Economy: Yes, Growth in Japan

By Jesper Koll

The Koizumi era encouraged real economic growth with passion. But what can corporate Japan expect from its political leaders now?

It’s Autumn 2008, and Japan’s Prime Minister faces a simple policy challenge: How to prevent recession in the worlds’ second largest economy? The good news is that Japan still has ample room on all policy fronts to stimulate economic growth and fend off a slump. Most important, the government must show determination that, yes, Japan’s leadership actually wants to actively promote growth. The post-Koizumi policy of inaction must change to a ‘can do’ spirit, rather than the never ending innuendo of an impossible fiscal deficit or inevitable demographic catastrophe.

Yes, fiscal spending is a real option. No, we’re not talking about building more bridges to nowhere, but better re-allocation of resources to actually promote growth. Example: raise pay for nurses and old-folks home caregivers. Last year, almost one quarter of national caregivers quit their job because the government-fixed pay is now lower than a part-timer makes at a Starbucks in Tokyo. Unlike bridge-building, nursing care is a real growth industry in Japan. Pay these people more, and service will improve, the old pensioners will be happier; and yes, the economic multiplayer is bound to be high as higher pay will almost immediately translate into higher consumption. Moreover, the much-taunted wage inequality issue would start to be corrected— not by making the well-paid nurses in private hospitals poorer but making the underpaid ones in public facilities richer.

Corporate Japan needs to push for more economic growth from its next Prime Minister.

Moreover, tax cuts are also possible, if they are promoted together with increased efficiency of tax collection. How can it be that one of the most advanced industrial economies still sees barely 30 percent of companies paying tax and almost one in four households not paying any income tax? Empirically speaking, Japan has one of the least efficient tax systems in the OECD. Cut corporate taxes to, say 20 percent, and close the many loopholes that promote inefficiency and you’ll quickly end-up actually raising tax revenues because profits will surge. Promote profit growth and you’ll get tax revenue growth—instead of promoting write-offs and special allowances, which will do nothing but promote over-investment and a waste of capital.

If there is one thing that former PM Koizumi and his economic powerhouse Minister Takenaka did achieve, it was precisely that they instilled hope that their policy would bring a brighter future for Japan. The goal was simple—let’s try and raise the growth potential of Japan.

The key ingredient for Koizumi’s success— apart from his personality—was his ability to get solid support from Japanese business leaders. Deregulation, small government, privatization of the postal savings machine, administrative reform and reduced power of the bureaucracy—all of this is the stuff that free market capitalists dream of. Finally, corporate Japan got a leader who was not afraid to promote winners, who believed in the magic of entrepreneurship and, yes, trusted business more than bureaucrats to come up with the solution to Japan’s deep-rooted problem.

More so than any Prime Minister before him, Koizumi actively promoted the participation of business in the policy making process. At the top he had the CEO of Toyota—arguably the best company in the world—inside his powerful economic advisory council. However, hardly a day went by when he did not meet with entrepreneurs ranging from successful Fortune 500 companies to just-started and struggling ventures.

Economic growth and wealth creation depend more than anything on animal spirits, on the passion and desire to actually do something new and better than has been done before. Corporate Japan has plenty of this, but corporate Japan must push for more of this spirit from their political leaders. If they do not, the next recession may come sooner than the next Prime Minister.

The main challenge that Robeco faced, and still struggles with, is convincing potential clients of its commitment to the Japanese market. “The major challenge is the fight to be taken seriously and to demonstrate to the Japanese market that we have a true commitment to be here, and most importantly, to stay here,” says Eric van der Maarel, General Manager of Robeco Japan. He says Japanese investors who have worked with domestic branches of foreign firms have reason to be a bit skittish. Many branches often have to give up too quickly, due to a lack of commitment by headquarters, entering the Japanese market with too many employees (at a very high cost base), expecting high results too fast, or because of a lack of local market/culture knowledge. JI