Next year is poised to be a great year for Japan. My main predictions are unashamedly bullish: Exports will get a boost from a re-acceleration in global growth; there will be a surprise pickup in domestic demand with business investments kicking in and, most importantly, consumers will begin to open their purses. After enforced austerity in 2020, 2021 brings the release of pent-up demand and a steady rise in the purchasing power of the Japanese people.
However, also in store are a few surprises, i.e. scenarios neither forced by the still substantial COVID-19 uncertainties nor predictions and expectations made by the quantitative models of the experts or the wisdom of the crowd. I am talking about what keeps me awake at night. Improbable as some of these events may seem, any movement in their direction will force an about-face in the overall consensus. That’s why surprises are so powerful. Enjoy, and best wishes for a healthy, prosperous and happy year in 2021.
Japan as Asian headquarters
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 start-ups. However, to really capitalize on Japan’s natural advantages — stable politics, pro-business laws, 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%, companies face a tax-bill two- or even three-times higher than they do in Hong Kong, Singapore and other Asian capitals. Given rising political risks elsewhere, all the country needs is a little nudge. If the corporate tax were cut to, say, 20-25% for any firm — Japanese or global — that establishes its Asia headquarters in Japan, many CEOs would seriously consider moving such infrastructure to Tokyo. Of course, Japanese tax authorities will balk at the idea; but the younger generation of LDP leaders fully recognize that 20% of something is better than 30% of nothing. An inward investment boom would follow, increasing not just the number of high-quality, high-paying job opportunities for the young and old alike in Japan, but would also naturally speed-up diversity and global awareness among local business leadership.
One planet, one destiny
In a joint effort to assert their leadership in Asia and globally, U.S. President Joe Biden and Prime Minister Yoshihide Suga spearhead the establishment of a new public-private infrastructure investment fund. A so-called “One Planet, One Destiny” investment fund would be specifically designed to turbo-charge global-best-practice development of both hard and soft infrastructure. The fund would more or less have an explicit mandate to outcompete investors from nonmember countries, i.e. China. Importantly, the fund’s debt and securities are eligible for purchases by the Federal Reserve, the Bank of Japan and other central banks. The benefit is clear: If the U.S. and Japan can lead and sponsor a concrete and proactive infrastructure investment fund that assures best-practices in all aspects of ESG and SDG, China’s “One Belt, One Road” would no longer have to be feared. A new era of healthy competition (with China) will start only if the U.S.-Japan alliance starts to mobilize capital and put their money where their vision is. Asia, Africa and Latin America need capital to build modern, free and democratic nations as urgently today as West Germany and Japan did after World War II. The race is on for who will dictate the terms and set the standards to build our planets’ future; and a united Japan and America has a good shot of catching-up and leading it.
Flying cars for the Olympics
Japan wants to use the Tokyo Olympics to showcase the nation’s innovative capabilities. In 1964, that manifested itself with the launch of the first shinkansen bullet train line; in 2021 it could be flying cars. Watch for the governor of Tokyo and Toyota to announce a flying car shuttle service for the 2021 Olympians — for medal winners in particular. For a true quantum leap in mobility, forget self-driving ground transportation — flying cars could become Japan’s next big thing. Japan’s undisputed leadership in awe-inspiring innovation would be re-established for the world’s next generation.
The 2021 shuntō delivers
For a true de-coupling of Japan’s economy from the ups and downs of the global business cycle, domestic demand in general — consumer spending in particular — needs a more powerful engine. After decades of wage restraints 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 feed higher wages. The greater the shuntō (job hunting), the better the chances of positive growth surprises in 2021, especially after the COVID-19-induced wage recession 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 incentives will lead to a consuming boom.
Bank of Japan ETFs
The BOJ owns almost 8% of the Japanese equity market, much of this through its ETF buying program. While justifiable as an emergency measure to help overcome deflation, the central bank’s de facto nationalization of equity capital has become counterproductive for many reasons. The biggest one 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 65-year-olds own more than 70 percent of net financial assets. To get an elderly saver to swap from bank deposits into risky ETFs will require real incentives — such as a change to inheritance tax laws. If the BOJ and the Finance Ministry can cooperate and devise a plan 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 the re-privatization of Japanese equities and a healthier corporate ownership profile, as well as a better risk-return profile for household sector balance sheets.
Pension funds and start-ups
Innovation and entrepreneurship are on everyone’s agenda, but little concrete action is taken to actually create a more entrepreneurial culture. A complex issue, but a sure way to start is to offer funding for start-ups. A public-private partnership incubator fund, where both the public and private pension funds commit ¥1 trillion in investments for domestic start-ups and domestic venture capital funds, which should help develop a new ecosystem. Ironically, the biggest obstacle here appears to be not a lack of credible start-ups and entrepreneurs, but the lack of professional expertise among Japan’s pension managers and other institutional fiduciaries.
Suga goes to Pyongyang
For security and defense experts, North Korea remains a quagmire; but for an economist, North Korea and Japan are a match made in heaven where an ample supply of natural resources and labor meets world-leading technology and capital. Prime Minister Suga is an effective promoter of Japan-led infrastructure projects. Engaging North Korea constructively in economic diplomacy would not just boost Japan’s economic fortunes, but surely would create a legacy for Suga worthy of the Nobel Peace Prize. Unlikely you may say, but so is a peaceful solution without stepped-up economic engagement. Sooner or later this is bound to happen.
Megabank buys a U.S. bank
Japanese financials in general, banks in particular, are eager to expand in the U.S. So far, high prices and expensive valuations in booming America forces Tokyo-based CEOs 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 other bank leaders and trigger a boom in mergers and acquisitions among Japanese financials.
Chinese boat people and Taiwan
While military weaponry and cyber hacks tend to dominate the debate on Asian security, human ambition and determination remains the ultimate driving force 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.
Sani Brown wins gold
In the 2021 Tokyo Olympics, Japanese sprinter Abdul Hakim Sani Brown runs the race of his life and wins the gold medal in the 100 meter sprint at the Tokyo Olympics. The son of a Japanese mother and Ghanaian father then goes on to narrowly miss the double by losing the 200 meters race to his Japanese teammate, Cambridge Asuka, son of a Japanese mother and Jamaican father. You may say I am dreaming, but hey, that’s exactly what the Tokyo Olympics are all about — big dreams. Either way, watch out for a strong Japanese team showing in the track and field events. More importantly, in addition to lifting global spirits — human endeavor and happiness cannot be stopped by a virus — Japan’s multicultural Olympians are poised to define a new global image of Japan that is open, innovative, resilient and fun.
Jesper Koll is the senior adviser to Wisdomtree Investments and is consistently ranked as a top Japan strategist/economist. He publishes blogs at www.wisdomtree.com/blog.
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