human rights and rule of law". It's still far off from China, who arrested a Swedish national in Beijing and hi-jacked another from Thailand to make them "confess to their crimes against China and its people" - that's Chinese for promoting free speech - in a video that was publicly broadcasted.

Some said the videos looked very much like the IS prisoners "confessing for their sins" against Mohammed - before beheading. Then again, China has old traditions in such "self-confessions" from the Mao times. And now we have a new Mao there.

A better comparison what Japan could have done with Mr. O'Barry comes from co-flawed France, who did not deter Pamela Anderson from coming to the country to speak against cruelty of force feeding ducks to make foie gras - a true and famous national tradition in France unlike dolphin eating in Japan but instead invited her to make her speech in the French Parliament. Maybe it was just sex and age discrimination: Pamela is still good looking in her 50's and could have appealed even to LDP's old geezers to take look at, I mean to listen to.

As said, the reality behind lofty speeches is different, yet Abe gives away some "surrender mentality" on Japan's long term prospects by accepting that the population will decline to 100 million, even nominating a new minister with the title calling for that. As Robert Dujarric, one of the most straight talking observers here, says in his bitterly written article "Japan Without Ambition" that such population loss happens "normally only in lands plagued by terrible wars or pandemics" and "100 million is just a waypoint on the road to oblivion". Despite all Abe talk, Robert says, Japanese society is today best described with "stasis, lethargy and fatalism along with pleasant life style". Robert concludes: "Unless Japan as a nation abandons its fatalism and takes charge of its future, it's impossible to be optimistic." (For full article click here.)

So let's not blame Abe for trying, if only he does it genuinely. The problem is, it does not look like that. Despite strong ground work by BOJ under Kuroda's leadership and sizeable public spending, the first two "arrows", those crucial reforms that he has promised, just do not seem to materialize. As another well-known commentator William Pesek writes: "Shinjo Abe has been squandering three-plus years of the most enviable reform environment Japan has seen in decades. If Abe had delivered even 10% of the restructuring he promised, investors would not be fleeing regardless of China's slowing growth rate." More specifically Pesek points out: "In December 2014, Abe held a snap election the Japanese did not want (to win a mandate for his three arrows, he claimed.) Yet 57 weeks on, Abe has made almost zero progress taking the weights off Japan's ankles. Now, he will squander the next 165 days campaigning for a new, new mandate" (in Upper House election this summer).

As readers might recall, my first comment on Abe as PM in 2012 was that economy is only a vehicle for the popularity that he needs to achieve his more private agenda. At the end of the day, he wants to be remembered not as the man who turned around Japan's economy, but the man who changed the American authored Constitution. This is something he solemnly promised to his grandfather and mentor, ex-PM Kishi.

There is a whiff of surrender mentality in the air also around the (again) much awaited spring wage talks. Despite Prime Minister's many urgings, big companies are not any more willing to increase the wages as much as last year and year before. Even the unions realize the situation has changed and ask for just about half of last year's average rise 2%. While the profits for FY2015 that ends in March still look good, the business outlooks are on decline not only in China but all over the world and the low JPY rate that has helped many to make huge profits is subject to rapid changes in the global volatility. This shows again the limits of command economy in democratic, free market. Not even BOJ's new fund investing money in shares of those companies, who "invest into human and fixed assets" - ie pay higher salaries and buy new machines - seem able to change corporate managers' minds. (True to his policies, Abe promised a sizeable pay rise to government officials instead.)

All the data coming out from last year is positive on surface. The trade deficit, one of the drags for the national economy, was down from JPY 13 trillion to just below JPY 3 trillion (USD 24 billion). The main contributor, however, was not rise in exports - they went up just 3,5 % in value and actually fell -1% by volume - but 8.7% decline in imports, mainly from lower costs for energy imports - for example crude oil imports slid 41%. As the oil prices have gone further down by almost half from last year's average USD 55, there is every reason to expect trade balance will turn positive this year. More importantly, the balance of payments that include income from Japanese companies overseas operations, should remain highly positive. As for exports, one important change was that with China in decline, but USA on rise, the Yankeeland reclaimed its old position as Japan's biggest market.

Retail sales climbed 4.7% in Seven-Eleven and other convenience stores surpassing JPY 10 trillion (USD 80 billion) mark for the first time. Their popularity is a long time trend, so it was more remarkable that even "normal" supermarket sales, squeezed between ubiqituous "conbini" and luxurious department stores, rose for the first time in 19 years.

The final figure for the foreign tourists fell just a dash under 20 million at 19.7 million, 47% up from 2014 and nearly four times more than in 2003 when Visit Japan campaign started. Their spending reached to JPY 3.5 trillion (almost USD 30 billion) making international tourism as big currency earner as car part exports, one of Japan's old established industries. Mainland China topped the visitor list with 5 million travelers followed by Korea, Taiwan and Hong Kong. USA was the fifth biggest source surpassing one million mark and you can bump into Finnish tourists, too, out on the town every now and then.

With the 2020 target already in the bag, it is said officials now target 30 million by the Olympic year. Much need to be improved in the service and infrastructure to do that: hotels are already now often fully booked in the Tokyo-Osaka-Kyoto main route and the English language service - not to talk about Chinese or Korean language - remains a far-off dream in most places. Better Wi-Fi access, too, is a big request on most foreign travelers' wish list. It's notoriously poor here because of practical oligopoly given to three mobile phone operators that allow them charge world's highest fees, something they wish pass on to foreigners through roaming connection with their carriers.

The outbound corporate investment reached to USD 80 billion which stands well in comparison to China's much acclaimed global shopping spree at USD 110 billion. In contrast to today's Chinese and past Japanese behavior, the M&A targets these days are not landmark properties or fancy golf courses but more like natural extensions of each company's ongoing business at home. Many such investments were made to Finland, too, even if nothing as big as Supercell and Metsa Fiber in 2014. Of course, there are always some examples you can ask whether they were really clever - like Japan Post splurging USD 5 billion for an Australian transport company and Itochu sinking USD 10 billion into a China government owned investment company. In Europe, some were shocked for Nikkei newspaper buying the venerable Financial Times to become an international media outlet.

The fate of the two "problem children", Toshiba and Sharp, is in the air at the writing moment. According to the latest news, Toshiba wish to unload almost all of its sprawling businesses except energy, nuclear and other, and its flagship NAND flash memory chips. Gone will be white goods, televisions, lap tops and "normal" memory chips. The fridges and washing machines are likely to be bought by INCJ, the government restructuring fund, who plan to combine them with same from Sharp. While not as flashy as memory chips and computers, these businesses are no throwaways with JPY 225 billion and JPY 315 billion turnover respectively last year.

INCJ's plan to buy Sharp's flagship LCD display business and combine it with J-Display, the similar business it earlier bought from Toshiba, Sony and Hitachi, is more controversial. Its proposed offer is JPY 300 billion (USD 2,5 billion) to shareholders provided the two main banks swap JPY 150 billion old debt to equity and provide JPY 350 billion in new financing. In contrast, Taiwan's Foxconn, the world's biggest OEM maker of mobile phones, has offered JPY 625 billion with JPY 400 billion going straight to existing shareholders and JPY 225 billion to buy off the banks. In other words, this is much better deal for both investors and the banks and it remains to be seen whether Abe government will here stick by its word that "Japan is an open market to investors" or whether it will be persuaded by nationalistic talk to "keep Japanese technology to the Japanese".

Another new worry is Softbank, whose brave march forward to many kind of new businesses all over the world - from Finland's Supercell to solar parks in Hokkaido and India and JPY 3 trillion fund for new start-ups - is now under financial threat following massive write down of its US acquisition Sprint, whose performance has proved a complete disaster. Bought at USD 20 billion just two years ago, it is said to value only USD 7 billion today. To make things worse for Mr. Son, not only Softbank's own share value has dived dramatically but its mammoth 25% shareholding in China internet giant Alibaba has lost even more value in the China stock rout.

All in all, there's a feeling that, with such contradictory news, the economy is "in pause" right now, not bad, not good, undecided how the future will pan out. In that respect, it resembles US economy - on the rise but how much? - or China that is said to remain basically sound except for overwhelming debt and steep decline in stock markets and manufacturing industries. In comparison, other BRICS, ASEAN and Europe seem to be now in more deep grown difficulties. Guess we will learn more in next weeks and months with fully clear results and outlooks spelled out at latest in the FY'2015 book closings end March. Meanwhile, we can only hope China will get its stock market stabilized so that the ongoing global anxiety and doubts about how bad things really are, will be removed. At the writing moment, experts speculate the Shanghai bottom could be reached at 2500 points, ie 50% down from the high last summer.

Finishing off on brighter note, it was good to see Japan U-23 soccer team to make its way to Rio Olympics winning its every match in the unique qualification tournament held in Qatar. The other Asian team straight through was Korea, so the traditional two power houses in Asia are back on the top after dismal performance in the Asian Cup last year. In contrast, the two teams celebrating there, Australia and China, fell off already at group stage.

It was especially rewarding to watch these young players, some still college amateurs, play so well, maybe better than the "full grown" national team of full professionals. The last match with a decisive overtime goal against Iraq was a sweet revenge for exactly similar loss in exactly similar place that stopped Japan痴 path for its very first World Cup in 1994. (They made it then 1998 and have been there every time ever since.)

It's only a half a year to Rio. Let's hope all arrangements will go well there even if the money has run out from the once proud BRIC country. At least there will be a good opening spectacle as Panasonic has contracted to pay for it.

Timo Varhama  
Tokyo, 28 January, 2016   


Previous Columns

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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