Monday, 27 August 2007

Hot August

It has been a sweltering summer with record temperature highs, especially around Nagoya and Tokyo. Measures to reduce electricity use are in place to try to ensure supply at peak demand times.

It’s not only the weather that’s been challenging though.

The elections sent a strong message of dissatisfaction to the majority Liberal-Democtratic Party (LDP) – returning a significant number of Democratic Party representatives.

Unfortunately, the LDP, having suffered through the Koizumi period, during which the members were unable to rein in the charismatic prime-minister, is now trying to re-assert the old backroom boys power system. Consequently, their reaction to the falling popularity of the government is not to call a halt to pork-barrel politics or to start listening to the needs of the electorate, but rather to insist that Prime Minister Abe take responsibility and resign.

Mr. Abe is not as charismatic as Mr. Koizumi, so cannot appeal over the heads of the LDP to gain direct support from the voters. Even if he could, not much support would be forthcoming, given the strange raft of policies the party is proposing.

Nevertheless, with surprising stubbornness and contempt for consensus, he has refused to resign. There is perhaps some chance that, between the voting shift towards the Democrats and the refusal of the prime minister to cave in, a return to pre-Koizumi smoky-room, power-politics may be avoided.

On top of the political turmoil has come the unwanted intrusion of the world economy into the cozy, export economy supported by the weak currency. The profligacy of US lenders has finally been seen for what it is and the (US) housing market has shown signs of structural cracking. The cracks extended into the stock market last week, sending the Dollar down and the Yen rocketing (albeit briefly) and consequently casting a shadow over the profit figures of all those Export Samurai making their money in the US market.

What lies ahead, as the summer heat dissipates and the cool winds of autumn start to blow across the country?

Much depends on the appetite for risk of Japanese investors. The fall caused by the housing market uncertainty not only caused a retreat from the Yen carry trade, it also cast a shadow of risk across the foreign investment portfolios of Japanese investors. If the repatriation of funds were to continue, the Yen would strengthen and corporate profits would suffer.

This seems unlikely to become a sustained trend, however. In an economy with a near-zero return on savings and a tradition of passivity on the part of shareholders, overseas investments are likely to become popular again despite the risks.

What then of the perceived structural weakness of the Japanese economy? It is true that domestic consumer spending has dipped and the retirement of the baby-boomers, starting in 2010, is cause for some trepidation. As Japan’s corporations start to focus on a greying domestic population and have fewer young people in the workforce, will this weaken their focus on “young-economy” businesses and drive investment offshore? Or will it give rise to additional, world-beating “Silver Economy” products. Perhaps a combination of the two.

Japan’s well-known strengths in design, manufacturing-quality and attention-to-detail are likely to support continued strength in products such as cars, machine tools and home appliances, but production will continue to move offshore. Replacing this lost manufacturing, we will probably see an increase in the emergence of “Silver Products” enabling an ageing population to continue with their daily activities in comfort and with dignity. These products will be eminently transferable across borders.

At the same time, we are seeing a drive to move beyond the traditional manufactured goods into biotechnology, robotics and nanotechnology (and it's not all robot pets and dancing humanoids).

In Japan, new businesses have not generally grown out of garage operations started by a couple of geniuses and financed by funds with a high risk-threshold, but they do grow as divisions of and spin-offs from large corporations and we are also starting to see small venture-capital funded start-ups in IT and biotech.

These factors, combined, suggest that the economy will prove more resilient long-term than the conventional wisdom believes.

No comments: