For outsiders, Japan is a land of mystery, formidable but opaque. Our perceptions are often little more than clichés that we try to apply, in vain, to an uncooperative reality.
In the 1980s, with its economy firing on all cylinders, Japan was regarded with awe as the benchmark for management and productivity. Remember the wonder of just-in-time production, the much-revered circles of excellence? Back then, the Land of the Rising Sun basked in the economic glory of its crown jewels, the six Keiretsu. These vast, interlocking networks of companies – each with a big bank at the center of the web – controlled virtually all the strands of Japanese industry, guided by the omnipresent but impenetrable MITI.
Japan’s muscular business model was also feared. After all, Japanese companies had bought the Empire State Building and half of Hollywood and would soon, according to the worriers, overtake the US as the dominant global economy. In fact, the story did turn into a Hollywood blockbuster, but it was rather a disaster movie leading a prolonged period of stagnation known as Japan’s Lost Decade.
Some economists believe that Japan has still not recovered twenty years on. They attribute the country’s malaise to an economic policy apparatus that was unable to adapt to a changed environment and failed to take the right measures. Hero worship is so fickle: yesterday’s invincible model is today’s obvious loser. But, as usual, we think the reality is a bit more complex. Most specialists agree that Japan’s aging demographic profile explains a large part of the country’s perceived underperformance. Moreover, for those who have visited the country, it is very difficult to reconcile the stream of poor economic data over the last two decades with brisk and bright appearance of its cities.
Recently a new myth has emerged: With the first real change in government in more than fifty years, the way Japan conducts its economic policy will also change, so the story goes. Instead of an export-driven economy, we will see the dawn of a new age of domestic and especially private consumption. Indeed, the new Finance Minister, Hirohisa Fujii, and new the Bank of Japan Governor, Masaaki Shirakawa, at first seemed to advocate that storyline, expressing the view that a strong yen could help the Japanese economy.
While it is too soon to judge how this particular story will develop, it faces at least one daunting hurdle to a happy ending: again, demographics. We have difficulties imagining Japan’s senior citizens going on extended shopping sprees, but maybe we are too conventional. Although we will monitor Japan even more closely from now on, we remain skeptical about the country for the time being. In fact, we think it is one of the world’s most fragile economies at present. We find Japanese equities highly overvalued compared with European peers, or those of Asia’s emerging markets, even taking the latter’s higher risk into account.
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