News from and on Japan, last edition

Reading Japan, EU – Japan trade treaty ratified in the EU parliament, the Bank of Japan as threat to global markets in 2019? How much whale meat does Japan consume? Fukushima cows and the costs of decommissioning 

Reading Japan, below the surface

With light & easy news on any subject 24/7 available through all possible media, we often forget that there is an abundance of articles, magazines and books on the very topic that we just swiped or clicked away.
In this very last issue for Dujat members of News from and on Japan, allow me to conclude this newsletter with a short note “Reading Japan” (attached) and leave you with number of books that are to my modest opinion worth reading. Why? As Dujat-member (tax lawyer, auditor, advisor, insurance broker, CEO / CFO of a Dutch subsidiary of a Japanese corporation) you are dealing with “Japan”, so why not take a dive in its culture and people, its rich heritage, customs and particularities? I am sure that a sincere interest in Japan’s culture will be beneficial for your business.

But let’s start with what happened in Japan in December 2018.

  • Politics: 
    • China’s growing strength is a threat not only for Japan, but also for Russia, that sees itself more and more dependent on China. After WWII Japan and Russia havent’t signed a formal peace treaty as the biggest stumbling block is the return of the four Kuril islands off the Hokkaido coast. The four islands in question have been under Russia’s control for more than 70 years. During that period, many Russians have settled there, while the government has also developed the islands’ infrastructure and militarised them. The Nikkei and other media report that PM Shinzo Abe would be willing to have only the two smalles of the four islands returned to Japan. “Abe’s thinking is that Russia will have less reason over time to return even one island, let alone two. In other words, Abe wants to cut his losses by resolving the dispute now”, reports the Nikkei, even if the combined area of Habomai and Shikotan equals only 7% of the four islands’ total. “Forging closer relations with Russia would also give Japan a new lever of influence over China and North Korea, two nuclear-armed rivals that Putin has assiduously courted. For the Kremlin, deeper ties to America’s richest ally would help alleviate Russia’s isolation from the West, particularly if the two islands likely to be returned will be exempt from Japan’s security pact with the U.S., as Putin is demanding”, reports Bloomberg. 2019 will most probably see a rapprochement between the countries, and perhaps partly fulfil the dream of Shinzo Abe’s father, the late Shintaro Abe, a former Minister of Foreign Affairs, to conclude a peace treaty between the two countries.
    • Japan’s defense spending is swelling to counter potential threats from North Korea and China and other vulnerabilities. A major investment is the conversion of the Izumo, Japan’s helicopter ship into its first post-war aircraft carrier, but the by far biggest investment is the purchase of a large number of fighter jets from the USA. 105 F35s alone will cost a trillion yen, while the purchase of two Aegis Ashore systems will set Japan back by 240 billion yen. However, Japan’s overall budget is still in the range of 1% of its GDP.
    • The EU – Japan trade agreement, also dubbed the Cheese for Cars treaty, has been approved by the European Parliament making this agreement effective as early from Februari 1 2019. The Japan deal does not need to be ratified by national parliaments to take effect because it excludes issues related to investor protection, which are being tackled in a legally separate negotiation, writes the Financial Times. Perhaps boring stuff for you, but this trade agreement that will cover 630 million affluent consumers will have a significant impact in the coming decades on the economies of the EU and Japan. Modern Diplomacy listed the key take-aways. More than 90% of the EU’s exports to Japan will be duty free at entry into force of the agreement. Temporary movement of company personnel, the export of beer from the EU to Japan, sanitary and phytosanitary measures, data protection, public procurement (EU companies will be able to participate on an equal footing with Japanese companies in bids for procurement tenders in the 54 so-called ‘core cities’ of Japan), it all will bring new opportunities.

  • Economy:
    • How is the Japanese economy performing? Q3 saw a bigger than expected contraction, no less than 2.5% after revision. The initial reading was 1.2% and the median forecast from economists polled by Reuters, predicted a revision to 1.9%, reports the Financial Times. How come? Well, blame the natural disasters … Severe flooding in western Japan during July, a powerful typhoon in September and the magnitude 6.6 earthquake in Hokkaido all struck during the third quarter, hindering exports and tourism.
    • Meanwhile, Prime Minister Shinzo Abe’s Cabinet approved a record initial budget for the 2019 fiscal year with part of the income a higher sales tax that will increase from 8% to 10%. The 2019 budget offers plenty of help for consumers facing a higher sales tax while increasing the nation’s debt load, at least for now, reported Bloomberg. “The budget will top JPY 100 trillion (USD 890 billion) for the first time, highlighting the government’s push to head off a potential economic downturn when the levy rises in October. Interesting to see the diagram with Japan’s tax revenue in this article, apr. 1/3 from sales tax, 1/3 from income tax, 1/5 from corporate tax. There is a considerable part to be financed by bond-issuing, but the bond dependency ratio, which shows how much of total income is from selling bonds, will drop to 32.2 percent from 34.5 percent last year.
    • “What’s the biggest threat to global markets in the coming year? It’s not a rise in U.S. interest rates, or the end of the European Central Bank’s bond buying. Rather, it’s the Bank of Japan. Even small adjustments by Governor Haruhiko Kuroda to ultra-loose monetary policy could agitate global asset prices more than other, widely expected changes”, writes Reuters in an article that heads “Breaking views – Japan is stealth threat to 2019 market stability.” The BOJ already owns assets collectively worth more than the country’s entire GDP. “Even so, it will keep growing its balance sheet after other major central banks have stopped. Any hints of a shift could alarm investors, whose assessments of risk and reward have been distorted by years of global central bank liquidity injections.” 
      As for the Nikkei-index performance in 2018: Tokyo stocks ended lower in 2018 from 23,050 (January 3, 2018) to 20,050 (December 30, 2018), with the benchmark Nikkei index losing 12.1 percent in 2018 for its first yearly loss in seven years amid growing concerns about a global economic slowdown following the U.S.-China trade war.
  • Corporate:
    • Masayoshi Son, Softbank’s President & CEO and founder of one of the world’s largest PE funds, Vision Fund (apr. USD 90 bln under management), listed 15% of Softbank Corp, the telco arm of Softbank Group, at the Tokyo stock exchange for a price that proved to be too steep. Result: the stock dived 15% on the first offering day, to rebound a little and close with a 10% loss. “SoftBank’s belly op will long reverberate in Japan’s markets.  Overpriced float undermines trust and efforts to re­engage retail investors”, headed a comment by William Pesek in the Nikkei. “December’s high-profile stumble is a blow to investors who believe in Japan’s boldest dealmaker. It also complicates life for other listing hopefuls – from Apple camera lens supplier Kantatsu to cybercurrency exchange bitFlyer. Now that 2018 is ending in tears, what might await Mrs. Watanabe (i.e. the average Japanese stock investor) in 2019? Trouble, unfortunately. Hopes for a rapid rebound from the 2.5% contraction in annualised growth in the third quarter in Japan are belied by external events. China’s prospects for keeping growth above 6% seem fanciful. The U.S. expansion that began in 2009 is showing telltale signs of wear. Uncertainty over the U.K.’s plan to leave the European Union and Italy’s debt troubles augur poorly for a vibrant 2019. … Japanese retail investors have long rushed into IPO’s of household-name icons, expecting big opening-day rallies. That strategy mostly backfired in 2018 as the real bull market was in cautionary tales. They will be reading those stories carefully in 2019 – and keeping their money well away from the market.” That would be a blow to Abenomics, as a rising Nikkei is one of its pillars. 
    • Also the Financial Times’ Lex column questions Mr. Son’s vision and came one week before Softbank’s dramatic IPO with an analysis of his approach and simply stated that Japan’s icon entrepreneur has a credibility problem. “SoftBank’s credibility problem is reflected in a big gap between the value of its investments and the price of its shares.”
    • Let’s revisit Carlos Ghosn – in prison. He might have been ousted as Chairman of Nissan and of Mitsubishi Motors, but he still is the standing President of Renault. Bloomberg carried an article about his re-arrest: he’s been held at Tokyo’s detention house since November. 19. The 12-story building, located in Katsushika in the northern part of the city, is one of eight such detention houses in Japan, according to the Ministry of Justice. On Dec. 10, Ghosn was indicted for understating his salary at Nissan during the five years until March 2015. He was also re-arrested on similar charges covering the three fiscal years through March 2018. After a Tokyo district court refused to entertain a plea to extend his jail detention on Dec. 20, prosecutors re-arrested him over an accusation of aggravated breach of trust. Part of the accusations is a deal in Saoudi – and it all results in a murky picture. Plus the Financial Times now reported that Nissan itself is extending its research for its former Chairman’s misconduct. “People close to Nissan said an investigation that began over the summer as an operation conducted under intense secrecy by a handful of senior executives now involved “hundreds” of the company’s compliance, legal and accounting staff worldwide. On January 1, the prosecutors need to decide whether they will indict, release, or re-arrest Ghosn on new claims.
      In the Japan Times, former US Deputy Trade Representative Glenn Fukushima elaborates on what will become a cause célèbre for the way Japan’s legal system is looked upon. All points to a well-prepared coup to save Nissan from a Renault take-over it teaches a lesson for foreign CEOs of Japanese companies to comply with the Japanese code-de-conduite. Michael Woodford, former Olympus CEO and whistleblower, who uncovered a huge accounting fraud of apr. USD 2 billion,  and Howard Stringer, former CEO of Sony under whose reign Sony’s share-value more than halved, are not the shining examples of executive behaviour that Japan is looking for. Bloomberg’s punch line on Carlos Ghosn is “from hero to zero”.

  • Society:
    • So Japan is to withdraw from the International Whaling Commission / IWC and starts commercial whaling in Japanese territorial waters and exclusive economic zone. The aim is to revive an industry with political significance for top leaders but whose long-term prospects remain unclear even with this shot in the arm, writes Japan Times. Speaking with reporters Wednesday after the move was announced, Chief Cabinet Secretary Yoshihide Suga cited Japan’s goal of revitalising the country’s languishing rural areas. “We hope that these regions will prosper more and that our rich whaling culture will be carried on,” he said. According to government figures quoted by Kyodo News, around 200,000 tons of whale meat was consumed in Japan each year in the 1960s, but it has been around 5,000 tons in recent years. Whale consumption accounts for just 0.1% of all Japanese meat consumption, according to the Asahi newspaper. Le Monde has a video on its site on whale hunting by Japanese fishermen, where you also can see a glimpse of the the decision by the International Court of Justice in 2012, with Judge Wada and former Ambassador Tsuji. But “Japan’s IWC exit no magic bullet for foundering whalers”, heads the Nikkei. Whaling by them will be only in  Japan’s exclusive economic zone. “Yet the future of Japanese whaling as an industry still looks bleak. Japan has only six companies and five vessels that engage in small-scale whaling, which does not fall under the IWC’s oversight.” 
    • Another subject in my Newsletter has been “Fukushima”. Having experienced myself the mega earthquake on March 11, 2011 in Tokyo I have always feel “connected” to this event. What happened to the “abandoned animals in Fukushima”? The government instructed to have the apr. 3.500 cows close to the crippled nuclear power plants to be killed, but some farmers refused. Japan Today carried a story on two of these farmers who want to protect their 50 cows “until they die a natural death just like human parents protect their children”. Although exposed to high radiation, the cows seem to stand it well. 
      The state-backed Japan Atomic Energy Agency says it would need to spend about JPY 1.9 trillion or EUR 15 bln to close 79 facilities over 70 years, in its first such estimate (Japan Today.)
    • Let’s end with a positive note. Who is the most popular pin-up in Japanese 2019 calendars? Not Japanese actor Kei Tanaka (#2) or, in third place, 24-year-old Olympic skating champion Yuzuru Hanyu. Loft, a Japanese chain of lifestyle stores, has reported that calendars featuring the rugged, blue-eyed Russian president Vladimir Putin are flying off the shelves and eclipsing even its most popular domestic celebrities. (Telegraph). I am sure that a peace treaty between Japan and Russia will further reinforce his popularity.
To close off this Dujat News from and on Japan, have a look at the attached “Reading Japan”. Great remark by Ryotaro Shiba, one of Japan’s most acclaimed novelists, at the very last page of this “Reading Japan”:  “the Dutch themselves had no idea how much they contributed to Japan. In that sense the Netherlands is a big country, big enough to have forgotten how much it gave to us.” 

This News from and on Japan will be continued, albeit in a somewhat different form, for Global Bridges’ business relations. If of interest, please let me know.

Best wishes for 2019.
Radboud Molijn
Global Bridges BV for DUJAT / Dutch & Japanese Trade Federation