The sun still rises in Japan's economy

Japanese technology on display at Tokyo's Miraikan museum. Photo / Bloomberg

Lunch at Tokyo's Foreign Correspondents' Club (FCC) is much like lunch at any such club in any of the world's big cities.

The food, like the decor, is plain but classy, with an international flavour. But the menu has one feature you'd be unlikely to see anywhere outside Japan: its prices, it boasts, have not changed since 1983.

For almost any foreigner, it's difficult to imagine what it must be like for a restaurant meal to cost the same now as it did 26 years ago. But for the locals, the answer is straightforward: "If you think it seems expensive now, boy you should have been here in the 80s".

The FCC is a regular haunt of Meishi Sonobe, a former vice-president of Mobil Oil in Japan who these days dabbles in a variety of business interests, including used car exports.

A charming and laidback fellow, Sonobe has recently accepted an appointment by New Zealand Trade & Enterprise to act as a conduit for Kiwi entrepreneurs trying to break into the Japanese market, through NZTE's Beachhead initiative.

While he is optimistic about the potential for increased trade between New Zealand and Japan, he is also realistic about the economic pickle Japan has found itself in.

In the late 80s, he notes, his mother's apartment in Tokyo was estimated to be worth around US$6 million. After the bubble burst in 1990, its value plummeted to just US$750,000, and has only slightly improved since then.

While the West is heaving an enormous sigh of relief that our own economic tsunami has not yet proved as bad as was feared, many Japanese remain sceptical about a global economic recovery. They, too, kept thinking the sunshine would break through the clouds any day, but nearly two decades on the sunblock remains on the shelf.

"At that time, about 25 years ago, the Nikkei was around the 7000 to 8000 level, and US Dow was 3500," Sonobe recalls. "Now, the Nikkei is back to [almost] that level again, but the Dow is still much higher. When you think the US has created that bubble over the last 8-10 years, the Dow could still more than halve."

The point has not been entirely lost on the United States, nor Europe for that matter, where sceptics have been fretting for a while about whether the rest of us could follow Japan's deflationary path.

Japan dealt with the bursting of its bubble by pumping trillions into its economy, but let bank debt roll over and over. Despite price wars, consumer spending has never fully recovered, and some critics say the US is making the same mistake.

The OECD's chief economist, Jorgen Elmeskov, insists Japan's situation is unique.

A few weeks ago Elmeskov acknowledged that a collapse in commodity prices in the first half of this year had led to negative headline inflation rates in a number of countries. However there was no need to panic as underlying inflation rates were "humming along nicely", he said.

Elmeskov does not expect Japan to shake off deflation for possibly another year.

Although Japan's economy returned to positive growth in the second quarter of this year, ending a severe year-long recession, latest data revealed this week does indeed show its problems are far from over.

Core inflation fell a record 2.4 per cent in August - a steeper drop than at any time during the country's famous "lost decade", and the fourth monthly fall in a row. Corporate profits have halved, exports are down by a third, and tax revenues have fallen by a quarter.

Unemployment figures due out today are expected to show the country's jobless rate has hit an all-time high of 5.8 per cent.

The mixed messages from its new 77-year-old Finance Minister (who last held the portfolio in 1994) are not helping. The yen has both surged and plunged in recent weeks on the back of his public comments about whether he will intervene to bring the exchange rate down.

In any case, the Bank of Japan cannot lower its overnight lending rate any further - it is already at 0.1 per cent.

And if that is not enough to keep the new Government awake at night, public debt will reach 227 per cent of GDP next year, according to the IMF.

Tokyo-based economist Jesper Koll is keen to point out that the United States and Japanese bubbles had crucial differences. In Japan it was the corporate sector and the banks that took on too much debt, he notes. In the US it was households that were leveraged to the hilt.

There is undoubtedly a bit of schadenfreude involved; for years the US has lectured Japan and many other countries about how to manage their economies.

But as Koll points out, Japan's economic woes have not been quite as harsh on its citizens as might appear from the headlines.

Some countries would welcome an unemployment rate of less than 6 per cent, for example. And it's not as if large chunks of the populace are destitute. It's still easy to find Dom Perignon, at $700 a bottle, in Tokyo's convenience stores.

Koll was born in Germany, but moved to the US to study. He worked for a while for the OECD in Paris, and ended up in Tokyo in the 80s after someone recommended he check it out as an interesting compromise between Western-style capitalism and Eastern socialism.

He fell in love with the place and looks unlikely to ever leave.

A former chief economist for Merrill Lynch and JPMorgan in Japan, these days he heads the Japanese branch of Singaporean firm Tantallon Research.

Koll agrees with Sonobe that the lesson Japan has learned is that Keynesian-style stimulus can only go so far.

"The US Government is buying bits of paper, and buying corporations and fiscal policy and monetary policy. And that's all fine and that's why we have macroeconomics. But what one of the big lessons from Japan is going to be is that at the end of macroeconomics, there is very little you can do."

Tatsuhiko Yoshizaki, chief economist for the huge Japanese trading company Sojitz, agrees that a bit more pessimism might be required in the West.

"Japan's experience of the 'lost decade' is now being a teacher to the rest of the world," he says. "As far as I'm concerned, the American economy is now doing that. The financial markets are now becoming very optimistic in the United States, and that's a big mistake."

Yoshizaki's personal belief is that the US dollar will not weaken dramatically for at least another year. But after that, things could get interesting, he muses.

"The States is now in the same position as Japan was 10 years ago. So maybe the US government will make a big loss and have big budget deficits. That will be bad for their currency. However the Japanese experience shows that this will not matter in this period. So that's how I can assure you the US dollar will be okay for at least one year."

America's economy also affects Japan's economy, of course, and a fall in exports is one of the reasons Japan's economy has struggled to climb out of the mire.

In manufacturing, Japan still has a competitive edge, Yoshizaki insists.

"On the other hand, our people are still conservative. So there are two kinds of Japan: an export-oriented economy and a large domestic market. The current situation is that the foreign demand has shrunk and the Japanese domestic economy is now in a very severe situation. So people are arguing we should develop our domestic market more. There is a severe need to improve and develop a new type of service industry, so we need more entrepreneurial and energetic people, but unfortunately we are not those kind of people."

For that reason alone, Japan is a promising market for New Zealand companies, he suggests.

"I have a golden kiwi every morning for breakfast. The image of New Zealand is very good. There's still 128 million people here and our living standard is very high. As far as agricultural foodstuffs are concerned, Japanese people are very greedy and very demanding. I don't think that situation will change quickly in the near future."

One situation that is changing quickly, though, is the development of Japan's close neighbour and historic enemy, China.

While in Tokyo I took the chance to visit the city's science museum, known as the Miraikan. Having recently visited Shanghai's much more impressive version of what is, after all, meant to be a showcase of national prowess, I couldn't help wonder if it was a handy metaphor for the two countries' radically different psyches.

While Shanghai's museum is frankly far too big and far too ambitious, with vast areas of unused space, it is still a fascinating place. Tokyo's museum is almost too compact, and too technical to be truly engaging.

You get a much better idea of Japan's technological supremacy by visiting the electronics district of Akihabara, or by popping into any of the major electronics stores in any of the main shopping districts. They all feature an enormous selection of extremely clever consumer products designed to make every facet of daily living as easy as possible.

You could conclude that the epitome of civilisation is toilets that play a synthetic flushing sound while you do number twos.

But it's also tempting to note that Japan's famous bullet train, the Shinkansen, is no longer the world's fastest. That honour now belongs to Shanghai's Maglev.

The most obvious example of how Japan appears to have lost its edge is the Sony Walkman, which revolutionised the way we listened to music back in the 80s. Sony's latest version of its MP3 Walkman is still very well designed, but it was Apple that came up with the iPod and iTunes, which have revolutionised the entire music industry.

While Japan's ambivalent attitude to entrepreneurship is slowly improving, Koll blames the country's stagnation on a reluctance of the old guard to relinquish its control of business. In Japan, he notes, people are generally still hired on the basis of which university they went to, and promoted according to their length of service, rather than ability.

"There are some guys out there who say Japan can solve its demographic problems by allowing 10 million immigrants. But if you're a PhD from Auckland University and you get a job offer from Apple or from Siemens or from Fujitsu, which one are you going to pick? If you're good and lucky at Apple, in 15 years' time you might run the company. If you're good and lucky at Siemens, you might run a country or a division. If you're good and lucky at Fujitsu, they're going to increase your housing allowance."

In an anecdote that might make some Kiwis cringe, Koll also despairs at what he describes as Japan's attitude to "the nobility of failure".

"Watching the Olympics in Japan is fascinating because every Japanese who comes in fourth or fifth place gets more attention than whoever came first... At the end of the day it is a Confucian society, and the problem here is the old guys can't let go. Everything depends on the generation before."

And as is well known, "the generation before" is rapidly growing in size. These days Japanese couples tend to have only one baby, and their parents are living much longer than previous generations.

No one I spoke to could explain exactly why the Japanese stopped having children, but the most likely reason seems to be that they simply went off the idea once they became wealthy. As a result, Japan has the world's most scary demographics - one in five Japanese is already retired and by some estimates half the country will be retired by 2050.

At the same time, the overall size of the population is rapidly shrinking. By 2090, at current projections, the country's population will be half of what it is today.

Japan is also notorious for its close links between businessmen and bureaucrats, and for its cautious political culture, which has simultaneously led to a long period of rule by the same party, but with a remarkably busy revolving door of Ministers and Prime Ministers.

Voters might have recently dumped the Liberal Democratic Party (LDP) for the first time since the Second World War, but only hard-core optimists believe there will be substantial changes in policy, despite the new coalition's populist promises to boost household incomes, introduce cash allowances for child-raising, a higher minimum wage, a renationalisation of Japan Post, and an end to highway tolls.

If anything, the change is probably bad news for an agricultural economy like New Zealand, as the centre-left party that is now in power, the Democratic Party of Japan (DPJ), is seen as even more protectionist, particularly when it comes to guaranteeing the livelihoods of the country's many small-time, and part-time, farmers.

In 2000 the famous American business strategist Michael Porter teamed up with two Japanese academics to point out some fundamental problems with Japan's postwar economic trajectory in a comprehensive study titled Can Japan Compete?.

The answer seemed to be: "Not very well".

That might be news to US carmakers, who have clearly lost the battle with their Japanese rivals. But according to Koll, not even Toyota manages to make a profit at home.

"It is supposedly one of the best companies in the world. But on average, no Japanese companies make money at home. There are all sorts of reasons why this is the case, but if you never want to be able to enter Japan again, you should write what's wrong with Toyota," he jokes. "It's a complete disaster."

To be fair, Koll also notes that Japan continues to lead the world in R&D and in the number of patents it secures each year. Like many others, he also marvels at how well everything works - the country's public transport systems are remarkably easy to use and reliable, and its national distribution systems are so efficient that Japanese travellers returning home don't think twice about getting a courier to deliver their luggage, rather than hanging around baggage carousels.

Its economic policies are also far more holistic than in the West, which has resulted in a much higher degree of social cohesion and astonishingly low levels of crime. And for all its economic troubles it still has an impressive standard of living.

"The Japanese are total hedonists," Koll grins. "It's still the greatest country on earth."

Despite outsiders' misgivings about Japan's future - and it has to be said, even its neighbours regard it as an economic basketcase - New Zealand officials are convinced there is still enormous potential for improved trade. It is still, after all, the world's second-largest economy, and one that accounts for one-tenth of the entire planet's economic activity.

The huge political power of Japan's farmers will continue to be a major sticking point. But that hasn't deterred New Zealand officials from continuing to push for a Free Trade Agreement (FTA).

Last year, after much skilful diplomacy by officials and a group of businesspeople, Japan agreed to host the first Japan New Zealand Partnership Forum, which resulted in an agreement to at least look at the issue. Another forum will be held at the end of this month, to coincide with the All Blacks' Bledisloe Cup match in Tokyo.

However there is already concern the relationship could yet move backwards, following a change of both governments.

According to Noboru Hatakeyama, a former senior Minister and bureaucrat who now heads the Japan Economic Foundation, Japan's agriculture officials are trying to reverse their former PM's agreement to initiate a study into an FTA, much to the embarrassment of foreign affairs staff.

It is perhaps inevitable that a degree of mutual mistrust will remain. Japan's former ambassador to New Zealand, Tetsuya Endo, told a symposium in Tokyo last year that it was natural that friendly countries would sometimes have disagreements. In the past, Japan and New Zealand had clashed over fisheries, he noted.

More recently there had been squabbles over the transportation of nuclear fuel and whaling.

"It is true that New Zealand has turned

Continued on page 16itself more toward the Asia-Pacific region ... but I do not think it is only me who sees a lingering wish to remain with Britain," he gently chided.

Hatakeyama makes a point of noting Japan's annoyance that it has been excluded from talks over a possible FTA known as the TPP (Trans Pacific Partnership) which so far includes Australia, Brunei Darussalam, Chile, New Zealand, Peru, Singapore, and Vietnam.

According to New Zealand officials, Japan excluded itself by demanding too many products be exempt from negotiations.

Naturally, diplomats like to emphasise the fact that we share many cultural traits with the Japanese, such as being "quiet people who listen well", and who have strong ethics.

But trade is all about self-interest. To New Zealand's slight annoyance, Japan has begun separate negotiations with Australia about an FTA, because of its huge reliance on Australian iron ore and coal.

A successful agreement between Australia and Japan could be potentially disastrous for New Zealand if it included any concessions on agriculture. However there is no reason to believe Japan's farmers will greet competition from Australians any more favourably than they would from us, and the gossip is that Australia's negotiators are making no progress at all on that front.

Meanwhile, our officials continue to argue that Japan's stubbornness over agricultural issues could prove counter-productive, given its need to import nearly two-thirds of its food supply.

If countries such as New Zealand lose interest in the market, Japan could face some interesting choices, they argue.

Former New Zealand trade commissioner John Hundleby has been dealing with Japan since the days before commercial flights between the two countries. These days he works for Meat and Wool New Zealand and he admits his frustration with the agricultural lobby is nearing the end of its tether.

"In my view, it has reached the point where it is very detrimental to Japan's future," he argues.

Japan's attitude is in contrast to both China and Korea, Hundleby notes. Korea already has a draft FTA with the United States and has begun negotiations with both Australia and New Zealand. It has indicated it is prepared to move on agriculture, albeit rather cautiously.

"For me, it is very sad in terms of Japan's long-term position. Japan really does risk missing out to other countries in the Asia region in the agricultural sector."

But for those New Zealand companies that are prepared to put in the hard work in Japan, the rewards can be enormous, says Hundleby.

"Provided product quality is maintained and promises are kept, it can be a good long-term sustainable business."

Our current trade commissioner in Tokyo, Ben Wilson, admits that message does not yet seem to have caught on. But he and NZTE's other nine staff in Tokyo are doing their best to change that, he insists.

"It's our fourth-largest export market, but New Zealand accounts for only 0.4 per cent of Japanese imports, so I'm kind of amused when people say there is no market potential here. Of course some of the end markets are competitive, but there's still another 99.6 per cent of the world's second-largest economy to work on."

The sectors which appear to have the biggest potential for New Zealand exporters, says Wilson, are food, biotech and IT.

He also notes that Japanese tend to be generous investors. "They're quite good shareholders to have on your books - they're not too demanding. It depends a bit on what your proposition is, but they're pretty understanding shareholders overall."

Indeed. One Japanese businessman I spoke to admitted he was astonished by the $1.3 billion Japanese beverage maker Suntory was prepared to pay last year for Frucor. Other mega-purchases of late include Kirin's decision to mop up the rest of Lion Nathan it didn't already own. Japanese seafood giant Nissui already owns half of Sealord.

But in fact, the level of Japan's direct investment in New Zealand is low relative to its economic size. Over the past six years it has doubled to $3.2 billion, but still ranks well behind Australia, the US, and Britain.

On the other hand, its indirect investment in New Zealand, which includes things like bonds and derivatives, has grown from $3.3 billion to $8.3 billion over the same period, cementing its position as our fourth biggest investor overall.

New Zealand's total investment in Japan peaked at $4.4 billion in 2008, but in the year to March dropped back to $3.6 billion.

As far as trade goes, Japan has recently slipped in importance for New Zealand, with China pushing it into fourth place.

The biggest items on Japan's New Zealand shopping list are aluminium, cheese, fresh fruit and logs. We mostly buy their vehicles, but also oil, tyres, and TVs.

On a GDP basis, however, New Zealand can be said to do half as much trade with Japan as it does with Korea, despite Japan being six times bigger than its neighbour.

The head of Tourism New Zealand's Tokyo office, Jason Hill, is flat out right now getting ready for the visit later this month by John Key and a plethora of hangers on, keen to rectify that.

He is praying those involved will be prepared to walk the talk.

"Everyone in New Zealand is looking at China and wondering about what's going to happen in 50 years' time, and Japan is being overlooked," says Hill.

"If you look at Japan in five years' time, it's going to be a little more useful until China catches up."

And Meishi Sonobe is the first to admit many Japanese have a similar attitude.

"If you talk to people in Japan, nobody knows about Fonterra, or F&P. Japanese always look to America and Europe - they never think about New Zealand, because the market is too small.

"But New Zealand people are very inventive, and very good at problem solving. New Zealand seems to be very advanced in electrical engineering, and healthcare and medical equipment. New Zealand and Australia could be a very good gateway to Western cultures. But Japan hasn't got that right yet."

Karyn Scherer travelled to Japan with the help of the Asia NZ Foundation.