I have been visiting Japan for more than 30 years and it’s a country that still fascinates and intrigues me. In the decades that followed World War II, Japan’s persevering spirit delivered an industrial miracle on a scale the world had not seen before. It became a leader in everything from cars to consumer electronics.
Now Japan is the world’s third-largest economy. To the disgruntlement of many in the country, its prized number two position was ceded to China in August 2010. But the reality is that since the end of the 1990s, Japan’s growth has stalled, and few would disagree that radical action was desperately needed to bring about a renaissance in the country’s economic fortunes. It’s a sobering fact that the country is by far the most indebted developed nation on the planet. In 2013, Japan's gross public debt surpassed ¥1 quadrillion (over 220% of GDP), making Greece (with its sovereign debt 160% of GDP) appear a virtuous model of fiscal prudence, in comparison.
So is there hope for Japan to return to its former economic glory days? Given its history of notoriously short coalition governments, strong political leadership with a mandate for reform is a prerequisite if things are to change for the better. In December 2012, Shinzō Abe and his Liberal Democratic Party swept to electoral victory, principally on the promise of reviving the country’s ailing economy. The new prime minister wasted little time in announcing his ‘three-arrow’ programme, which quickly became known as ‘Abenomics’.
Economic realities cannot be postponed indefinitely; ultimately, the country’s colossal deficit has to be addressed
In determining Japan’s future, it’s worth looking a little more closely at just what these ‘three arrows’ constitute. This may help you to decide whether you are a believer in ‘Abenomics’, or whether you think it’s an overhyped experiment that will result in yet another asset bubble that soon bursts.
The first arrow focuses on aggressive monetary stimulus. In April 2013, bank of Japan governor Haruhiko Kuroda, whom Abe personally appointed to the role, began a monetary easing campaign of unprecedented size, pledging to double Japan’s monetary base by boosting purchases of bonds and other financial assets. Known as quantitative easing (QE), in simple terms, Japan’s central bank began printing money electronically on a scale of US$70bn a month, close to the US’s own QE initiative of US$85bn, despite its economy being just a third of the size. Many economists concur that Japan’s monetary adventure is very much a journey into uncharted territory.
The second arrow relates to fiscal stimulus, with the announcement of major infrastructure and public works projects. While this will undoubtedly create economic activity, it will also further add to the country’s already blooming deficit. Increasing public spending at a time when you are trying to address sovereign debt of such a massive size is, to many, a contradiction in terms. If we knew it worked, spending your way out of a crisis would be an easy solution. While this is an ongoing argument in many countries around the globe, the suspicion is that Japan is reluctant to take any painful medicine associated with austerity.
But Japan’s government has the option to borrow more, since it is not dependent on global capital markets. Uniquely, the savings of its own citizens overwhelmingly provide its credit. Nevertheless, economic realities cannot be postponed indefinitely; ultimately, the country’s colossal deficit has to be addressed.
Top of my personal ‘wish list’ of what Japan desperately needs to triumph, is a fundamental change of mindset to facilitate hostile takeovers
After Abe unleashed his first two arrows, Japan bounced out of recession, with many investors around the world seemingly certain that Japan would finally accelerate away from its 15-year of economic malaise. It must be acknowledged that Abe’s policies were responsible for the country’s equity markets being one of the most successful in the developed world in 2013, with Japan’s Nikkei index surging by 57%.
Despite the euphoria of the equity markets, the third arrow, and to most informed observers by far the most important, is structural reform. But Abe's speech on 5 June 2013, announcing the government’s plans, was something of a damp squid. There were lots of fine words, little detail and everything on the long finger, in other words, subject to indefinite postponement. He failed to address any of the hard decisions facing the nation, such as switching back on the majority of its nuclear power stations, labour law reform or a definitive commitment to join the Trans-Pacific Trade Partnership, with the agricultural reform this would entail.
Top of my personal ‘wish list’ of what Japan desperately needs to triumph, is a fundamental change of mindset to facilitate hostile takeovers. This is domestically in the first instance, but ideally to allow international participation, bringing with it not just capital inflows to Japan, but also management expertise with a different view on the world.
To achieve this objective, legislation would be needed to address the issue of ‘poison pills’ (changes in a company’s stock plan that are intended to make the company less attractive to buyers in a hostile takeover situation). Japanese companies commonly use poison pills to protect themselves from takeovers, whatever the commercial logic.
The Abe administration needs to actively discourage the collective defensive behaviour of shareholder groups in blindly preserving the status quo
Even more importantly, however, the Abe administration needs to actively discourage the collective defensive behaviour of shareholder groups in blindly preserving the status quo. Equally, banks needed to be stopped from protecting the weak from being taken over by the strong. For us to believe that reform is real, we would need to see the weak being allowed to fail and meaningful M&A activity occurring. Only then could we start to buy in to the story that corporate Japan is changing.
I don’t believe this will happen, however, and I believe that, frustratingly, we will see a continuation of the current situation where large numbers of Japanese companies are led by boards that are mediocre, or worse, and whose directors remain in position until they die or retire.
So with meaningful structural reform still to be delivered and with Japanese growth forecast to slow, many investors remain deluded in believing Abe will easily return Japan to a land of milk and honey. The jury is, of course, still out, but printing and spending money is easy. To achieve sustained economic success, painful reforms will need to be passed, and this will undoubtedly require Abe to face up to powerful vested interests. I remain highly doubtful the necessary, but controversial, reforms will be enacted.
I believe Japan needs to become a more open and relaxed society, but the country seems to be going the other way
It has been enlightening watching the Japanese financial markets over the past year. Many investors are troubled by concerns that what we are seeing is an ‘emperor’s got new clothes’ scenario. Japan’s economic problems are more about deep-rooted societal attitudes, which create the dysfunctional behaviours we often see in corporate Japan. Such tendencies seem so intrinsic in the DNA of the country’s collective thinking that one wonders how the difficult, but essential, change will ever come about.
Aside from structural reform, I believe Japan needs to become a more open and relaxed society, but the country seems to be going the other way. During the Olympus scandal, I experienced first-hand the deferential and self-censoring nature of much of the Japanese media, so I'm profoundly concerned by the new state secrecy law, which was passed by the Diet (Japanese Parliament) at the end of 2013, almost exactly a year after the Abe administration came to power.
In January 2012, I asked a leading Japanese financial journalist what would have happened if I had given them the file supporting my allegations of massive financial fraud by the company, instead of a Western media outlet. The journalist was extremely honest in stating that they would have desperately have wanted to have run the story, but the editor would never have allowed it. The message was clear: you do not challenge a large Nikkei-listed company of wrongdoing, regardless of the strength of the evidence. At the time, I found this profoundly depressing. In developed democracies, the media is the most effective mechanism for holding the powerful to account. We have seen this in practice many times, from the Watergate scandal in the US through to British parliamentarians being exposed for abusing their expenses.
Anything that may make a journalist in Japan even more uncomfortable with exposing wrongdoing is a worrying development when transparency and openness should be the way forward
Of course, every country has a fundamental right to protect its citizens’ interests and there is an obvious need for some issues relating to national security to be secret. But the vague definition in the new secrecy law of what actually constitutes a state secret potentially gives government officials carte blanche to block the release of information on a vast range of subjects.
Any civil servant or journalist who then makes public this unspecified knowledge faces a lengthy jail term. Japan is a peace-loving democracy, but this loosely worded law, in my opinion, is more characteristic of the state controls of the world’s autocratic regimes. Anything that may make a journalist in Japan even more uncomfortable with exposing wrongdoing, wherever it may exist, is a worrying development when transparency and openness should be the way forward.
On a personal level, I have a great affection for Japan and its people, and sincerely hope the country can navigate a successful path through the many obstacles it currently faces.
Michael Woodford is the former president of camera maker Olympus. He blew the whistle on the $1.7bn accounting scandal that erupted at the company in 2011. His book, Exposure (published by Penguin Portfolio), which details the Olympus affair, is being made into a film that is expected to be released in 2015. He now runs his own consultancy business that provides specialist training and consultancy on corporate governance. For more information, see www.michaelwoodfordassociates.com