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Will Japan Regain Its Greatness?

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By Michael Shari

Business is trying to resurrect Asia’s economic miracle a year and a half after the Tohoku tragedy. Tokyo is enjoying a long-deserved renaissance. Young professionals are converging from all across the Japanese archipelago, driving the population of the Japan’s capital up by about 1 million people, to about 12.5 million, since 1995, while the nation’s population has leveled off at about 128 million since 2004. Cranes are swinging over gaping construction sites citywide thanks to relaxed building height restrictions, defying occasional tremors and transforming the city into a showcase for displays of cutting-edge 21st century architecture. Opened in May was the 634-meter (2,080-foot) Tokyo Skytree, the tallest tower in the world.

“This economy is pretty similar to that of Florence, Italy, in the Renaissance era,” says Hitoshi Itagaki, president of Principal Global Investors, recounting how Italian peasants and artisans who survived bubonic plague flocked to Florence where public services still functioned. “They created a really beautiful Renaissance culture, and the same phenomenon is happening in Japan.”

Japan certainly isn’t suffering from the pestilence that wiped out 30% of Italy’s population in the 14th century. But it is being plagued by old age and a declining birth rate. Population growth is being capped by a closed immigration policy while the oldest third of the population is living on pensions, not paying taxes and barely spending. Some of the new arrivals in Tokyo are, in effect, refugees from the nation’s high unemployment rate, which is reaching 5% as factories nationwide shut down and jobs are moved to cheaper countries like China and Vietnam.

They’re also fleeing radioactive contamination in the Tohoku region of the main island of Honshu, just north of Tokyo, which was devastated by an earthquake, tsunami and a nuclear power plant accident that, all told, killed about 20,000 people in March 2011.

But like the Medicis and other Florentine subjects of Lorenzo il Magnifico, the bankers and business leaders of contemporary Tokyo spend significant amounts of time brainstorming ways for the economy to reinvent itself. To hear Itagaki tell it, Japan should stop trying to reboot the Asian economic miracle that once amassed enough cash for Japanese banks to acquire the Chrysler Building and Rockefeller Center in the 1980s and accept a more mature model for modest but steady annual growth built on soft industries. Such inspiration rises in the absence of formal guidance from the government of prime minister Yoshihiko Noda. Noda has been under such pressure from a populist opposition in the National Diet since he was elected on a reform campaign in August 2011 that he reshuffled his cabinet in June to cut a deal over tax increases that are intended to cover pension and health care costs for the aging, and the reconstruction of Tohoku. But since the tax hikes, more that 50 of his sitting party members have tendered their resignations.

Economic Reinvention

One industry that offers the potential to bolster growth is luxury goods. The sector shined a ray of hope on the economy in the first half of this year when there was a marked increase in spending by young people on jewelry, watches and other high-priced items, says Takashi Maruyama, head of Japanese equity at Nikko Asset Management. He asserts that this trend is not short-lived. This year’s Mercedes-Benz Fashion Week Tokyo festival was crowded with Japanese fashion design houses with sophisticated, international-sounding names, like Vous Êtes and A Degree Fahrenheit, that are actually run by young-and-upcoming Japanese designers who cater to very domestic Generation Y tastes.

Another such industry is domestic tourism, which is growing as an insular new generation shows little interest in traveling or studying abroad, says Charles Beazley, chairman and CEO of Nikko Asset Management. The ministry of land, infrastructure, transport and tourism aims for Japanese people to spend an average of 2.5 nights a year each as tourists by 2016, up from 2.12 nights in 2010. By 2016 the ministry hopes that domestic travel expenditure will reach Ұ30 trillion, or $378.5 billion, annually, up from Ұ25.5 trillion in 2009. Japanese travelers are filling a void left by foreign tourists, only 6.2 million of whom visited Japan in 2011, down from 8.6 million in 2010.

Then there’s the construction industry, which is experiencing a boom from rebuilding public works in Tohoku since the earthquake. According to Nomura, Ұ32.4 trillion, or $408.9 billion, in damage was done to manufacturing, agriculture and other industries, while another Ұ7.8 trillion, or $98.4 billion, in damage was done to roads, bridges and other public infrastructure. Construction contractors started setting up new offices in Sendai, Tohoku’s largest city, last year. Contracts were being issued in the second quarter of this year, contributing about half a percentage point to quarterly GDP growth, according to SMBC Nikko Securities chief economist Junichi Makino.

Healthcare, nursing homes and other services for the elderly are growing fast on rising demand, says Yasunori Iwanaga, chief investment officer of BlackRock Japan. Spending on healthcare is equivalent to only 8% of Japan’s GDP—half that spent in the US, according to the Center for Strategic and International Studies in Washington. Recent studies by the Japanese government show that Japan’s population will shrink by one-quarter by 2050 as one in four people is now over the age of 70 and the birth rate is falling so fast that with every 100 seconds that pass there’s one less child age 14 or younger.

Outside these sectors, some Japanese corporations are dominating niches of certain industries. Itochu SysTech, for example, supplies thin-film photovoltaic modules to companies in China that assemble solar panels for export. These firms stick to a high-end niche and do not attempt to compete with Chinese manufacturers on wages. “There are stories where you can see the country coming back,” says Robert Feldman, managing director and head of economic research at MorganStanley MUFG in Tokyo. “But it’s not because of good macro management. It’s because the Japanese are so clever at coming up with neat little things to do, and responding to problems, that they have something to sell.” Read more in the Global Finance.

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Written by Theophyle

September 2, 2012 at 12:39 pm

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