Contrarian View – a Pending Downturn for Gaishi?

Contrarian View – a Pending Downturn for Gaishi?

Living here in Japan, it is hard not to get caught up in the recovery of the local economy. There is so much capital investment in infrastructure and operations going on, as well as a flood of foreign investors and market entrants that the opportunities for employment are better than they have been for a decade. I am aware of companies that have orders in to recruiters for 50 to 100 staff over the next 6 months and if you look at the earnings of listed Japanese recruitment firms, the profits have never been better.

However, I have a sneaking feeling that this may all change - starting with the gaishi companies.

Certainly now, in July 2006 we are now at a highpoint in gaishi expansion in Japan. Banks, securities firms, luxury goods makers, logistics companies and others rushing to fill orders for products, services, and know-how by Japanese companies and consumers. While that is the good news for gaishi in particular, there is a dark cloud on the horizon - namely the US economy and global tensions.

We need to remember that Gaishi are not independent businesses, they are outposts of some parent company and thus they are sensitive to the fears and concerns of the parent's management team. As a case in point, last time the US economy went into decline - which was at the time of the NASDAQ (read "dot.com") stock market crash of 2000, followed by the World Trade Center attacks on September 11, 2001, foreign firms in Japan were instructed by their shocked headquarters staff to pause all new business investment and batten down the hatches. They did just that and as a result, hiring dried up and in some companies and thousands lost their jobs between 2002 and 2003. I would estimate that more than 5,000 people were let go from foreign banks alone.

Interestingly at the same time, those domestic Japanese companies already in the pits wondered what all the fuss was and just kept on keeping on. I say this to illustrate the fact that Japanese firms that are not doing a lot of international business have momentum and track all of their own. They are not really affected by temporary foreign events, nor in a downturn in the small gaishi sector. This could be useful to remember in a year's time.

So the gaishi economy in Japan as it pertains to employment, is very much dependent on the state of mind of the US and European headquarters. If there is fear overseas, then there is a knee jerk reaction here. There is also plenty to be worried about - ranging from the escalating problems in the Middle East, rising oil prices and interest rates globally, gradual deflation of the housing bubble in Western economies, we have the makings of a global economic correction. Yes, the Japanese economy is in good shape and the government has officially acknowledged that we're entering a period of fresh expansion. But, as we have seen before, while Japan is on one track the world can be on another. The key question is to ask "Which track is your office tied to? Japan or the headquarters?"

As an employee of a gaishi, how do you hedge against a possible downturn? Logic would suggest that there are a number of ways:

1) Choose to work for a company which is run independently of the overseas headquarters which has a decent level of sales and profit coming from Japan (cut-backs are less likely at such outposts).

2) Delay a planned transfer to another firm on the basis that last in is first out.

3) Move yourself into a position that is less exposed to "adjustment", i.e., move from administration to front office, or from new product development to maintenance and support.

4) Skill up and make yourself more valuable, i.e., swap drinking and darts time for study time.

5) If you want to be really prepared, start talking to Japanese firms about moving back the other way.

So do I really think the coming downturn will be severe, and when will it happen? Without a crystal ball it is hard to say. However, based on developments in the US economy alone, such as rising interest rates and blow-out on military spending, the decline is likely to be slow and in fact in the short run US investors may actually find Japan a better home for their money - leading to a temporary surge in activity here. In this scenario, I would imagine next year as being a period of belt-tightening and cut-backs.

However, with the fear factor generated by global pressures and particularly if there is a major terrorist attack on a Western target, then the chances suddenly become much higher. With the rhetoric going on in the Middle East, this could happen any time.