Economic Development of Japan

1. Economic Development of Japan No.14 Current Issues 2013

2. Current Issues 2013 • Abenomics • Future of manufacturing SMEｓ

3. LDP Government of Shinzo Abe • First Abe Cabinet (Sep.2006-Sep.2007) was unsuccessful. • Second Abe Cabinet (Dec.2012-) has the following features: • Active, quick and vigorous (compared with past PMs) • Politically conservative (critiques say “right wing”) • Aiming to revise constitution—instilling nationalism, officially approve military capability • Diplomatically active (foreign visits, top sales, coping with China & N. Korea, etc.) • Economic revival as top national priority (Abenomics) • High popular support + fragmented oppositions LDP will very likely win a landslide victory in Upper House election (July 21, 2013) and gain political free hand

4. Three Arrows of Abenomics To revive the economy, three “arrows” are mobilized. 1. Aggressive monetary policy (“New Dimension”) - New BOJ Governor Haruhiko Kuroda (Mar.2013-) - Dispel deflation mindset: inflation target of 2% within 2 years - Monetary expansion with new asset purchases (REIT etc.); doubling monetary base & gov’t bond holding in 2 years - Correction of high yen 2. Flexible (=active) fiscal policy - Revive economy first, consolidate budget later - Increase infrastructure investment 3. New growth strategy (proposed in steps; cabinet approval June 14, 2013) - Japanese Economy Revitalization Headquarters (under it: Industrial Competitiveness Conference) - 3 roadmaps and 3 plans (12 pillars – 37 items – 56 sub-items)

5. Source: Japan Revitalization Headquarters, PM Office

10. Supporters of Abenomics J. Stiglitz—“Depreciating yen to end deflation is the right policy. Just as I recommended 10 years ago.” Paul Krugman—“I evaluate Abenomics highly; no other country could do this policy mix.” IMF Managing Director Lagarde—”Inflation target of 2% is desirable as long as central bank independence is secured.” Fed Chairman Bernanke—“I support it as a policy to end deflation.” Prof. Heizo Takenaka (Keio Univ.)—“Abenomics is 100% right.” Prof. Koichi Hamada (Abe’s advisor)—“Don’t worry about recent stock market drops—they are just corrections of excess optimism. The real economy is improving.” Prof. Takatoshi Ito (Tokyo Univ.)—“BOJ economists think QE is ineffective. But many researchers and officials support QE as a tool to change inflation expectation.

11. Critiques of Abenomics George Soros (investment guru)—”Japan’s monetary policy is bold but very risky; it may trigger a collapsing yen.” Prof. Kunio Okina (Kyoto Univ.)—“If deflation mind is dispelled but fiscal discipline is not secured, monetization of fiscal deficit will generate a serious dilemma between financial stability and price stability.” Kazuo Ueda (Tokyo Univ.)—Monetary expansion increased interest & yen volatility. If long-term interest rates rise, expected positive impact on real economy will not happen. Ryutaro Kono (BNP Paribas)—“The monetary transmission mechanism is broken. Under such circumstances, monetary expansion may destabilize asset prices, raise long-term interest rates, and put BOJ in a macro policy dilemma.” Nikkei Newspaper commentary—“The growth strategy lists only easy measures; bold reforms in such key areas as medical service, agriculture, corporate tax rates, etc. are not clarified.”

12. Call rate(interbank short-term interest rate) Bubble Zerointerest ratepolicy Zerointerest ratepolicy Lehman Shock Money & bank lending Excess reserves are built up during zero interest rate periods

13. My View on Abenomics • Compared with DPJ’s total impotence, Abe is doing much better. He has brightened Japan’s short-term psychology—but that is not enough for long-term growth. • A policy mix of fiscal, monetary and growth policy is nothing new; but Abe’s policy presentation is innovative. • Growth policy is primary, and fiscal and monetary policies are supplementary. New industries must emerge first, then macro policies should support them. Abenomics is strong in fiscal and monetary areas, but growth policy remains weak. • If long-term interest rates start rising, government will be completely bankrupt. • Pumping money into a broken transmission mechanism risks asset bubbles and financial instability. Market psychology is unpredictable and BOJ cannot control what will happen. • Proper policy procedure is not followed: there is a disconnect between visions and listed actions.

14. Pumping money into an integrated world is risky. Global and national good & asset markets General goods & services Foreign money & assets(F/X instability) Inflation target of 2% Bank of Japan Aggressive monetary policy Consumer durables Energy & commodities Driven by unstable market psychology; unpredictable direction & timing Global & national liquidity glut Government bonds Precious metals Real estate Investment in emerging markets Quantitative expansions Stock market US & EU (US Fed: ending QE3 within this year???)

15. Standard Policy Making Procedure(Five Necessary Conditions) The entire process should take about 1 year for policy revision and 2-3 years for new policy 5. A secretariat with sufficient authority andresponsibility to coordinate the entire process Top leader 1. Vision 2. Consensus building 3. Documentation Brainstorming Set broad goals & direction Drafting work Comments & revisions Finalize & approve Studies & surveys (Drafting may be outsourced) Stakeholder consultation 4. Substantive stakeholder participation Ministries ＆agencies Academics & consultants Regions & localities Businesses

16. Growth Strategy Formulation in Abenomics • Broad visions are given (three arrows, three plans, etc.) • However, concrete growth measures were presented too quickly without deep consultation with stakeholders. They are just a collection of various ideas proposed by committee members and officials in charge. Visions –(targets) – (policy areas)– actions • Because consensus building and stakeholder involvement (2 & 4 in diagram above) are skipped, proposed measures are too many, too vague, and unlikely to be supported or implemented by businesses and key ministries. • By taking sufficient time to interact with all stakeholders, they will feel attached to and responsible for agreed policies. This psychological effect is important; hasty announcement of policy measures will not have this advantage.

17. Future of Manufacturing SMEs • Competitive SMEs have been a driver of Japanese growth, but they now face many structural challenges. • Long-term domestic recession • Deflation (price cut pressure) • High yen (recently largely corrected) • High corporate tax of about 40% • Rises of China, Korea & Taiwan in electronics & cars • Aging of SME owners & lack of next generation engineers • Power shortage • Delayed participation in TPP, FTAs, EPAs, etc. • The number of Japanese SMEs is declining sharply in every region and sector. The Lehman Shock (2008) further accelerated this trend.

18. Number of establishments In both number & jobs, Japanese manufacturing firms peaked around the bubble period and declined significantly since then. Number of employees

19. Evolution ofOutward Manufacturing FDI • 1960s-70s: initial FDI, some causing friction with workers and host countries in Southeast Asia. • 1980s-: Trade friction with US & EU prompted car and electronics makers to produce in market countries instead of exporting from Japan. • Mid 80s & 90s: a sharp yen appreciation and opening of China pushed many large Japanese firms abroad, and some of their SME part suppliers also followed. • 2000s-: relocation of production sites due to accelerated integration (WTO, FTAs…) • 2008-: Lehman Shock & harder competition force large firms to go abroad more and procure parts globally. SME suppliers in Japan have lost regular customers. • Now: Long-term production networks in Aichi (Toyota), Suwa (Epson) and other industrial cities are disintegrating. Manufacturing SMEs have to find new customers & markets.

20. Disintegration of Toyota Pyramid (Aichi Prefecture, near Nagoya) • - Accelerated relocation of factories abroad • Global part procurement with QCD (quality-cost-delivery); no longer committed to buy from Toyota City or former suppliers • Toyota says it will “maintain domestic production of at least 3 million cars” (incl. Aichi, Tohoku, Kyushu) Final car assembler Toyota First-tier suppliers Denso, Aisin etc. Second-tier suppliers • Numerous SMEs: • Previously regular & captured suppliers to Toyota • High technology and QCD, but no other capabilities • Toyota no longer promises orders in Japan or abroad. Third-tier Parts & components 4th- tier

21. Japanese Manufacturing SMEs:Features and Issues • Japanese SMEs have high technology and skills, but other capabilities (strategy, marketing, IT, networking, English..) are lacking—unlike Taiwanese or German top SMEs. • Many SMEs are considering to invest abroad for survival: popular destinations are Thailand, Vietnam & Indonesia. • From 2010, METI began to promote SMEs’ outward FDI. National & regional support networks have been created. Local govt’s, JICA, JETRO, HIDA, SMRJ, etc. are mobilized. • Our APIR research report (for Osaka/Kansai): • A clear vision for Japan’s future monozukuri is needed • Classify SMEs: not all SMEs need to go abroad for survival or expansion • FDI should be a means to equip Japanese SMEs with all-round capabilities as well as to enhance host-country industries • Government can support outgoing SMEs through information, matching and negotiation/cooperation with host countries • The risk of “hollowing-out”?—more data & discussion needed

22. ASEAN and Japanese SMEs • Many Southeast Asian countries want to invite Japanese manufacturing SMEs (Thailand, Indonesia, Malaysia, Vietnam…) • The Abe government also supports SMEs’ export & FDI (in addition to TPP/FTAs, infrastructure export, “Cool Japan”). • Our APIR research: • Pick a few countries (Thailand & Vietnam) and help them improve industrial capabilities and learn Japan’s core skills and technology with intensive bilateral cooperation. • Japanese monozukuri (manufacturing) should be globalized—it should also be practiced and developed outside Japan and by non-Japanese people (Japan faces aging and lack of technology inheritors).