Why Japan can expect an investment boom
I will make a forecast: 2012–13
will be the year that foreign investment into Japan explodes. Japan will become
fashionable again, and the reasons are obvious – if you can avoid media
distortions.
I have not always been as bullish
on Japan as JPMorgan’s Jesper Koll and some others. However, having worked in
finance and in China, I have some insights into what Japan does well.
The first of my seven reasons for
optimism is that Japan is more ethical and better run than China, India or the
global finance industry. The problem of unchecked greed is clear enough, but
even the reputations of foreign banks for competent management have taken a
massive beating. Risk-management tools have been shown to be pretty much useless,
and back-office operations were often hopelessly flawed and inaccurate. In
China, the government’s reputation for sound management is also suffering, as
cases of elite infighting and breathtaking corruption come to light. In
contrast, Japan’s superior management and risk control mean Japan will plod
along in relative safety long after India, China and finance-driven economies
struggle to recover from their respective post-bubble doldrums.
Second, Japan is more pragmatic
and less ideological. Western economies are in trouble partly because of a
self-induced ideological frenzy. This ideological bias (the idea that markets
are self-correcting) was largely the cause of the crisis and has exacerbated
the crash. For example, although the nominal aim of governments and
supranational organisations is to reduce government debt, why is debt rising in
so many countries? Indeed, austerity policies are actually increasing
debt-to-GDP ratios. Rather, the crisis appears to have been a heaven-sent
opportunity for free market fundamentalists to “roll back the frontiers of the
state”. Look at David Cameron in the UK, who is acting like a re-incarnation of
the Iron Lady. As part of his strategy to reduce the role of government,
Cameron appears intent on privatising the National Health Service – along
American lines. This is patently daft.
Third, Japan is still insulated
by a thick layer of financial muscle. Its GDP is almost 50% larger than
Germany’s. Its government debt, while vast, is still comfortably funded
domestically. In contrast, the UK and the United States have run deficits with
the rest of the world for over 25 years.
Fourth, Japan has low individual
and corporate debt. Half of the listed Japanese companies have zero debt. That
is because Japan’s response to globalisation was to “lend and sell” rather than
“borrow and buy”. Japan (like Germany) pulled off a magnificent export bonanza.
Individuals and companies used the proceeds to pay off the last of the debt
accumulated during the bubble years.
Fifth, Japanese companies have
reoriented with amazing speed away from their traditional export markets in the
EU and the US, to Asia. As a tidal wave of Japanese yen rushes towards Asia,
foreign companies are slowly realising that they absolutely must have a
presence in Japan if they want to benefit from this opportunity. Any company,
for example, that wants to service Toyota, once more the largest car
manufacturer in the world, needs a presence in Japan even if the aim is to sell
to Toyota internationally. It may not be the traditional factory and sales
network selling to Japanese buyers, but foreign companies will need to send
competent and well-paid staff to establish relations with Japan’s corporate
elite. Best of all, foreign companies will be welcome and necessary partners,
since Japanese companies need help in operating to global standards.
Sixth, Japan is changing
unbelievably fast. Don’t be fooled by institutional and political inertia. The
changes are colossal, and they are a gold mine. Since the Japanese economy is so
huge, a small shift in habits can release billion-dollar opportunities – as
Coca Cola found when it started selling bottled tea in Japan. Tea, until very
recently, was usually drunk at home, freshly made.
Seventh, Japan has technology
that many foreign companies need. Indeed, Japan is still the big beast in the
Asian neighborhood. Sure, it doesn’t scamper around as much as it used to, but
trade surpluses with China, South Korea and ASEAN nations show that those
countries still couldn’t function without Japan’s high-end manufacturing
inputs.
In effect, non-Japanese companies
have little choice but to invest in Japan. As the engines of unsustainable
global growth come to a juddering halt, Japan has to feature more highly in
corporate investment plans. The country is predictable, rich, safe and
experiencing dramatic and lucrative change. Only a fool could ignore this.
DAN SLATER
Business & Investment Opportunities
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