News from and on Japan, January 1 – 14, 2018

The Year of the Aibo, PM Abe in East Europe, Japanese corporate venturing, what to do with Fukushima water? Lower yen, higher share prices, Japan’s labor shortage and Japan is Populist-Free!

2018 is the Year of the Dog, or as Institute of International Monetary Affairs (IIMA) Director claims: the Year of the Hound (this acronym is better suited for his message, see link below.) Dog or Hound, that is less important than the question: what type of dog are we talking about this year? When it is up to Sony, it is the Year of the Aibo, Sony’s robot-dog revitalised after many years silence. Aibo was one of the surprises of the CES, the annual Consumer Electronics Show / CES in Las Vegas, earlier this month.
But there is more to report in this News from and on Japan in the first 14 days of this year.
  • Politics:
    • “Why is Japan Populist-Free?”, asks acclaimed Dutch – British writer Ian Buruma in this article provided by Project Syndicate. Some noteworthy observations: “Contemporary Japan may have its flaws, but it is now much more egalitarian than the US, India, or many countries in Europe. High taxes make it hard to pass on inherited wealth. And, unlike in the US, where material prosperity is flaunted, not least by Trump himself, the most affluent Japanese tend to be discreet. Japan has surpassed the US as a country of the middle class” and “Thatcherism has probably made the British economy more efficient. But by crushing trade unions and other established institutions of working-class culture, governments have also taken away sources of pride for people who often do unpleasant jobs. Efficiency does not create a sense of community. Those who now feel adrift blame their predicament on elites who are better educated and sometimes more talented – and thus better able to thrive in a global economy.” With or without PM Shinzo Abe (according to Steve Bannon “Trump before Trump”), Japan is following its own course.
    • Meanwhile Mr. Abe has kicked off a European tour to Estonia, Latvia, Lithuania, Bulgaria, Serbia and Romania and it is the first time a Japanese Prime Minister is to visit these countries. Abe, who will meet the heads of the six states on his tour in as many days, is keen to raise Japan’s profile in the region as China bolsters its ties there. All six nations Abe is visiting are among the 16 Central and Eastern European countries that hold an annual summit meeting with China. China has invested over the last two years billions of Euro’s in East European infrastructure projects as part of its One Road One Belt project. Also North Korea and cyber security are on his watch.
    • Whatever the developments in North Korea: they are of utmost importance to Japan. Assuming that it will be quiet on this eastern front until the Olympic winter games in PyeongChang, only the crystal ball will tell us what will happen afterwards. Contradictory articles in two prominent American media. “It’s Time to Bomb North Korea”, writes Edward Luttwak in Foreign Policy. “Of course, there are reasons not to act against North Korea. But the most commonly cited ones are far weaker than generally acknowledged. One mistaken reason to avoid attacking North Korea is the fear of direct retaliation.” “Any U.S. Attack Would Risk a War”, thinks Abraham Denmark in Foreign Affairs: ”even if the United States was able to carry out the strikes and prevent a massive North Korean response, however, it might not be able to successfully destroy all of Kim’s nuclear weapons and missiles. Indeed, the Pentagon recently told Congress that eliminating all of North Korea’s nuclear weapons would require a ground invasion, probably owing to Pyongyang’s penchant for building military facilities underground, limiting the effectiveness of airstrikes. If the United States decides to attack North Korea without attempting to eliminate its ballistic missile and WMD capabilities, it would leave itself and its allies at Kim’s mercy. If, on the other hand, the United States is determined to keep going until North Korea has been completely denuclearized, it must consider the potential consequences of a full-scale invasion.”

  • Economy:
    • Also in 2018 Japan’s economy is expected to grow. Last Friday the Nikkei ended at 23.653, up from 22.764 at year-end 2017. Japanese stocks are currently trading at about 15 times projected earnings, Tatsunori Kawai of Kabu.com Securities told Nikkei, “a mere fraction of the aggressive valuations during the asset price bubble in the late 1980s and early 1990s – giving space for further market gains. He projects the index to trade in a range of 23,000 to 27,000. Yoshinori Ogawa, strategist at Okasan Securities, projects the index would climb to around 25,000 to 26,000. His calculation is based on expectations “that earnings per share for Nikkei issues will grow about 5-10% in fiscal 2018, bringing the figure to roughly JPY 1,600 from around JPY1,500 now.” Japanese analysists’ estimates tend to be conservative, so don’t be surprised if the Nikkei ends up considerably higher in 2018.
    • “Stronger Yen no match for Japanese stocks”, writes Bloomberg. The common option is that the lower the yen, the higher share prices, but the graph in this article shows otherwise. “Even though the yen hasn’t weakened, the volume of Japanese exports to Asia and the U.S. has been increasing on a pick-up in global demand, which is improving Japanese corporate earnings,” told Toshio Sumitani, chief market analyst at Tokai Tokyo Research Institute Co. to Bloomberg.
    • Government statistics, showing a ratio of 1.55 jobs (including regular and non-regular) available for every applicant, suggest the tightest conditions since the mid-1970s, writes Leo Lewis in the Financial Times. “The number of foreign workers in Japan surpassed one million for the first time in 2016 as restaurants, retailers and hotels quietly break with tradition and lean on outsiders for numbers.” His conclusion is that Japan is ill prepared for the coming labour shock. “Whether it is unfinished construction in the suburbs, cafés giving up on lunchtime sittings, septuagenarians bolstering the workforce or difficulties hiring performers for Disneyland shows, the evidence is everywhere.” The panacea should be more investments in IT. “Weak per-head IT investment in the service sector – an expression of that traditional approach and a failure to spot the problem – has resulted in low-to-zero productivity growth.” But, see also the remark in Ian Buruma’s article, efficiency does not necessarily create a sense of community … 

  • Corporate:
    • A tied labour-market has also other risks: the new reality in rapidly aging Japan is that there are nearly 1.3 million small and midsize companies that are thought to be in danger of going out of business in 2025. The future of smaller suppliers is a big worry for the auto industry that depends on them, writes Nikkei. “Looking at all small and midsize companies, the owners of more than 60% will be at least 70 years old in 2025. The Ministry of Economy, Trade and Industry estimates 1.27 million such proprietors have not yet found anyone to take the reins. Half of all small and midsize companies that opt to fold are turning profits. Increasing closures of small and midsize businesses could rob Japan of 6.5 million jobs and JPY 22 trillion (USD 193 billion) worth of gross domestic product by 2025.
    • But let’s not be over-pessimistic. Japanese companies are increasingly active in corporate venturing. Nissan-Renault-Mitsubishi announced last week to invest USD 1 bln in new ventures in autonomous driving and AI. Panasonic has its venture fund and of the big companies’ venture capital investment last year, JPY 35.3 billion went to enterprises in Japan. “While this may pale beside the JPY 155 billion raised by startups that year through IPOs on Japanese markets for emerging companies, it also indicates an environment where startups have easier access to funds and have a greater chance of surviving and developing new technologies.” (Nikkei).
    • Two months ago I visited the President of a large Japanese manufacturer and asked him how he challenged American hedge funds that had a stake in his company. “They ask me to focus and spin-off some of our non-core business”, he told me. “I always smile at them and tell them that we do the oppositie: we look for new business area’s where we can employ our expertise, even if that new business has nothing to do with what we are known for”. 
      I found an extraordinary example of such as new activity: Melco, a company known to manufacture computer peripherals, is in the process of acquiring Tokyo-based noodle-maker Shimadaya, raising questions about the company’s strategy in combining two vastly different types of businesses under one roof. “Melco said it would help Shimadaya accelerate overseas expansion, taking advantage of its knowhow accumulated from its own experience in operating globally. Another objective is to put its food safety management system to commercial use. This system will allow Melco to collect data using cameras and other devices installed at Shimadaya’s factories.” (Nikkei).

  • Society:
    • For sure to stay in 2018 are the seemingly never-ending problems at Fukushima’s defunct nuclear reactors. Most worrying is the enormous amount of contaminated water tanks that are now on-site; the amount of radioactive water at Fukushima is still growing by 150 tons a day. In addition to the cooling water, hundreds of tons of groundwater flows underneath the Fukushima Daiichi site and gets contaminated by nuclear material. Some of it cannot be captured and flows straight into the ocean. The chief of Japan’s nuclear regulator now claims that this stored water that contains radioactive tritium even after being treated, should be released into the sea after dilution. “We will face a new challenge if a decision (about the release) is not made within this year,” Nuclear Regulation Authority Chairman Toyoshi Fuketa told a local mayor, referring to the more than 1 million tons of coolant water and groundwater, stored in apr. 900 tanks, that has accumulated at the facility crippled by the 2011 disaster (Japan Today and nuclearnews.net.) However, there are different views like by James Conca in Forbes, who thinks releasing this stored water it is the best solution.
    • Different from the Dutch school system, where high-school students finish their school with a series of exams, in Japan college and university entry requires an entry examination. 582.669 students participate this Saturday and Sunday in these tests and the results will be used by 843 public and private universities and junior colleges (Japan Today).
    • … and 2018 is the Year of the e-Dog”, or better: the Year of Aibo. Sony’s robot dog Aibo was launched in 1998, went into hibernation in 2006 and was woken up at the CES in Las Vegas one week ago. The dog is composed of 4,000 parts, includes AI, oled eyes and many sensors and is active for 120 hours when charged. “A major challenge was to make Aibo both obedient and disobedient to the right degree,” one of its developers said, “since that makes having an Aibo more like having a dog, something that will inspire affection in owners.” The new Aibo is cleverer than its ancestor, thanks to a wireless cloud-based AI system that collects and analyzes a data from other Aibo robots. This gives it a bigger repertoire of tricks and allows it to automatically download software that lead to unexpected new behaviors (Nikkei). See also https://www.youtube.com/watch?v=VG-yKLftlrE. It reminded me of a famous poem by Dutch writer Annie M.G. Schmidt that I would like to paraphrase: I wish I were two Aibo’s, so we could play together.
Have a great working week.
Radboud Molijn ,  

Global Bridges BV for DUJAT / Dutch & Japanese Trade Federation