[Video Gallery] The Impending Japanese Crisis

I Feel Like Chicken Little: Nobody is Paying Any Attention to Japan

The future of Japan.

I started this blog for one reason, and for one reason only: to bring awareness to the macroeconomic problems facing Japan and the consequences if these concerns are not addressed promptly, if not immediately.

I have clearly failed in this respect.

You see, it doesn’t take much to realize how much of a pickle Japan is in. Record trade deficits. Record debt. Record tax rates. The oldest population in the world. Highly restrictive immigration. With fewer people to pay for a growing amount of debt, compounded with greater expense incurred by taxes spearheaded by the Noda administration, the conditions for Japan’s fall from grace are in place, ready to be triggered be the smallest sign of economic uncertainty.

Remember, this is not itsy-bitsy Greece that we’re talking about. This is Japan – the world’s third largest economy. The only reason that it is still breathing is because of how tiny Japanese government bond yields are.

With its current account deficit being the way it is, Japan will have to look outside its borders to finance its debt. That’s when the house of cards will start to collapse. Interest rates will skyrocket in an attempt to attract foreign investors. Increased consumption taxes, combined with flat wages,  will push the savings rate through the roof. Consumption will, in turn, fall flat on its face, and investment into Japan will dip as a result of little to no growth prospects. The combined result of all of this? Default.

Despite the horrifying prospect of the world’s third largest economy tanking, nobody seems to be paying attention. The politicians are too focused on attacking each other to do anything else. Some Japanese businesses are toying with the concept of given up on Japan. Many people in Japan remain pessimistic or apathetic about future prospects, while the international community is still pumping money into Greece and counting the number of hairs on Newt Gingrich’s hair.

What gives? Am I, a Hong Kong-born, Canadian secondary school student with an interest in economics and the culture of Japan, the only one who cares about what will happen to the economy of one of the richest nations on Earth? Look at what happened back in 2008 when the US economy hiccuped. Now imagine a full scale, Fukushima-style meltdown of the Japanese economy. Don’t think for a second that you won’t be affected if you’re not living in Japan. We’re looking at a tank greater than the decline and collapse of the Roman Empire. No exaggeration.

I want to do more about the situation than write about it. I really, honestly do. But by the time I come of age and get the necessary experience and education to be remotely useful to Japan, I fear it may be far too late.

“Japan is falling!” the little Asian boy cried. But no one heeded a word and the earth soon stood still.

The Ideal Japan

Lexus' slogan is "The Pursuit of Perfection". Shouldn't Japan's motto be the same?

“If you could become the Prime Minister of Japan, what would you like to see accomplished during your tenure?” Fully aware of my ambitions of eventually joining the Japanese political sphere, a friend of mine posed this question while we travelled home after a long day’s work. Although his inquiry itself was an honest and legitimate one, I quickly realized that I never really (seriously) thought about this question.

If I had the power to reform Japan, what would it look like? Which issues would I focus on in office, and how would I address these issues? How would I put Japan back on track? What would my platform look like?

(Do keep in mind that I am still quite young. There are several things that I have yet to understand, and I would rather not have blog posts I wrote based on a kid’s understanding of the world to be used against me in a gubernatorial race in twenty years’ time. These are my positions at present.)

Economic Policy

Emulate Singapore. In many ways, Singapore is very similar to Japan. Singapore is powered by American-style capitalism run under the guise of democracy, when really everyone knows it’s a technocratic wonderland controlled by Lee Kuan Yew and friends a la Ichiro Ozawa. Yet somehow, it manages to be a mini, more efficient version of Japan. Like Japan, Singapore’s economy is driven by exports. Their workforces are highly educated. Both invest a ton of money into R&D, and geographically both are resource-poor countries with high population densities.

And that’s where the similarities come to an end. For the most part, Singapore remains corruption-free. The Ministry of Finance effects quasi-free market policies. Its corporate tax rate is half Japan’s; consumption tax sits at 3 percent; its business environment remains open and transparent; its infrastructure up to date; and unknown to many, Singapore is one of the top three refineries of crude oil in the world. Unlike Japan, it’s actually growing at a rapid clip and manages its finances very, very well.

Granted, each country has its quirks; certainly, a solution in one case may not necessarily transition well to resolving another problem. In terms of economic policy, however, Singapore serves as a powerful model to which Japan can look up to in restructuring what many consider to be a rather inefficient form of economic governance.

Social Policy

Although mainstream media both inside and outside Japan have remained mum on the issue, pushing forward with the newest initiative to implement a Canada-esque, points based immigration system seems like the right way forward.

Gay marriage and the like will likely not be key issues in the near to immediate future, as individuals in Japan tend to keep that sort of thing to themselves and in the warm embraces of love hotels.

Healthcare is a tricky one. I won’t claim to know enough about the Japanese healthcare system to make any assertions, but last I checked, healthcare and pensions are becoming the biggest public expenses as the population ages. Will it be unpopular to cut it down? Certainly. But when one side of the balance sheet is outpacing the other, at some point something is going to give. Ensuring that the basics are covered while tying the extras of healthcare benefits and pensions to the country’s economic performance may be an unpopular move, but it will be an ideal one in moving towards a more sustainable Japan.

A Nordic-style education, rather than the traditional, rote memorization model used for so many years, may be the way forward in making Japan a more innovative society. You can find more information about this an article I wrote earlier wherein I used the Finnish education system as a model for Japan’s future:

“Though its education system is paradoxical to Japan’s in every conceivable way, Finland beat the East Asian nation in ranking third overall in the OECD’s test of junior high school students. It would be difficult for the average Japanese (or average East Asian, for that matter) to understand why. According to the OECD, the Finnish spend the least amount of time in school and begin their schooling a full two years later than their peers in the rest of the world. Mention cram schools to the average Finn and he will look at you in utter bewilderment. There is only one (yes, one) mandatory exam, taken at the end of one’s secondary schooling. In contrast to many of the equally high ranking countries in East Asia (Japan included), Finland’s education system seems to be too relaxed and too unorthodox to perform well on any standardized test – yet it does.”

A Japan that is less focused on the “guilty until proven innocent” notion would certainly be an ideal one, particularly when you take the country’s 99 percent conviction rate into account.

Environmental Policy

Cut down electricity usage not only to keep Japan’s carbon footprint steady, but to minimize Japan’s dependence on imported energy and mitigate the necessity of restarting its highly unpopular nuclear power plants. The growing popularity of electric cars are likely to put increased strain on the power grid; cutting away at the fat, such as blasting the aircon with the door open to attract customers, will negate the powerful drain of electric cars. Hopefully.

Military Policy

Status quo. Japan is getting a great deal: the best military of its strongest ally protecting the country with a relatively low cost. Development of its own, in-house weaponry could certainly be encouraged. Joint development alongside South Korea would serve both countries’ interests in deterring China and North Korea as well.

Dedicated to Tetsuya (pseudonym)

[Video Gallery] Japan’s Impending Financial Crisis

Note: Excellent English dubbed videos of discussions held on Japanese television can be found here. Highly recommended.

 

 

Olympus and Its Fall from Grace

“In Greek mythology, Mt.Olympus is the home of the twelve supreme gods and goddesses. Olympus was named after this mountain to reflect its strong aspiration to create high quality, world famous products.” – Olympus company statement

The higher you go, the harder you fall.

Named after the highest mountain in Greece and the home of the Greek gods, Olympus perceived itself to be the pinnacle of the electronic world. Back in the good old days, it had the products to back its bold statement. Olympus was the first corporation to produce domestically-manufactured half-frame cameras. It was the first company to introduce live preview to DSLRs. The first flexible endoscope was co-developed by none other than Olympus itself. As a pioneer in electronics and photography equipment, Olympus was truly worthy of its namesake during the latter half of the 20th century.

Fast forward to October 2011, and it becomes clear how drastically things have changed for the worse. Share prices have plummeted following allegations of financial malpractice. American, British and Japanese prosecutors alike are looking into the case. What in the world went wrong?

The long and short of it all is as follows:

  1. Foreigner (Michael Woodford) promoted to CEO of Olympus.
  2. Woodford looks into Olympus’ acquisitions from 2006 to 2009.
  3. Three of the four acquisitions made by Olympus had underwritten assets and were abrogated after their acquisition.
  4. The fourth acquisition involved a $687 million transaction fee to two investment bankers following its acquisition.
  5. Woodford calls for Olympus’ chairman resignation.
  6. Woodford is fired by Olympus, and goes public with his findings.
Woodford’s concerns are far from invalid. $687 million is a hefty sum to pay to two individuals for a single transaction. Dissolving three companies after acquiring them makes no sense at all. The burden on proof lies on Olympus, and it has become absolutely clear that they have something to hide. As one reporter noted, “What is the point of this press conference if you are not going to address the main issues?
The problems with Olympus can perhaps be a metaphor for larger underlying problems in Japan. True, there are many things in Japanese corporate culture that we foreigners find difficult to understand. But does that really justify massive payouts, shady financial practices and a lack of transparency not only at Olympus, but at many other Japanese firms? What is the point of Japan’s stringent rules and regulations if exceptions, oversights and loopholes are being made left, right and centre? What is the point of promoting a foreigner to the company’s highest position if he is only expected to be the puppet of the company’s board of directors? While Japan sees a sense of responsibility as a virtue, why is nobody coming forward to take the heat?
There is something fundamentally wrong with management at Olympus. The sad thing is, Olympus is probably not the only Japanese corporation misguided in this regard.

Japan’s Bleak Prospects

[Blog Update: University applications and academic priorities have kept me busy during these past few weeks; the trend is unlikely to let up anytime in the near future. I will try to post as frequently as I can (it will take a few posts to get back into the writing mode). I do apologize for the dearth of new posts and would like to thank you for your continued support of Saving Japan.]

If the Japanese government were a corporation, it would be filing the Japanese equivalent of Chapter 11 by now. The country continues to rack up billions upon billions of yen in debt while delving deeper and deeper into the red. Round after round of QE spending seems to be the only thing a snail – paced administration has been able to think of since coming into power two months ago. Its government has been utterly incompetent in passing anything benefiting the common people; in fact, the government has done the exact opposite in revealing that radiation emitted from Fukushima may have been double the original estimate. Its Prime Minister has failed to reveal a proper sense of direction for the world’s third largest economy; FTA negotiations are either at an infancy stage or left at a political deadlock. Without a true sense of accountability, a general direction or proper budgeting skills, Japan is set to go down faster than Nortel in our current time of economic turmoil.

Of course, I am not the only one who has realized this. The Occupy Wall Street (in Japan’s case, Occupy Tokyo) protests show that people as a whole are dissatisfied with government so utterly ignorant of local concerns, both in Japan and around the world. Is it really that difficult of a task for politicians to care about those who placed them in that position of responsibility to begin with?

Sometimes I wonder what things would be like if they could be rewritten from scratch. A friend of mine interested in Canadian politics once said that he would make it constitutionally illegal for the government to run a budget deficit – cuts would simply be made to make up for the shortfall. What if the same were to be applied to Japan? How would similar large-scale shakeups change Japanese society? Would it even be possible at all?

The answer to that is a (probable) no. Whether two, five or ten years from now, it will take more than a miracle for Japan to avert imminent default. No matter how idiotic people perceive American politicians to be, they, at the very least, are discussing a solution. Absolutely nobody in Japan’s political spectrum has come forth with a plan to stop the mad cycle of borrowing and printing money. Without any concerted effort, it is unlikely things are going to change.

And that is a sad state of affairs. The Occupy Wall Street movement in the United States protests the abuse of control the wealthy and powerful have over the common people. It has only continued to pick up steam stateside and elsewhere around the world…everywhere but Japan. In the words of my good friend Mike (who is really like a Yoda figure to me), “In a city with over 35 million homes in the metropolitan area alone, a demo like these recents ones that draw a mere few hundred is, frankly speaking, a total failure.” It is. And with that failure, the iron triangle of big bureaucracy, government and private industry, will only continue to look after its own interests as the economic health of the country around it declines precipituously, to the point where Japan has begun to embark on a path to economic irrelevance.

Maybe Japan would be better off defaulting. Only then will people begin thinking about common objectives, rather than keep with the pervasive mentality of self-preservation on a sinking ship.

The DPJ’s Stimulus Plan Won’t Work

It goes without say that most policymakers are terrible with money. Japan is certainly no different. Facing a growing budget shortfall and mounting public debt, the Japanese government has done little in the way of making things better since the bubble burst in 1991.

In fact, the government has – more often than not – made things worse. Quantitative easing in the early 2000s, for instance, failed to stave off deflation in Japan, and had even put the country at risk of economic recession. Profligate stimulus spending failed to restore long-term consumer confidence in the economy. The government’s slow response in the wake of March 11th has not made things any better.

To further reinforce this negative image, the Japanese government has announced that it would “(propose) a 9.2 trillion yen ($120 billion) temporary tax increase and selling the government’s stake in Japan Tobacco Inc. to fund rebuilding from the March 11 earthquake and nuclear disaster…agreed on a third post-quake stimulus package of about 12 trillion yen.” 

In other words, the government is hoping to tax and spend its way to recovery. Will it work?

Absolutely not.

As Albert Einstein noted (and a quote my good friend Mike likes to use), insanity can be defined as “doing the same thing over and over again and expecting different results.” Is that not what we see here with the stimulus package? Do remember that this is the third stimulus package since the earthquake; Japan has experimented with various forms of government stimulus on multiple occasions in the past. None of them have been very effective.

Income and corporate tax increases are unlikely to help the cause of regions hard-hit by the earthquake either. By giving more of what I earn to the government, I have less to spend on leisure (tourism) and my business has less to invest in potential ventures or expand employment. I become more inward looking and less willing to invest in areas like Tohoku region, which are not known for vibrant business environments. As a thereotical business owner, “Why should I?” will become the prevailing mentality.

And if it’s revenue the government is after, why sell the Golden Goose? Fifty percent of Japan Tobacco is owned by the Japanese government, which generated a profit of 145 billion yen last fiscal year. Raise the tax on cigarettes to international levels and it becomes a win-win situation: either people stop smoking and relieve Japan’s healthcare system of its smoking-related problems, or JT and the Japanese government make a boatload of money, which it can thereby dedicate to earthquake relief.

Everything in this new plan just seems a bit out of place. Japan’s economic recovery will not be founded on the basis of simply hiking the tax and selling off what is effectively a government subsidiary.

FEATURE: The Political Conundrum

Politics is a sticky business. Without question, the majority of those in the political sphere try to stay in power through support of populist policies. Popular movements, however, are not always right, and the fickle nature of public opinion can easily turn 180 degrees and end a politician’s career prematurely.

A politician, however, must be careful not to alienate his voters else risk political suicide. In times of peace and relative prosperity, constituents want stability above all else. Changing the status quo when one’s level of comfort is high is something that voters want politicians to avoid at all costs (unless changing the status quo leads to an improvement in their current standard of living). Cut the standard of living and you have riots similar to those currently being experienced in Greece and in places where austerity measures have been put into place.

It isn’t easy being a politician. You have to walk a fine balance between doing what the people want and doing what would be in the best interests of the country. Many times, both are not one and the same. Steer too much in the direction of the voters, and you get blasted for being a spineless populist. Veer in the other direction and you won’t be seeing a second term.

What Japan needs right now is a tightrope walker. What Japan needs is an individual capable of achieving both.

It’s obvious, for instance, that Naoto Kan is no longer up to the task of being an effective Prime Minister. Besides bumbling much of his term since Yukio Hatoyama resigned, Kan-saori has managed to turn the whole Japanese Diet against him and attain an approval rating lower than any Prime Minister in recent history. The fact that he backed many populist movements, such as the wave of anti-nuclear sentiment currently in Japan right now, has not helped his popularity one bit. Without the support of the public nor of the political class, it’s obvious that Kan cannot get anything done with his hands tied behind his back.

The reality of Japan’s situation, however, is this: Japan cannot afford not to get anything done. With every passing day, the ranks of elderly Japanese grow. The workforce is shrinking. Tax revenues are shrinking. Productivity is declining. Savings rates have plunged. The budget deficit is growing. The debt to GDP ratio is rising. The cost of social services is increasing. Jobs are being outsourced to developing countries. As most of Japan’s debt is held by domestic investors, it can certainly keep up the status quo for a few years, if not longer. The problem with that is time: the bill cannot be delayed indefinitely, and Japan (like the current US debt crisis) will have to pay up eventually.

But the longer Japan waits, the more it can’t afford to pay the bills. What may ultimately result is default. At that point, all living standards will experience a precipituous decline. Japan will have hit a brick wall.

At the rate things are headed right now, this is the most likely option. It isn’t, however, the only one. As exercised twice before in its long and rich history, Japan is capable of massive structural reform. In the same manner that it turned itself around post-WWII, Japan is certainly able to revive itself from its coma. That much has been clear to historians and observers alike for quite some time.

What isn’t so clear, however, is how Japan will be able to do it. It’s easy to say that a country needs political change. It becomes difficult when you start to boil down to the specifics. How should Japan change, and what can it do to get itself back on track, in a world where everyone but China seems to be going down the wrong path?

This is why Japan needs effective political leadership. A leader who is able to convince his society that difficult, but necessary measures will have to be taken to ensure the continuing prosperity of the nation. A leader who is able to compromise with Japan’s many vested interests, and deal with a bureaucracy that seems to function independent of government. A leader that is capable of rallying Japan together in support of a common cause.

Such a leader is easier described than come by. As Garrett Hardin so fittingly put it in his article The Tragedy of the Commons, individuals looking after their own interests will ultimately lead to their collective downfall. Social security will have to be cut, but the growing political clout of the elderly will prevent such changes from ever happening. Free trade agreements will have to be signed, but farmers and others affected will try their best to block the FTAs from ever reaching their full economic potential.

And that’s where we have the political conundrum. Who’s capable of being in charge? How is he going to achieve political unity? Is it possible to change up the status quo in order to maintain the status quo? These are questions that no one, not even the most experienced of political analysts, have answers to yet. Perhaps that is the biggest issue that Japan faces now.

The US Debt Crisis and Japan

There has been a lot of talk these past few weeks about the possibility of the US defaulting on its debt obligations and the government’s need (or in the eyes of members of the Tea Party, lack thereof) to raise the debt ceiling.With both parties caught in a state of political deadlock, the probability of the former is growing with every passing day a deal isn’t brokered.

It would be unnecessary to explain exactly why default would be bad for the US economy. That much is evident to even those who do not follow the news. What isn’t as obvious is this: how will a US default on its debt obligations affect Japan, the Japanese economy and its people?

Let’s start with the basics: currency. With the current uncertainty about the future and state of the American economy and with the ongoing debt crises in major European countries, many investors are fleeing Western countries to safer havens. One such haven is Japan, as the yen rose to 77.95 yen per US dollar. Fundamental economics knowledge dictates that a higher yen yields more expensive exports from Japan, thereby negatively impacting Japanese exporters and those who work for such companies. Expect the government to print more money to ease pressure on exporters if the pattern of the strong yen continues in the mid to long term. Job prospects will likely weaken, and unemployment figures will remain where they are, if not experience a rise in the coming months.

(To those who wonder why Japan’s yen remains strong despite meagre economic prospects and a high debt to GDP ratio, read this article).

It’s also worth noting that the United States is Japan’s second largest import/export partner. As an export-oriented country, Japan will be hard hit if the US defaults on its debt. Take Toyota as an simple but effective example. Toyota makes more money in North America than it does anywhere else. Period. With North America as its largest market and with the United States making up most of the continents’ consumption, Toyota will be adversely affected if Americans don’t have the means to purchase new cars. The same applies to a number of prominent Japanese manufacturers, and devastating effects will be felt by Japanese businesses and by those who are employed under them back in the Land of the Rising Sun and elsewhere around the world.

And that’s just the tip of the iceberg. Also remember that…

  • Japan is the second largest foreign holder of US Treasuries in the world.
  • Much of Japan’s defence is reliant on US cooperation, which may be scaled back in the event of default and domestic obligations.
  • Japan’s major trade partners all have strong ties to the United States, and a US default would filter down to negatively impact these relationships as well.

All we can do now is hope and pray that the United States doesn’t default; for if it does, it spells enormous trouble for Japan and may well be the last push Japan experiences before it’s thrown into its own debt fiasco.

American Economic Inequality and Its Applicability to Japan

Recently, I had the opportunity to read former Secretary of Labour Robert Reich’s book Aftershock: The Next Economy and America’s Future. Though the book itself was primarily concerned about issues facing the American economy and addressed the factors that led to its current economic predicament, I was surprised (or shocked, for the lack of a better word) by the similarities between the United States and Japan on a socioeconomic level.

Tangent: I highly recommend picking up a copy of the book for yourself. It’s an interesting look into a potential direction the United States may be heading over the next few years.

One of the main points Reich tackled in the novel was that of the growing economic inequality between the rich and the poor in the United States. Reich theorized that the concentration of wealth in America’s upper classes has drained the middle class of its spending power, thereby reducing the number of viable consumers and slowing consumer spending and economic growth.

To illustrate this point, one of the main analogies he used involved a $100 million dollar salary. Give that all to one man, and he will probably spend a quarter to half of his fortune and tuck the rest away for a rainy day. By contrast, if one were to spread the $100 million among five hundred individuals earning $200 000/annum each, each individual would spend 75%-80% of his/her income and put the rest into savings and long term investments. It’s easy to see which path is more conducive to economic growth and increased consumer demand.

It’s easy for one to dismiss this as a Western problem – one that egalitarian Japan is immune to.

You’d be wrong.

According to an article published back in 2006 by USA Today, the OECD reported that “income inequality rose twice as fast in Japan as in other rich countries between the mid ’80s and 2000″; that “the gap between rich and poor in Japan is wider than the OECD average” and “found that the top 10% of Japanese male wage earners now earn 3.2 times what the bottom 10% make.” Egalitarian? Hardly.

The fact of the matter is, Japan is in the exact same boat the United States has been in since the Reagan administration: wealth has been siphoned up to the highest levels of society, which has in turn had a negative impact on the economies of both superpowers.

The solution, according to Reich, comes in the form of a reverse income tax and higher marginal taxes for the wealthy. Here’s how it works.

“Full time workers earning $20 000 or less would receive a wage supplement of $15 000. This supplement would decline incrementally up the income scale…then to zero for full time workers earning $50 000. The tax rate for full time workers with incomes between $50 000-$90 000 would be cut to 10 percent. The taxes for people with incomes between $90 000 and $160 000 would be 20 percent.

(By contrast) The top 1 percent pay a marginal tax of 55 percent; those in the top 2 percent pay a marginal tax of 50 percent; and those in the top 5 percent pay 40 percent. This would more than pay for the income supplements and tax cuts…the surplus would be used for additional incentives and for reducing the federal deficit.

The wages supplements and tax reductions would enable the middle class to spend more, and their spending would help move the economy to full capacity and sustained growth.” 

Interesting, isn’t it? Though not everything designed to address American concerns or problems works in Japan, this is one case that may actually be the exception. Income inequality – regardless of the country – is a hindrance to economic progress.

This could certainly be part of the greater economic solutions leaders of both countries are searching so desperately for. It may be nothing more than a suggestion on paper, but it’s a viable plan that Japan should perhaps consider pursuing.

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