Petrol Tax

Here's an interesting demonstration of how things in Japan often follow a different logic from elsewhere.

In the oil shock years of the 70's, Japan imposed a temporary petrol tax to discourage excess consumption.

Subsequently, throughout the (almost) uninterrupted rule of the LDP, the ruling governments forgot to repeal the "temporary" tax despite the fall in oil prices. Not such a serious problem as not many people use their cars for work here. The daily commute is usually by train or bicycle for most people.

Suddenly, though, this month, the government, facing a situation similar to the oil shock- oil $100 a barrel, has decided to repeal the "temporary" tax. The stated reason is to ease the burden on consumers. Discouraging petrol consumption is, apparently, no longer a priority. And the Kyoto protocol?

For most people the tax reduction won't really make that much difference and it comes against the background of rumblings about the need to increase consumption tax, which will affect a broad swathe of consumers. Puzzling.

The real thrust of the reduction is to break up the "Road Gang". A group of politicians spend the tax on useless projects designed only to enrich themselves and their cronies.

Of course, there might be other motivations. There is a worrying decline in car ownership among younger people in Japan. Without going into the reasons for this, suffice it to say that the decline is real.

To some degree, the Japanese car industy's export strength stems from low-profit domestic sales which cover overhead. The profits are made outside Japan. If the domestic base decreases, this can only have a negative effect on export competitiveness. Perhaps the needs of Toyota and Honda are part of the reason for this initiative, rather than the the desire to ease the burden on the long-suffering consumer...

The next post will look at why car ownership is decreasing.

Will the Rat bring Wealth?

The Year of the Rat might sound negative to Western ears, but actually these furry charmers are supposed to bring wealth. They are admired for their industriousness among other traits.

There are mixed predictions for the Japanese economy this year, but "not bright" seems to be the consensus.

Having noted all the reasons for the gloomy predictions, let's focus on a couple of more optimistic points:

1. There is the feeling of a New Deal in the air, with even the Keidanren saying higher wages would be good for re-kindling domestic demand.
2. There appears to be a desire to re-enter the economy among those Freeters who chose not to join it through the traditional Salaryman route 10 years ago. An example is the transfer of ownership of convenience stores to their Freeter managers under franchise deals.

There is a push from both ends to get things moving domestically, which should help to counter the potentially negative influences from the global economy.

I leave it to Grumpy Old Pedant to expound on matters demographical should the whim seize him.

Wishing you success in 2008

Turning Leaves

As the baby-boomers start to retire, receiving their retirement bonuses from their grateful employers, the opportunities in the financial sector in the next year or two are great for the well-prepared.

There are also widespread predictions of greater leisure spending, but a counter-trend is emerging of companies re-hiring the retirees for a number of reasons:

• To cover the skills gap
• To prevent know-how being transferred to competitors in other N E Asian countries
• To utilise a low-cost resource

For some time now, retired Japanese managers have been working in Korea and China, passing on the know-how gained in thirty years of working life.

Japanese companies' strict retirement rules forced them to retire, but at the same time, these companies were complaining of lack of skilled personnel.

Recently, the penny has dropped and many companies have realised that , as they can pay re-hired retirees lower salaries than they were previously receiving, they can kill several birds with one stone by re-hiring. Many employees are happy to have the opportunity to keep working and take up the offer either from their former company or one in the same sector.

The upshot of this is that the boom in leisure activity might not be as great as predicted. Given a choice between sitting in a hot spring sipping sake and continuing to commute to the office, it seems that many prefer the latter.

Chilly September

The hot weather has continued, but the world of politics is looking distinctly chilly.

No sooner had we started to celebrate Abe's resolve than it crumbled.

The messy appointment of Fukuda indicates a return to the old system. He talks a good reforming game, but is unlikely to be able to deliver much. If Abe san lacked charisma, Fukuda's score must be negative. His ability to work outside the LDP machine is nil.

This is a sad situation for Japan. Continuing with reform might have unleashed the country's entrepreneurial power. Now we look set for two years of status quo.

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.