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Thursday, June 22, 2006


Can Japan profit from recovery?

U.K. journalists caution against return to pre-bubble mind-set

Staff writer

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Japan is enjoying more than four years of continued economic upturn after finally solving many of the problems that haunted the country since the 1990s. But is Japan becoming complacent now that it has survived the post-bubble doldrums — even though it has the potential for more robust growth?

News photo
Anatole Kaletsky (right) of The Times newspaper speaks during the June 8 symposium at Keidanren Kaikan while his co-panelists Anthony Hilton (left) and Angela Jameson look on.

Has corporate governance really changed? Has the nation embraced globalization and is it ready to cope with the fast-paced developments in today's international business environment?

These were among the questions posed by six journalists from leading British media organizations who took part in the June 8 symposium at Keidanren Kaikan, organized by Keizai Koho Center under the theme, "The United Kingdom and Japan Viewed by British Journalists."

Following a week of meetings with government officials, lawmakers and businesspeople, the panelists discussed the prospects for the Japanese economy, Japan's relations with China and other issues. The session was moderated by Yoshinori Imai, executive editor and commentator for Japan's public broadcaster NHK.

"Everyone I speak to here is very optimistic and confident about the outlook for Japan. . . . I want to suggest that there are actually more dangers or at least possible mistakes in the years ahead than people recognize," said Anatole Kaletsky, an editor-at-large of The Times newspaper.

Kaletsky said there is a "risk of complacency and a lack of ambition in this country today."

This, he said, is surprising because leading Japanese companies and their managers have long been known for their principle of "kaizen," or continuous improvement. "This same principle does not seem to be applied to the macroeconomic performance of the country as a whole. . . . The idea that you can actually improve continuously does not seem to be very prevalent either in the business community or among policymakers," he said.

The government announced in May that Japan's economy marked the 52nd straight month of expansion since 2002 — the second-longest period of growth in postwar history. The expansion is longer than the bubble-era boom between 1986 and 1991, and is approaching the longest ever, 57 straight months of growth between 1965 and 1970.

Still, Kaletsky said Japan's growth trend estimates — 1.5 percent to 2 percent a year — are far too low. "Why are you so unambitious? Why is 1.5 percent or 2 percent considered the maximum growth rate that you can achieve?"

The veteran writer urged Japan to question key assumptions that lead to such modest growth estimates — limited increases in the nation's labor productivity and a shrinking labor force.

For example, Japan should at least aim for annual labor productivity growth of 3.5 percent to 4 percent — the same level as in the United States, he said.

Given that major Japanese manufacturing companies have been able to improve productivity very rapidly, the same methods should be applied to less efficient sectors of the economy whose productivity remains well below international standards, he added.

Kaletsky also challenged the view that Japan in the coming months is headed for a difficult period of a significant slowdown — if not outright recession — because it has never experienced a continued expansion lasting more than 57 months.

News photo
Yoshinori Imai

Economies worldwide are more stable and less cyclical than in the 1960s and 1970s, and the expansion in Britain has entered its 14th year, he told the audience.

"So I would say in terms of the cyclical situation and long-term trend growth, the potential in Japan is even much greater than is recognized in the present, rather optimistic environment, and I would urge people in Japan to be a bit more ambitious and less complacent," he said.

To ensure continued growth, Japan should engage in a thorough public debate over anticipated changes in government policy — tax increases and the lifting of the Bank of Japan's zero interest rate policy, Kaletsky said.

"Of course one can accept that the zero interest rate policy is abnormal and unhealthy in any capitalist economy, and I don't think anybody would dispute that the interest rate should go up above zero," he said. "The question is whether the rate should go above 0.5 percent or 1 percent in the foreseeable future."

Noting that Japan — as shown by some economic indicators — is still in a deflationary environment, Kaletsky said the BOJ should continue to maintain ultralow interest rates "until you get out of deflation or until you get to a level of inflation" comparable to other world economies.

Taxes are clearly going to have to rise in the near future, given the "unhealthy" — if not dangerous — level of public debt, he said. But the mistakes of 1997 — when a consumption tax increase pulled the fragile economy back into recession — must be avoided, which is another reason the BOJ should keep interest rates at ultralow levels for at least a couple of years, he said.

Risks are also present in the corporate sector, which is widely said to have regained confidence after finally eliminating the excess labor, debt and investment that had lingered from the bubble era, Kaletsky said.

"I wonder how much really has changed" in terms of corporate governance, he said, noting that some major Japanese firms appear to be returning to their "unhealthy old habits of the pre-bubble era."

Kaletsky said he suspected that with the improvement in the Japanese economy in recent years, big corporations are "moving back to the corporate philosophy that puts more emphasis on investments and market share than on return on assets and profits."

"I think there is a tendency among large companies to believe again that they have to fight to the death to preserve certain product markets, to preserve their position in terms of market share, to continue to run very large, diversified and in some ways illogical portfolios of assets," he said, citing as examples the cutthroat competition among Japanese electronics makers in the LCD television market and the battle between Toshiba and Sony over high-definition DVD standards.

News photo
Clive Cookson (left) of the Financial Times discusses Japan's science and technology efforts as fellow British journalists Daniel Dodd (right) and Mary Dejevsky listen during the June 8 symposium.

And the situation is reflected in the stock market, where many Japanese companies look overvalued in relation to their international competitors, Kaletsky charged. The level of profit in major listed companies is "remarkably low in relation to their market capitalization and turnovers," he added.

Such positions, he warned, will come under the increased scrutiny of shareholders who include more and more American and European institutional investors.

Anthony Hilton, business commentator for The Evening Standard, questioned whether Japanese companies have changed their ways to cope with the fast-paced developments of world economies.

"The world now goes much faster" than before, Hilton said. "The speed of change is such that many people doubt whether a company can live a long time. Maybe a company should have a short product life cycle, bringing it to market and letting it die, with a new product quickly taking its place.

"The emphasis of business today is not on long-term (thinking), consensus and evolution," he said. "All the many things we think of as Japan's strengths — continuity, consensus and slow but effective decision-making" — may not be valued in today's business environment, he added.

Hilton also asked if Japan has really embraced globalization, which he said is about opening up to the rest of the world. "I wonder if when Japanese talk about globalization they understand how it fundamentally changes things. . . . I feel that perhaps Japan is still insulated from that impact," he said.

True, Japan has opened up to its major trading partners in Asia, but "I don't think of the Japanese economy as outward-looking, except for the big exporting companies," he noted.

Globalization is often associated in a negative context with outsourcing — or hollowing-out — of less competitive industries to other countries where production costs are lower. But this is something that Japan should not just prepare for but aggressively take advantage of, said Kaletsky of The Times.

Outsourcing helps to stabilize a national economy by moving the production — the most volatile business process — outside of the country, Kaletsky said. And perhaps Britain, of all the industrialized economies, has gained the most out of this outsourcing, he added.

"With hindsight — and I think this is something that Japan can learn from the British experience — probably the greatest achievement of the (Prime Minister Margaret) Thatcher period was actually not anything she created, but all the things she destroyed.

"The destruction of so many great British industries — coal, steel, textiles and even of the car industry — was really the foundation of the prosperity Britain has enjoyed." The exit of those industries, which would have disappeared anyway with competition from China and other emerging economies, paved the way for the creation of more competitive industries in Britain like aerospace, pharmaceuticals, finance and the revived auto industry, he said.

"Britain produces and exports more cars today than it did in 1979 before Thatcher came to power — thanks almost entirely to the investment that we've received from Japanese manufacturers who have brought to Britain a modern car industry capable of withstanding international competition — which I think Britain would never have been able to develop on its own," he noted.

Hilton also said the British economy has thrived by openly inviting the best people and the best companies to the country.

Today, 15 to 20 of Britain's top companies listed on the FT100 are run by non-British — Americans, Germans, Italians, and so on, he said. The City, the center of British financial industry, is "probably 80 percent to 90 percent internationally focused" with very little focus on domestic business, he added.

Hilton said he does not foresee Japan ever getting to that stage of opening up — partly because of the problem of the Japanese language.

"Because our language is English, it's much easier for people from the international community to come and settle in London," he said, noting that the language barrier will be a major obstacle for non-Japanese to come and settle in Japan.

Instead, he said the Japanese should be more willing to go overseas — as students in the United States, for example — and be much more outward-looking.

"For solutions to your problems, you are looking into yourself. I think you should be looking more out into the world to solve your problems," Hilton said.

Clive Cookson, science editor of the Financial Times, also said Japan, even though it spends a great deal of money on research and development activities, should boost cross-border interactions in the fields of science and technology.

As long as Japan's economy expands even at a moderate pace, its major electronics firms will certainly produce world-leading new products, and Japanese automakers particularly face a promising future in the area of environment-friendly vehicle technology, he said.

However, scientific institutions in the academic and public sectors appear excessively bureaucratic in comparison with their Western counterparts, and they're "very parochial at a time when science is more global than ever," Cookson told the audience.

"There are too few Japanese scientists working overseas, and far too few foreign scientists working here," he said.

This is in sharp contrast with the situation in China and India, vast numbers of whose scientists and engineers are working in the U.S. and Europe, he said. And as the U.S. becomes less hospitable to non-American scientists, hundreds of thousands of these expatriates will be returning home during the next few years, helping revitalize research in China and India with new ideas and working practices, he added.

Speaking on environment issues, Angela Jameson, an industrial correspondent for The Times, said she heard from some of her interviewees during the visit that exports of energy-efficiency technology will be a major earner for Japan in coming years.

Still, Japan is far behind its target in reducing greenhouse gases under the Kyoto Protocol, she pointed out, noting that Japan's emissions of those gases in 2003 were 8 percent higher than in 1990 — even though the protocol requires the nation to cut emissions by 6 percent from 1990 by 2012.

Jameson said she will be watching whether Japan will increase its reliance on nuclear energy — believed to result in less emissions of greenhouse gases — despite the nation's uneasy history with nuclear power. This will be a more politically sensitive issue here than in Britain, where the government is expected later this year to put construction of new-generation nuclear plants on the agenda to replace ones that will mostly have to close by 2023, she added.

Jameson called it "disappointing" that Japan — despite its record of industrial innovation — does not seem to have a sense of urgency in developing renewable sources of energy like wind power and biomass.

While such alternative sources account for only 1.7 percent of Japan's primary energy supply, she said that 4 percent of power supply in Britain comes from renewable sources — mostly wind power. Britain has a plan to increase the ratio to 10 percent by 2010, and although the nation may not achieve this goal, it will get close to it, she added.

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