Catalysts for Japan Optimism

Far from a constraint, Japan's demographics, debt and geoeconomic position are now turbo-charging long-overdue structural change

By popular request, here the English original draft for my regular Japanese language column in the NIKKEI, published earlier this month. Enjoy & many cheers ;-j

My favorite economist is a Frenchman. This may come as a surprise. After all, I am German and in all things intellectual the German-French rivalry is a very serious one. Yet after decades of working as a financial economist and adviser to investors, corporate leaders and policy makers I am convinced no one can rival the wisdom of French economist Jean-Baptiste Say. My favorite quote: “In policy as well as in morality, the grand secret is not to constrain the actions, but to awaken the inclinations of mankind.”

Shibari Daruma — by the always inspiring Beni Shibari

My favorite economy is Japan. Again this comes as a surprise to many, particularly my Japanese friends. They say “How can you be optimistic on a country with a declining population, record fiscal deficit, and stuck in the middle of the US-China geoeconomic tensions?” And they are right on the first round implications of Japan’s demography and debt on the arithmetic of national income (=GDP) accounting – fewer people means less national income, and rising debt repayments means lower discretionary spending power. The arithmetic is clear, easy and real.

However, they are almost certainly wrong on the economics. They are missing the wisdom of Say’s insight “not to constrain but to awaken the inclinations of mankind”. Make no mistake: Japan`s structural realities are now a catalyst for real structural change, forcing a rising “Animal Spirits”, the term John M Keynes used to popularize Say’s original insight.

How so? Simply put:

Scarcity is the mother of invention.

Let look first at the demographics, then the debt. Human capital is by far the most important input and asset for any economic endeavour. Now even the large prestigious Japanese companies have to fight to attract and retain their employees. Japan’s labor market has become a `buyers market` where potential employees can now dictate their terms. More important than just higher wages, this forces a break with the traditional, proud but subbornly ridgid corporate culture: employees now know their scarcity value, want to create their own career, want to be paid for performance, and don’t want to be a traditional `salaryman`.

The fact that more and more companies are introducing meritocratic pay and competitive, rather than seniority-based promotion is arguable the most bullish development for Japan. Because of the labor scarcity a real productivity miracle can happen in Japan. The scarcity `awakens the inclination of Japanese employees` - they now have `animal spirits`.

Of course, this forces a revolution in corporate HR departments that the proud old guard may not be happy about, but now can no longer resist. At the same time I am certain Japan’s culture is resilient enough to ensure Japan’s new generation of star performers will never evolve into a ‘winner-takes-all’ and ‘make me-great-again’ plutocracy.

What about the national debt, how can that be a positive catalyst?

Because it now forces a long-overdue re-allocation of fiscal resources.

Until now, Japanese politicians could easily increase government spending seemingly without having to pay for it because interest rates were falling. Now interest rates are rising, so the resources available for the government to intervene in the private sector are shrinking.

Again, this new scarcity of funds will trigger creativity and `animal spirits`. Already a focus on evidence based policy making, stricter auditing of public funding, cutbacks on, for example, government lending programs is creating new business opportunities for the private sector. Funds will be shifted from costly support for ‘zombies’ towards impact incentives for ‘national & regionl champions’.

This is what PM Takaichi is all about: she will raise the efficiency of public spending, not the amount of it.

Which brings me to the final, and perhaps most important, reason to be optimistic on Japan: the new geoeconomic realities are now forcing an awakening of the inclinations and ambitions of the Japanese people.

As America and China become more ensnared in their rivalry, the risks are rising that Japan will become less relevant to the ambitions of the two superpowers. The only way to safeguard against this is for Japan to become more sovereign, more stronger, and more self-sufficient. This new `Gai-Atsu` foreign pressure is a very powerful wake-up call to `awaken the inclinations of mankind`.

So I am very optimistic on Japan precisely because the government has no more choice and now has to do what former Prime Minister Koizumi Yunichiro advocated almost two decades ago : `what the private sector can do, the private sector should do ( 民ができること民がやるべきです ). And because the most important asset for economic activity, human capital, is becoming more powerful and demanding real structural change.

Of course, Japan’s political leaders would do well to embrace the wisdom of Jean-Babtiste Say. Economic and global conditions have never been better to speed-up structural reform and create a new Japan. I very much trust Prime Minister Takaichi will indeed ‘awaken the inclinations’ of the Japanese people.

Thank you for reading - as always, comments welcome. From a first hint-of-springtime-in-the-air Tokyo, many cheers ;-j

Here the link to the NIKKEI article.