Like Japan today, it has recovered
Japan's recovery and future role in Asia
Asia's second largest economy is currently recovering rapidly and is therefore worth not just one, but three looks.
At first glance, “Abenomics” is finally getting the country going again after decades of laborious structural adjustments and a series of disasters with an extremely expansive policy. At second glance, however, the question arises whether this is not just another flash in the pan and whether long-term problems such as the enormous national debt are not only being circumvented. At third glance it gets really exciting, because Japan is re-establishing itself as one of the most important
the most important “player” in the largest and fastest changing growth region in the world.
Good news from Japan seems long overdue, because for a generation now the story has read like a string of crises: the financial bubble (1991-1995), the following banking crisis (1997-2002), the fight against falling competitiveness (2002- 2004), finally the global financial crisis (2007-2010) and then also one of the largest earthquakes ever measured, the tsunami and the nuclear disaster that devastated entire parts of the country.
and paralyzed almost 30 percent of electricity production (2011-2015). All of this against the background of a rapidly aging society, which only allowed the country 24 years with a balanced demography to develop a comprehensive social security system.
Since the end of this period around the turn of the millennium, government transfers to the social security funds have exploded and have driven debt to 240 percent of GDP. "Abenomics", with its growth optimism and a comprehensive program of "structural reforms" to remove the legacy, was therefore not only received with a fireworks display on the stock exchanges (the Nikkei has increased two and a half times since 2012). The demand for labor has also increased,
At 3.5 percent unemployment, there is practically full employment, exports are driving growth in traditional industries again, large companies
men now have cash reserves close to half their market capitalization, and demand has recovered within a year from a long overdue VAT hike. At the same time, the country is actively pushing outward again, does not shy away from the confrontation with an increasingly hegemonic China and is actively trying to integrate itself into the growth markets of Southeast Asia.
Flash in the pan "Abenomics"?
A second look, however, shows that a large part of these successes was only achieved through an extremely expansionary monetary policy and a depreciation of the yen by 35 percent. The skepticism regarding the long-term reform ability of the country and government is therefore still low, especially in Japanese industry and households. From the outside, this seems at least partially unfair, because the previous major reform programs (Hashimoto 1997, Koizumi 2002, DPJ government 2009 and Abe 2012) do not need to hide behind the reforms under Reagan and Schröder. Ultimately, the real growth rates in Japan in the last decade of around 1.5 percent per employee were by no means behind the USA or Germany.
Of course, all of this is not enough if, as in Japan, the challenges against which you have to be measured are much greater. In fact, the medium-term growth prospects are again falling far short of the government's lofty goals. Thanks to the weak yen, expansionary policy, cheap oil and a strong market in the USA, Japan can grow by around 1.5 percent this year and next. From 2017, however, this will hardly be achievable, because the tem-
Porous tailwinds will disappear again and new tax increases to finance the rising social spending will continue to burden the economy. In addition, the already significant decrease in population will accelerate noticeably and Japan will be 25 million people smaller in just under 30 years.
In Germany, similar prospects have led to comprehensive immigration policies that have long stabilized the workforce and growth. In Japan, increasing the proportion of foreigners from below two percent in the long term (USA and Germany 13 percent) is not seriously discussed because of concerns about cultural identity and the difficulties of an effective integration policy. For companies, this means that despite the current low international wages, the labor market will remain a long-term obstacle to growth. For long-term growth, Japan will therefore have to set new productivity records. The demands of the Abenomics reforms are accordingly enormous and the government is trying to address all major economic problems at the same time.
The entry into the world's most ambitious free trade project with the USA and large parts of Asia (TPP) is not only intended to reduce trade barriers, but also to improve the investment climate and break up encrusted structures. A new "Governance Code" for companies should focus management more on productivity and profitability and make them much more transparent. An agricultural reform should finally enable private companies to invest in Japan's cooperatively organized agriculture and thus stimulate the regions that are falling further behind.
The low exchange rate should not only be used for exports, but also to build up a tourism industry that can put this exotic country, which is so interesting for all of Asia, on a par with France, Italy or Switzerland. The energy industry must become significantly more efficient through the liberalization and sale of the networks. Finally, a cultural change is also being sought that will open up extremely well-educated women with better career opportunities and
should also get the demographic problems under control in the long term.
Japan: Not Asian Greece
How realistic is all of this? The government is undoubtedly working hard to implement the reform packages and the environment is favorable as the traditional growth
motor Japan, the manufacturing industry, has costs under control again and can invest in future technologies again. Productivity is increasing strongly here, but remains tied up by capacity and demand problems in the shrinking home market until companies are pushing more abroad and opening up new markets there.
Ultimately, however, Japan’s future growth will be decided in the large service industries, in trade, in health, in mobility and
nication. This becomes clear when you take a look at Japan's most successful companies, which are now called Fast Retailing, Seven & I, Softbank, Dentsu, but also M3, Rakuten, Yamato and Secom. All of these companies are not only growing and investing heavily in Japan, they are also working on their expansion into the Asian market. In Japan, these companies are winning in a market where urbanization is now a whopping 96 percent and where city centers are becoming increasingly common.
grow significantly again due to the influx of people.
This expertise is now helping companies to make the leap abroad, because practically all Asian countries are now working massively on expanding their "megacities" and are emulating Tokyo, the world's largest, safest and most productive metropolis. From infrastructure systems, IT systems and logistics to towards hyper-efficient convenience stores, restoration franchises and hospital management, Japanese "urban" services are experiencing a boom in Asia.
This means that one of the biggest areas of concern is the uninterrupted rise in government debt of almost 240 percent of GDP. Contrary to what the government claims, this problem is by no means under control and cannot be solved through higher growth either. Realistically, the Japanese director
tion can never repay his debts. Interestingly, however, this means neither an imminent national bankruptcy (as in Greece) nor an insoluble debt drama, because the debt in no way consists of excessive government consumption (which in Japan is in the lowest range of the OECD), but essentially consists of government transfers of private wealth into the (also by no means generous) social funds.
This is astonishing, because while Europe prides itself on funding the world's highest social transfers, year after year the Japanese government takes out extremely low-interest loans from wealthy retirees and uses them to fund subsidized pensions and health services. This system will no longer work at the latest when growth and thus interest rates rise again, but this is unlikely to be "explosive". The mountain of debt is already being reduced today by the massive purchases of government securities by the Bank of Japan later further melted due to significant inflation.
In the not-too-distant future, Japanese households will therefore find that their high savings are worth much less in real terms, but will practically not be able to escape this trend. In the future, there will therefore be a further burden on the internal growth forces, in particular private consumption, but not a "debt crisis".
This brings us to the third, long-term look at Japan, which is more a look at East Asia as a whole. Because Japan can barely grow at home, it will again push outwards much more strongly. Thanks to the previously very low export quota of less than 20 percent and with continued favorable exchange rates, exports could be doubled with appropriate investments and corporate strategies, which would contribute significantly to financing the deficits.
This is exactly what the monetary policy and free trade-oriented part of Abenomics aims at. However, companies are not convinced of such a mercantilist strategy. The economy is already struggling with capacity bottlenecks, especially in the labor market. Foreign investments in the future markets, which have for a long time secured a large part of the income growth and profits of large companies, are more promising.
In order to make this possible, however, companies have to integrate themselves “deeply” and in the long term into their future markets. Japanese companies are therefore increasingly
hedge on takeovers of key companies and free trade and investment agreements. The "Trans Pacific Partnership" agreement (TPP) with the USA and Asia is therefore a top priority for Japan. However, it also means that the government must become more influential on longer-term developments in the partner countries and that it needs powerful military potential to intervene in trouble spots. The "security laws", which are so hotly and controversially discussed in Japan and Asia, and the reinterpretation of the constitution to enable increasing foreign deployments of the "self-defense forces" should be seen against this background.
The demands on politics therefore continue to rise considerably. While until a decade ago it looked as if the Chinese market would be sufficient as a future market, the increasing political disputes and competition have already put an end to this illusion. It is therefore no coincidence that the then new Prime Minister Abe, completely contrary to all previous habits, visited all ASEAN countries right at the beginning of his term of office and expanded cooperation at all levels up to India.
Of course, this harbors great potential for conflict with China, which is pursuing its own expansion strategy in Southeast Asia. In the "island dispute" with Japan, China has therefore initially swung onto a confrontational course, which of course should also show the USA how much the demarcation lines are shifting in Asia. However, as in Japan, China's main interests seem to be less on confrontation than on a comprehensive security policy in what both countries consider to be a “difficult” political and economic environment in Southeast Asia. It is helpful here that in the economic field the interests of both countries
are predominantly complementary.
Key industries in ASEAN
While Japan has dominated entire key industries such as the vehicle market (with market shares of over 90 percent) in ASEAN for decades, it draws from ex-
tremendously capital and labor intensive areas such as large infrastructure investments and whole parts of the electronics industry. A working
division, which enables China to invest in “hard” infrastructure (rail, road, port construction) and Japan to specialize in “soft” system development.
development and technology transfer allowed.
The same applies to the competition and future cooperation between the Japanese-dominated Asian Development Bank (ADB) and the new Chinese-run Asian Infrastructure Investment Bank (AIIB). After a “hot” start, the interests of cooperation are already starting to predominate. Conversely, the ASEAN Group will continue to oppose being a playing field for “larger” interests and will try to integrate a common market with the ASEAN Economic Community (AEC) from the end of this year.
However, due to the small market size of the individual countries, the dependency on exports from China and Japan and the internal difficulties in ensuring a stable regulatory policy, this is unlikely to succeed. On the other hand, the AEC certainly has the potential to offer Japan and China a platform for cooperation that would otherwise hardly be possible. The AEC is likely to become an important anchor of stability in Asia, albeit less through internal integration than through external cooperation, as is the aim of the RCEP (ASEAN + 6) cooperation agreement. Despite all skepticism about the reform possibilities of Abenomics and the growth possibilities of the aging society, Japan has begun to play a bigger role in Asia again.
The companies have completed a large part of their restructuring, but no longer expect sustainable growth and are pushing outwards. The key markets here are rapid urbanization and the expansion of megacities with their enormous investment and technology needs. Japanese companies are technological leaders in all of these areas, but are still stumbling with the internationalization of management, the implementation of interfaces to a growing number of partners and the integration of global IT systems.
The economic recovery and the development of new markets will therefore also lead to a significant opening up of Japanese companies to the outside world.
Martin Schulz, Senior Research Fellow, has been an economist at the Fujitsu Research Institute (FRI) in Tokyo since 2000. At the private “think tank” of Japanese industry, which mainly deals with economic policy, corporate strategies and future technologies, he is responsible for globalization, international corporate strategies and economic policy analyzes. His analyzes are regularly quoted and broadcast in large parts of the international press and media (BBC, CNBC, ARD, ZDF).
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