This is a guest post by Joseph Caron. Joseph served as Canadian Ambassador to Japan and to the People’s Republic of China as well as Canadian High Commissioner to India. He is currently a member of the Board of Directors of Manulife Financial Corporation, Vancouver International Airport and Westport Innovations. JosephCaroninc.com
Canadians who have the good fortune of living in today’s Japan, and those who have decades of experience there, understand that its unique blend of cultural and social continuity, mixed in with its economic discontinuities, has largely reshaped the county over the last two decades. Seen from abroad, Japan, in just over one generation, has gone from being viewed as the power house of Asia, only to loose that position to China, and to be relegated to seemingly perpetual ‘also ran’ economic status. For Canadians who do not have extensive familiarity with Japan, this has left a confusion of images, many inaccurate. This absence of a clear vision does not serve Canada’s interests. It is important to correct the negativities by providing a more fulsome picture of today’s Japan, and the opportunities it continues to present. Such messaging is the job of our Chambers in Canada and Japan, as well as that of Canadians committed to international business.
Canadians who look beyond our borders and across the Pacific, can consider three narratives about modern Japan. Two will be familiar.
The first narrative is the Japan Rising story: for over a decade beginning in 1960, Japan’s economy grew by an average of 9.7% per year. It’s growth rate and technological and industrial accomplishments were so spectacular that they re-introduced post-war Japan to much of the world. In many notable respects, not least through investment and foreign aid, Japan’s strengths launched the economic renewal of Asia that has defined the post-World War II era.
For Canadians, this era, which lasted until the late 80s, meant Japanese Toyotas and Hondas and Nissans, Sony Walkmen and Trinitron televisions and Panasonic and Hitachi appliances. Canadian tourists brought back an awareness of the unique and incredibly rich features of Japanese culture, and at home, we developed a sudden and previously unsatisfied desire to eat raw fish on little balls of rice.
The second narrative concerns the post bubble Japanese macro economy. Japan’s macro-economic performance from 1990 onward has created a different image of Japan, even as its cultural allure has been retained.
In the immediate aftermath of the bursting of the asset price bubble in 1990 – prompted by the Bank of Japan’s decision to raise interest rates but also because a lot of bad business and government policy chickens came home to roost – the Nikkei plunged by nearly 50% from approximately 39,000 to 20,000 during 1990 alone, subsequently hitting 15,000 by 1992. Commercial real estate in the largest cities, which had risen from an indexed 100 in 1983 to over 500 in 1990, plunged below 100 by 2002.
The deflationary impact was greater than that experienced by any other developed economy in contemporary history. Average GDP growth between ’92 and 2001 was 0.8%, from 3.8% in the ‘80s. Zero interest rate policies were introduced in 1999. Ten year JGBs have gone from paying an all time high of 7.59% in May of 1984 to a record low of -0.03 for some issues earlier this year. Risk premiums and inflation premiums are close to zero. Governor Kuroda has indicated that there is no practical limit to how deep into negative territory government bonds could go. Meanwhile interbank rates have been below 1% for over 20 years.
The public debt to GDP ratio leaped from 71 percent in 1992 to 240 percent today. During the last five years, Japan has had negative growth in two years (2011 and 2014) and anemic half a percent to one and a half percents in the other years.
The Japanese themselves and those involved one way or another with Japan initially spoke of ‘the lost decade’ of the ‘90s and when that didn’t suffice, the reference became ‘the lost 20 years’.
We can’t deny these facts. Nor should wedownplay Japanese social policy challenges. But these don’t tell the whole story. Canadians need to look beyond the two first narratives and understand the abiding strengths of the Japanese economy, the third narrative. We need new metrics to understand Japan’s contemporary realities.
The fact is that Japan’s remarkable achievements in producing and marketing those famous consumer products from the 60s to the 90s were accomplished absent competition from other Asian industrial countries. To state the obvious, this is no longer the case. China’s rise is a well told tale. Korea today is in 11th place in the GDP stakes, just ahead of Canada. ASEAN as a collectivity, with a $2.5 trillion GDP and average 5% growth rate, has a larger economy that those of India or Russia. Against these lower cost competitor manufacturing economies, Japan’s free ride in the region is long over.
So one understand today’s Japan narrative by using today’s glasses because the real action is at ground level, and in response to the globalization of manufacturing.
Japanese ICT lost its luster to its competitors when they created competing global brands, best exemplified by Apple and Samsung. It also saw the US lead in areas that were nascent in the 1970s, such as biotechnology, nanotech, cloud computing and so forth.
One of the consequences of these tech developments has been that what makes our every day consumer products and tools to work and produce the marvels that we now take for granted are not the outer shells but what’s inside them. We have the impression that the Japanese economy has largely exhausted its creativity and its technological innovativeness, post Apple and a weakened Sony, but that’s not true.
Take Apple. Few Canadians have heard of Japanese companies such as Murata, TDK, Kyocera, Nitto Denko but these and other Japanese firms provide many elements of Apple’s iPhone 6. Four of the seven critical component suppliers from Asia are Japanese: Sony for its cameras, Japan Display for screens, TDK for inductor coils, and Toshiba for storage. According to some sources, 139 Japanese companies supply components to the Apple family of products. That is more than twice the number of American firms.
And its not just Apple:
- Nidec: it has the world’s largest market share for hard-disk drives;
- Mabuchi Motors: it has 70% of the motors used in automotive door mirrors and handles with its brush and brushless electric motors;
- Japan Steel Works in Hokkaido is the only company in the world than manufactures solid steel vessels for nuclear reactors;
- Shimano supplies over 60% of the world's bicycle gears and brakes;
And of course, we can't exclude YKK, which makes around half the world's zip fasteners!
Thus, in addition to global leading transportation, digital media, financial and auto companies, Japan is home to a plethora of world class, highly specialized manufacturers leading in key industrial subsectors, as those noted above. Some of these firms have international footprints, others supply what is still the vast Japanese domestic market: Japan is one of only 12 countries in the world with over 100 million people. This makes it, for example, the second largest insurance market in the world.
Japan has a centuries old tradition of manufacturing, referred to a monozukuri, the making of things. As anyone who as spent time in Japan and watched a sushi chef prepare dinner or a sales clerk wrap a gift will know, there is a meticulousness, a devotion to precision, correct form. These characteristics of Japanese culture flow naturally into manufacturing and professional conduct. They underpin the products that you buy and on which mass producers such as Apple and Toyota depend.
And its not just a matter of culture: since 2000, Japanese have won 16 Nobel prizes, all in the sciences, half in physics and the rest in chemistry and medicine. That’s more Nobels than the total for France (10) or Germany (9). Only the UK and the USA surpass Japan on that front.
Japan is the third largest investor in R&D after the US and China, and it surpasses both as a share of GDP: 3.6% over the US share of 2.7% and 2% for China. Only South Korea, at 4.3%, surpasses Japan. Canada’s share of R&D to GDP is a paltry one third of that of Japan.
Another thing to keep an eye on: the propensity of Japanese business and consumers to spot cutting edge trends.
During my 17 years of living in Japan, I was ever impressed by the thirst for the new among Japanese consumers, the desire to have the latest gadgets, fashions, products and services that businesses could dream up. Over the years, I watched hundreds if not thousands of commercials on TV which invariably flashed ‘shin hatsu bai!’, the latest, the newest model. This hasn’t changed. If you want to spot trends, spot them among the Japanese.
For example, NTT Docomo and other digital providers had Japanese consumers surfing the internet, paying for content by phone, zapping bar codes in magazines and taking photos well before anyone else. My first word processor was a Japanese language Sharp Shoin, acquired in 1984.
Japan is the biggest app market in the world, according to Forbes, with Google and Apple selling more apps in Japan than in the US or Korea.
On the way to the 2020 Olympics, Japan is installing universally accessible NFC, that is, ‘near field communications’ facilities throughout Tokyo to automatically connect all of our smart phones to service providers, including the subway system, train stations and so forth.
All of this, and more, define contemporary Japan.
Many of us may keep an eye on the macro-economy, and that makes sense because Japan remains the world’s third economy and is one of the keystones in the Asian dynamic.
But we all live and do business in the micro-economy. That is where Canadian businesses will continue to find opportunities in Japan. And that is the message the Chambers must convey to Canada and Canadians.