Japan’s challenges: learnings from its peers
While Japan likes to view itself as a unique society (and country) it would be fair to say it is rare one.
Many of the structural challenges Japan faces it shares with a handful of other countries that have had similar historical trajectories over the last 300 years: namely the UK and Sweden.
This perspective allows one to develop insights as well as learn from the experiences of its equally rare peer group. Also, their interactions with the three superpowers of: the US, China and Russia/FSU reveal further similarities.
Japan’s structural challenges, which feed the social-economic dynamic, are long established.
The “Japanese “Miracle” ended in the 1990s; and that path has yet to be rediscovered.
Since that asset bubble burst (across numerous categories), Japan has suffered three “Lost Decades”. The period of “Abe Economics” allowed the nation to tread water. The effects of the Credit Crunch and numerous other financial, as well as natural and man-made crises, have exacerbated the situation. The Covid effects have merely extenuated the long-standing structural weaknesses, which have not been addressed. While a financial innovator, introducing negative interest rates and Quantitative Easing, these measure have not kick-started the Japanese economy, as hoped.
Japan’s structural weaknesses remain, largely unresolved.
An ageing and declining population, as birth rates are negative and net immigration is negative. (its immigration rate is less than 0.6). This dynamic is increasing Japan’s dependency ratio, to one of the highest in the world.
This trend places increasing strains on: the tax bases; social services and; health care.
A knock-on effect is labour shortages. Also, it makes Japanese labour uncompetitive vs alternative sources found in Mexico, Vietnam, Thailand and China for an increasing range of products and services.
A further related factor is the supply chain and its own weaknesses. A system severely tested by recent climatic and nuclear events.
The related Fukushima nuclear incident and associated tsunami have raised question with regard to environmental management as well as energy policies, particularly Japan’s dependence on nuclear and fossil fuels.
Failure to address these issues reflects an increasing sclerotic bureaucracy, dulling the enviable and innovative aspects of the economy.
To fund these inefficiencies and shortfalls, Japan’s national debt to GDP ratio has risen to over 260%, one of the highest in the world.
Inflation, as elsewhere, is set to rise.
A further dependency to be reviewed is relations with China. Japan has well-established and string ties with the US, seen a fundamental to its own security.
National and international security/defence remain perennial issues. Again, the China dynamic may see a more active Japanese posture in the future.
Doing business in Japan has its own formidable challenges
The Japanese economy ranks third in the world in terms of gross domestic product (GDP), yet 114th for ease of doing business. Despite its domestic competence, having local assistance is essential for any international investor or overseas venture in Japan. A truism for all countries, but more so for Japan than others.
Japan is a leading centre for innovation, boasting a highly attractive business and living environment within one of the world's largest economies. Japan’s leading reputation among is based on its R&D capabilities, personnel and well established legal system (such as intellectual property rights), amongst other aspects.
Of particular concern for a foreign direct investor are some of the following aspects.
The Japanese tax system is a victim of the country’s love of bureaucracy. The World Bank and IFC rank Japan 123rd in the world for its corporate tax system, which can soak up 330 hours a year in management time, with 14 payments required annually. Corporate tax rates stand at 30%, with other levies also requiring consideration.
Construction and Property related aspects.
o Permits. It takes 193 days to arrange construction permits, according to the World Bank and International Finance Corporation, (far exceeding the OECD average). Over 14 procedures must be navigated, again involving several governmental departments and local authorities.
o Getting Electricity. Tepco, or Tokyo Electric Power Company, handles electricity in the capital and surrounding areas, and takes an average of 105 days to connect the company to the mains. Businesses must arrange a construction date, submit an application and await connection works, before having a meter installed.
o Registering Property. Registering property is a lengthy procedure, and requires a certificate of the seller’s seal impression, payment of stamp duty at a post office, application at the Legal Affairs Bureau and payment of real property acquisitions tax.
Enforcing Contracts. Enforcing contracts can take-up to 360 days and cost 32.2% of the claim. There are 30 procedures involved, with court proceedings taking up most of the time.
This list is not to dissuade a potential investor, but to raise awareness of some particular aspects of direct investments in Japanese assets. Indirect investments, such as equities and debt instruments are relatively unencumbered.
Peer group offers clues as well as opportunities for sharing/co-operating/investments
The list of peer countries would be: the UK and Sweden (with its constellation of Nordic-Baltic neighbours). This peer group share particular characteristics.
Japan, the UK and Sweden are island-states or peripheral nations, with medium sized populations, having a strong innovative streak in industrial-technological matters. They are all liberal democracies with active monarchies. Their governing elites are all in a stat of flux. The three countries share a historical arc of military and imperial power. They possess maritime sensibility; in some cases based on free trade or seeking to expand their influence.
Also, the three peer countries all have interesting and similar dynamics with larger superpowers of the US, China and FSU/Russia. The links with the US are strong; seen as vital to national interests. Those with China are fraught with uncertainties, despite obvious mutual advantages. Simplistically, Russia has always been a menacing force.
UK: it is grappling with fundamental, nearly existentialist issues. The BrExit saga is just the latest manifestation of the retreat from Empire. It faces challenges to territorial integrity, sclerotic public services, an ageing and increasingly under-skilled population as well as a near bi-polar attitude towards Immigration (rate of 2.57). The post BrExit loss of nearly 1.0 million EU nationals has had negative effects across the economy. The current dynamic has dented the country’s traditions as a broad spectrum innovator and free market trader as well as reputation as a setter of standards. Its world-leading status is being eclipsed. The UK it shares many of the same challenges as Japan.
Sweden: long lauded a as model society, it benefited from making its imperial transition centuries ago; and avoiding participation in crippling modern wars. The 1940s Socialist based model of inclusion: the “People’s Home” has seen its economy mature and strengthen over the decades. Sweden has been a leader amongst the constellation of neighbouring Nordic-Baltic states (Denmark, Norway, Finland, Estonia, Latvia and Lithuania). In recent years, Sweden has relied on a proactive immigration policy to manage its ageing and static population issues; with mixed results (its immigration rate is 3.19). Sweden and its Nordic constellation remain innovators and centres of excellence across a spectrum of sectors, increasingly Technology focussed. For example, tiny Estonia is the home to Skype, Grabcad and Wise. Sweden’s traditional policy of neutrality is currently being assessed. Sweden and the Nordics provide Japan with clues with regard to managing its environmental and social issues.
To paraphrase a quotation by the American politician, Dean Acheson: these countries have ‘lost their Empires but not yet found a new role’, despite the wealth of experiences and treasure within their respective societies.
Both peer countries have vibrant trading links with Japan. Their respective approaches to common challenges provide opportunities for improvement, growth as well as investment opportunities.
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Justin Jenk is business professional who enjoys simplifying decisions by connecting-dots. His career encompasses a rare blend of roles as a manager, advisor, investor and board member; with a track record of successes. He is a graduate of Oxford and Harvard universities. Justin can be found at justinjenk.com or www.raktas.ee or researchgate.