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June 20, 2007


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Tom Pedersen

No interest, no return – will Japan return? Will there be interest?

To make Japan a "gateway" to Asia, another idea being prominently featured in the future of Japan dialogue, where will the interest come from? Will it be a gateway for the Western world to gain access through Japan to China? To Russia? To India? From Asia to the West? Are these plausible scenarios? Is there interest?

Other ideas include more transparency in financial markets, and allowing filing of IPO documents on the TSE in English. If the market becomes more transparent, will more foreign firms again choose to list in Japan? In 1991, there were 127 foreign firms listed on the TSE, today only 24 foreign stocks are traded on the TSE. Will they return?

A striking assessment of the current situation in Japan was offered at an opening panel discussion. The panelist offered that Japan missed so many opportunities in the last 15 years and that the focus now has shifted to "survival" instead of competing to win. What happened to all the chances – liberalization of markets, currency policies, needed legal system reforms, service sector reforms? Why is change still described as post-war? How many missed boats? Which war? This unfortunately describes what people are thinking about – the catch up and it "can't be helped" victim mindset instead of a winning orientation. In can be helped – but only if there is interest. There could be returns, but only first if there is interest.

Without interest, huge amounts will languish in inefficient savings accounts and there will be very scant returns to support an increasing number of retirees at a time of decreasing tax revenue. Big problem. There must be interest in this debate or there will be no return for Japan. The problems of kakusa will intensify and generations of wealth and savings will vanish. The very quality of life, safety, and security will change at a time when regional powers will have increasing participation in the new Asian miracle.

How will Japan participate in this new miracle? Must the country also age and lose its economic vitality? Can Japan return to the world stage as a leader in environmental and geriatric sciences? Can Japan once again display adaptive resilience in the face of overwhelming adversity?

More questions than answers. Part of the change problem in Japan is that the past 15 years of stagnation and missed boats has not produced the types of problems in daily life that many would associate with prolonged economic slump. Look at the skyline of Tokyo today and you will see a vastly transformed city from just 10 years ago. Walk down the street and you will still see luxury brand shops packed with young shoppers. Visit high-end restaurants on any night in Tokyo and you will be hard pressed to get a seat without a reservation. There may be new poverty in Japan but it is still relative and very hard to see.

With interest, Japanese investors might return. With interest, more foreign investment would find its way to Japan. With interest, the yen could find its own level and the massive currency interventions supporting a weak yen and export-led recoveries could stop. With interest, that money could find a better home, in Japan, and spur a recovery with wide participation and renewed foreign interest. With interest, Japan could finally focus on improving productivity in the service sector.

With interest and returns, the current situation can and must reverse. There is no alternative. As lifetime employment and seniority based pay systems are becoming things of the past, the very social contract offered by employers has changed. Just as 401(K) in the US shifted risk from companies to individuals for retirement planning, defined benefit programs in Japan are following a similar path. Underfunded pensions in Japan of the 21st Century loom large without interest and returns.

A correction would be painful. As the carry trade unwinds and exports become less competitive at a time that quality standards for Asian substitutes are improving, the old thinking of post-war catch-up Japan decision makers would kick in. We could be right back to the can't be helped scenario. Game over.

This can be helped. With interest.

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