Wednesday, March 12, 2008

Directionless Japan?

The Bank of Japan could be leaderless within a week is the headline today in an article in the Times of London online:

The central bank of the world’s second largest economy could be “leaderless within a week” after an assault on the Japanese government by the opposition party.

The opposition Democratic Party of Japan (DPJ) today successfully blocked the government’s nomination of Toshiro Muto as the next Governor of the Bank of Japan. Analysts claim the gambit could force a general election.

The piece goes on to paint a very bleak picture for the Japanese economy:

With nobody selected to replace Toshihiko Fukui as governor when his term ends next Wednesday, the BoJ faces its worst crisis since gaining independence a decade ago. The turmoil also coincides with a Japanese stock market in tatters and the economy balanced on the edge of recession.

It reminds me of the lashing the Economist gave Japan a few weeks ago. On the cover of an issue that covered Japan’s economic and political problems, the magazine inserted an “i” in Japan to create “Japain.” Here is the essence of their argument:

A few years ago, people hoped that Japan, which is still a bigger economic power than China and has some marvellous companies, would help take up some of the slack in the world economy if America tired; that now looks unlikely. Productivity is disastrously low: the return on new investment is around half that in America. Consumption is still flagging, thanks in part to companies' failure to increase wages. Bureaucratic blunders have cost the economy dearly, and Japan needs a swathe of reforms to trade and competition without which the economy will continue to disappoint.

The leaderless central bank seems to be an apt symbol for Japan in general.

During my trip to Japan last week, I heard several stories from businesspeople about an overall lack of direction in the country.

One employee of a major Japanese manufacturing firm said that current economic growth is the result of hard work and innovations made five to ten years ago. The manufacturing sector operates on a five-year product cycle, so if we want to know what is in store for Japan’s future, we should look at what is happening now. In his view, hard work and the “samurai spirit” are long gone in Japan. The recent entrants into the labor force are lazy, he said. His forecast was therefore bleak for Japan’s manufacturing sector.

What’s more, he said that Japan as a society needs instructions on what the next goal is. He said that firms are great at reaching centrally-mandated goals. The problem is that no one has a sense of what is next for Japan.

His friend, a Japanese entrepreneur, told me that there are still few incentives to become an entrepreneur in Japanese society. As an entrepreneur, one can expect no favors from the government and lower earning power compared with salaried employees. Where is the productivity and innovation going to come from?

As many people know, Japanese bureaucrats briefly considered promoting nanotechnology and biotechnology as alternatives to manufacturing. Now that the consensus is that manufacturing is Japan’s strength, panic is setting in about Japan’s relative competitiveness in that sector.

I heard one story about a major manufacturing company hiring consultants to build a new business strategy from scratch. As the story went, the company asked the consultants, “What should we do next?”

Another businessman told me about some of the young entrepreneurs he has met. In his view, they have no ideas and are simply throwing away their careers because they launch businesses without a business plan or experience.

The same businessman went on to tell me that executives looking for new employment opportunities are only concerned about two things: the salary offered and the benefits available. In his experience, no one talks about finding rewarding work or making a difference. This mentality may be a hangover from the restructuring that took place over the previous decade. Moreover, during the Koizumi years, restructuring and the use of part time labor only provided a temporary fix.

Here is a fairly pessimistic assessment from economist Krassimir Petrov in the Market Oracle:

To summarize my expectations about the Japanese economy in 2008, the macroeconomy and the stock market should perform poorly, while the Yen has a strong potential to rise. The long-term strategic investor should stay out of the Japanese stock and bond markets.

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