2020 is poised to be a great year for Japan. My main scenario is straightforward: exports get lifted by the re-acceleration of Chinese demand and domestic demand strengthens due to strong business investment, fiscal support and a steadfast rise in the purchasing power of Japanese employees.
However, there will be surprises — scenarios not captured by the quantitative models of the experts or the current consensus “wisdom” of the crowds.
Here are the outlier scenarios that keep me awake at night. Improbable as they may seem, any movement toward their far-out direction will force a true about-face in the current consensus. That’s why surprises are so powerful.
Japan cuts the corporate tax for firms establishing their Asia headquarters here.
Japan is the undisputed bastion of stability in Asia and could easily become the Asia headquarters location of choice for both established multinationals and entrepreneurial startups. However, to really capitalize on Japan’s “natural advantages” — stable politics, pro-business rule of law, best-in-class infrastructure, high quality of life and superb access to all of Asia, etc. — one obstacle remains: a very high corporate tax rate.
At basically 30 percent, companies face a tax bill effectively two or even three times higher than they do in Hong Kong, Singapore or other Asian capitals. Given the rise in political risks elsewhere, all we need is a little nudge: If the corporate tax were cut to, say, 20 to 25 percent for any company — Japanese or global — that establishes their Asia headquarters in Japan, many CEOs would seriously consider relocating their leadership teams to Tokyo.
Of course, Japanese tax authorities oppose a tax cut, but the younger-generation Liberal Democratic Party leaders fully recognize that 20 percent of something is better than 30 percent of nothing. An inward investment boom would follow, boosting not just high-quality, high-paying job opportunities for Japanese both young and old, but also naturally speeding up diversity and global awareness among local teams.
2020 delivers a 4 percent pay rise, double the 2 percent workers got last year.
For a true de-coupling of Japan’s economy from the ups and downs of the global business cycle, domestic demand in general and consumer spending in particular needs a more powerful engine.
After decades of wage restrains and unions lobbying for long-term job stability rather than short-term wage gains, the job market has become tight and the “war for talent” should begin to fuel higher wages. The higher the wage hikes in the annual shunto labor-management talks, the greater the chances of positive growth surprises in 2020.
At the same time, watch for more companies following Toyota’s lead in introducing more genuine pay-for-performance compensation. In Japan, momentum is building for both. Make no mistake, base pay hikes plus pay for performance make for a consumer boom.
Abe goes to Pyongyang and leads the way for a $1 trillion Japan-led infrastructure upgrade for North Korea.
For security and defense experts, North Korea remains a quagmire. But for an economist, North Korea and Japan are a match made in heaven: an ample supply of natural resources and labor meets world-leading technology and capital.
Prime Minister Shinzo Abe is an effective promoter of Japan-led infrastructure projects. Engaging North Korea constructively in economic diplomacy would not only boost Japan’s economic fortunes, but also create a key political legacy for him. Unlikely, you may say, but so is a peaceful solution without ramped-up economic engagement. Sooner or later this is bound to happen.
The U.S. Federal Reserve Bank imports the Bank of Japan’s operational model and fixes the U.S. 10-year yield at 2.5 percent.
If U.S. President Donald Trump gets his wish and the American economy speeds up to 3.5 percent to 4 percent before the November election, U.S. bond yields are poised to rise, possibly as high as 5 percent or more for the 10-year bond. After all, real GDP growth of 3.5 percent implies nominal growth of around 5 to 5.5 percent and, historically, it’s been rare for bond yields to be below sustained nominal GDP growth.
What matters is that rising yields will force downward pressure on U.S. risk assets in general, and U.S. equities, real estate and credit in particular. To pre-empt this, Trump may find it hard to resist forcing the Federal Reserve to import the BOJ operational model: Fix the U.S. long bond at an agreeable level, say 2.5 percent, and let the economy go into overdrive for the election cycle.
The BOJ offers a “people’s swap,” selling its ETF equity holding to Japanese savers.
The BOJ owns almost 8 percent of the Japanese equity market, much of this through its exchange-traded fund (ETF) buying program. While justifiable as an emergency measure to help reduce deflation, the central bank’s de facto nationalization of equity capital has become counterproductive for many reasons. The biggest is that nobody can conceive a smooth exit — if the BOJ starts selling, surely the market will crash.
Who is there to buy the BOJ equity overhang? There is only one answer: Japanese savers in general and the older generation in particular (the over-65s own more than 70 percent of the net financial assets.) To get an elderly saver to swap from bank deposits into risky ETFs will require a real incentive carrot: inheritance tax.
If the BOJ and the Finance Ministry can cooperate and devise a scheme where any individual who buys ETFs directly from the BOJ will have these ETFs exempt from inheritance tax, I am certain the central bank could clean up its balance sheet within a couple of weeks.
The net result would be a re-privatization of Japanese equities, a healthier corporate ownership profile and a better risk-return profile for household sector balance sheets.
Japan aims to leapfrog the world in clean energy engineering by launching a top priority nuclear fusion public-private partnership.
Japan now has a young and ambitious new environment minister, Shinjiro Koizumi, and global leaders are increasingly desperate to present a solution that provides for massive-scale production of clean and safe energy.
Nuclear fusion — the dream of producing energy in the same way the sun does — is a potential solution, but progress in building viable and stable clean fusion reactors has been slow. Recently, however, there have been credible signs of progress and an ambitious national priority project could turbo-charge the rate of advancement in this field.
The time is ripe for a Japan-led national project like America’s moon shot. At the very least it would re-energize Japan’s technology companies and focus their attention on what they are good at: hardware and analog technology. If successful, a Japan Fusion Project would not just re-establish Japan Inc. as the engineering envy of the world but also boost Japan’s status as the green superpower of the world.
A Japanese mega-bank buys a major U.S. bank.
Japanese financial institutions in general, and banks in particular, are eager to expand their U.S. operations. So far, high prices and expensive valuations in booming America have forced Tokyo-based chief executive officers to keep their powder dry.
However, sooner or later a big deal will get done; and when it does it will force the hands of the other banks’ leaders and trigger a boom in mergers and acquisitions among Japanese financials.
SoftBank’s Vision Fund launches a Japan-focus venture capital fund.
SoftBank is a Japanese company that controls the world’s largest venture capital fund, the Vision Fund. It’s an aggressive sponsor of new technology entrepreneurs and startups with investments all over the world. Notably absent, however, are investments in Japan-based entrepreneurs. Don’t get me wrong, this may very well be a wise decision. The fund’s expert investors have access to deals all over the world and may simply not see the kind of returns in Japan they think they can get elsewhere.
However, if and when this changes and the world’s leading technology investors begin to put capital behind Japanese entrepreneurs, the move will signal a big turning point in Japan’s start-up ecosystem. “Startup Nation Japan” will become a reality when globally active venture capital begins to sponsor Japanese entrepreneurs.
Taiwan starts to be peacefully invaded, with 100,000 civilian Chinese boat people landing to settle there.
While hard weaponry and computer hacks tend to dominate the debate over Asian security, human ambition and determination remain the ultimate driving forces of national ambition.
In the case of Taiwan, a “peaceful invasion” may be launched, with a fleet of, say, 100,000 mainland Chinese landing by private boats on Taiwan’s shores to settle and live on the island. This would be a truly disruptive mutation of the “One China” policy and a definite game changer in South China Sea geopolitics.
Japan’s Sani Brown wins the 100-meter sprint gold medal.
On Aug. 2, 2020, sprinter Abdul Hakim Sani Brown runs the race of his life and wins the gold medal in the 100 meters at the Tokyo Olympics. The son of a Japanese mother and Ghanaian father then goes on to narrowly miss a double gold by losing the 200 meters to his teammate Cambridge Asuka, son of a Japanese mother and a Jamaican father.
You may say I’m dreaming, but hey, big dreams are exactly what the Tokyo Olympics 2020 are all about. Either way, watch out for a strong Japanese team showing in the track and field events. More importantly, Japan’s multicultural Olympians are poised to create the real legacy of the Tokyo Games: changing the global image of Japan.
Jesper Koll is WisdomTree’s head of Japan and is consistently ranked as a top Japan strategist/economist. He publishes blogs at www.wisdomtree.com/blog .
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