“This time is different.” These are four very dangerous words. When you hear them it always pays to be extra skeptical, especially in the context of someone giving you financial advice or presenting an economic forecast. Personally, I always hold on to my wallet extra tight when the “trust me, this time is different” clause gets invoked. We’ve all been there in our respective professions and passions: It takes a thief to know a thief.
As an economic strategist and professional Japan optimist, I certainly do have an extra hard time trying to make my case. The legacy of Japan’s lost decades is incredibly strong. Being a Japan optimist, I often get a similar reaction to the one that hard-core Elvis fans must get when they insist that “the King is still alive.” However, unlike the King of Rock ‘n’ Roll, the Japanese economy is very much alive. In fact, there is plenty of hard empirical evidence that Japan has not just changed but actually has got what it takes to be an economic powerhouse and the envy of the world in terms of economic sustainability.
So what is different this time? Why won’t Japan slide back into another lost decade? Because the following three fundamental forces have changed from negative to positive:
The ownership structure of corporate Japan has changed from a closed, insider-based system to an open and competitive system.
In economics, nothing matters more than ownership. Equity ownership dictates the allocation of resources. It is the very basis of power for all the essential corporate decisions — financial, strategic, human capital. Ownership defines the true corporate culture. Twenty years ago, more than half of the equity ownership of Japan Inc. was tied up in mochiai cross-shareholdings. Now this is down to less than 5 percent.
This breakdown of Japan’s keiretsu ownership structure is the key reason to be bullish on Japan. The old Japan Inc. was a system of insider capitalism that incentivizes bad economic decision-making — group banks kept lending to group companies not on the basis of economic merit but for the sake of maintaining relationships; supply-chain group companies were forced into utter dependence on the conglomerates and their banks that owned them, allowing de facto zero price power and no room for competitive diversification or independence. Imagine your company was built using your brother-in-law as a supplier. Cutting him off when a more efficient and better supplier emerges is basically impossible and incentivizing him to change his ways takes time.
In finance, the mochiai cross-shareholdings fueled a debt bubble and then kept “zombie” companies alive for much longer than their economic worth warranted. In management, this enforced a “closed fortress” corporate culture of rule followers and “yes man” salarymen who, in the case of failure, had nowhere else to go — the other fortresses were not open to you.
In contrast, today, corporate Japan has liberated itself from the group-ownership straitjacket, and has turned from a membership-only closed club to an open-for-business structure. The recent Toshiba case proves the point: The old Japan Inc. would have gone out of its way to keep Toshiba in the group, thus keeping Toshiba’s assets hostage to continued in-group control. Instead, Toshiba’s ownership has fundamentally changed. Outside capital has come in and the assets are being strategically refocused on core competence. This includes previously unthinkable actions: asset sales, spinoffs, outside directors and management. While Toshiba is a dramatic case, we are now seeing many examples of economically rational changes in corporate strategies across all industries.
Make no mistake — this new openness is made possible by the removal of the cross-shareholdings structure. Japan Inc. has turned from being closed and insider-focused to being open for not just business but open for new strategic partnerships, open innovation and letting core-competence assets sweat like never before. Yes, it is different this time.
Public policy has changed from political instability and ad-hocism to stability and pro-growth consistency.
Between 1990 and 2012, Japan had one of the most unstable political leadership regimes in modern history. In contrast, today’s Japan has become a bastion of political stability. Prime Minister Shinzo Abe will celebrate the fifth anniversary of his rule this month and, more importantly, the recent election result has raised the odds of Team Abe staying in power for the foreseeable future. This is good news for all of us in the private sector — whether we identify as entrepreneurs, business leaders, investors, consumers, pensioners or a combination thereof.
Of course, you may agree or disagree with some of Abe’s policies, but actually it is the predictability and consistency of policy that is often more important than the content. Flip-flopping is the worst that can happen. The less entrepreneurs and business leaders can trust what the tax laws or the investment rules or energy policy or the labor laws or health care costs are likely to look like in a couple of years, the more cautious they are going to become. Just as Japan’s political stability in the 1960s, ’70s and ’80s was important to her economic success, the trap of political instability and regime uncertainty was a huge negative factor cutting down corporate animal spirits and the private sector’s willingness to take risks and invest for the future.
Whether you like Team Abe or not, they do have a consistent track record of being pro-business and pro-growth. No question that more could be done to promote entrepreneurship and growth, but the basic direction is now constructive. Specifically, a premature tightening of policy is now unlikely. Where the 1990-2012 period was marked by repetitive “stop-go-stop” monetary and fiscal boom-bust cycles, Team Abe is keeping a steady course of modest fiscal and monetary support. In turn, this creates ideal conditions for the private sector to develop not just stable growth but escape velocity. Yes, this time is different.
Japan’s ruling elite is now united in its goal of reclaiming Japan’s status as a tier one nation.
Corporate ownership changes and political stability are the deep structural change that has taken place, but perhaps most importantly, the motivation and ambition of Japan’s ruling elite has found a new focus. Simply put, the rise of China from developing economy to global competitor has focused their minds like nothing during the past decades. No, Japan does not want to become an economic colony of China. Abe in a speech to the U.S. Congress stressed the urgency for fundamental change in Japan’s economic structure as “TINA — There Is No Alternative.”
In my 30-some years, I have not seen the ruling elites — politicians, technocrats, corporate or social thought leaders, be they young or old — as united as they are today in their eagerness to reclaim Japan’s status as an undisputed tier one nation. While the past decades were marked by defeatism and fatalism, today’s Japan is marked by ambition, confidence and a newfound idealism. Japan wants to be Japan, not America and not China. Nobody knows yet what the new Japan will look like, but make no mistake that a new Japan is being created. Yes, this time is different.
Jesper Koll is WisdomTree’s head of Japan. He’s been researching and investing in Japan since 1986 and has been consistently ranked as a top Japan strategist/economist. He’s written several books in Japanese and publishes blogs at www.wisdomtree.com/blog .
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