Title: "The U.S. Perspective on Japan: Financial Market Deregulation, Restructuring and the Future of the Japanese Economy"
1. Japan Passing Trend
I will talk about the media's perception of Japan in the U.S., especially in New York, that is the center of the U.S. media. It has been quite amazing to see the change in attitude towards Japan over the past three years, since I started working in New York at the end of 1999. Back then, Japan still had a tremendous amount of prestige, even though it was still mired in a "recession." Today Japan is considered not only having potentially catastrophic financial difficulties, but is also perceived to be on the brink of economic collapse. This perspective has actually been taken seriously in the U.S. by a number of influential people. This perspective has lead to the so-called "Japan passing" trend to be replaced by a "Japan passing out" one.
Three years ago, the problem was thought to be with the political system and how the political system could be somehow magically reformed and lead to a change the financial system. Commentators thought that several "reform" minded prime ministers would be able to do this with the support of bureaucrats. Perhaps the media has finally learned that change will take place based on new thinking by the ruling party, a party which never actually left office or lost power. The agenda was to "hold out" for as long as it took for the markets to recover. The recovery of the real economy would lead to a revival and the stabilization of the financial system. Western reporters truly believe this would happen and reported on it diligently. Of course, the growing presence of foreign financial firms also contributed to the reporting, since it was crucial to reform the Japanese economy at least in the minds of the investors. After years of false hopes, the perspective is very different.
Commentators feel that there is nothing that can help Japan at this point and are waiting for some type of collapse. This sounds so familiar, eerily similar to the same chants heard of in the U.S. at the beginning of the decade. Conveniently forgetting about the laws of business cycles, negativity on Japan has turned into good sport and infused with a sense of fatalism on the Western press' part. Why has that happened? Is this "Japantina" talk really representative of what is going on in Japan? Failure of numerous stimulus packages, the failure of the emergence of a true political "leader" in the western sense and the persistent and stubbornness of Japanese policy makers can be blamed for the current malaise, though not nearly as bad as it is portrayed. Many reporters in major news groups, whom I have talked to, are convinced that there is something really wrong and they will continue to write about this. However, it is expected that they will soon realize that they are talking about the world's second largest economy with the world's largest pool of savings which also happens to be the world's largest creditor nation. They will look at real numbers as opposed to short-term gains or losses in percentage terms and will also be fair in the reporting on, yes, the United States.
2. Clear Message Needed
It is very important to get across a clear message to the outside world of what is actually going on in Japan. All to often, due to Japanese culture, this does not occur. Also, culture has led to continuous promises of change, though there may have been stronger feelings of doubt in regard to a number of measures that were planned or initiated but never delivered the expected results. If things are not changing, or expectations are low that certain reforms, for example, will not or cannot be carried out, then report that and clearly provide the reasoning behind the conclusion. If this is done and things turn out better than planned, then you have a "positive surprise", which is always rewarded by the market. In terms of investing in Japan, many sophisticated investors read stories in the press which helps to form their macro view. This macro view helps to shape their investment selection strategies for their portfolio and how much money they allocate to Japan. Now, foreign investors account for around 20 percent of Japan's stock market, and the figure may go up to at least a third, probably in the next couple of years. I think it is a good thing for Japan, because I think that outside influence is necessary to help stabilize and restructure the financial system and the corporate governance system. While I am very positive on Japan, I feel that the lack of ability to provide the real picture in Japan by the Japanese and foreign reporters has led to a lot of misunderstandings overseas. Today, it is also leading to missed opportunities for foreigners. In short, you have to give the bottom line in terms of news and local opinions, especially expert Japanese opinions and those of foreign who have spent a considerable amount of time in Japan and are fluent in the language. If the situation is bad, report it. If it's good, report it. The worst thing to do is build up expectations that cannot be fulfilled in the near future, since the American time line is much shorter than the Japanese one. Americans expect it to happen next month, while the Japanese may feel that it is only the start of a long process of events leading to the desired goal. Cultural differences aside, miscommunication can cost Japan dearly. Those same stories and the past false hopes of foreign investors waiting for the world's largest restructuring story to unfold has led the Japan premium to increase significantly and this will play a huge role in the competitive viability of Japanese companies in the future, as well as the solvency of the government itself.
3. Japan's Financial Crisis
Is there really a financial crisis in Japan? That is a question that is often asked. I do not believe there is a financial crisis at the moment, and certainly not among the Japanese. There is concern, but it does not register high on the crisis meter. I think that Japan is wealthy enough to last for several more years in this state. I do believe that the end for a number of companies is coming very soon, and I see a kind of crisis coming after a few more months, probably in May or June. It simply is impossible for the government to bail out every company, and they are going to have to be selective as to which company they support. That is most likely exactly what they will do. I think the Japanese process will slow down the crisis situation, as has been the case for the last ten years. I don't think this is positive news for investors, but it certainly doesn't justify more Japantina stories. Each and every bailout by the government is a negative sign for foreign investors. Bankruptcies are a positive sign that something is changing. These perceptions affect news stories that will in turn affect credit ratings not only for companies, but also for the country as a whole. It may become costlier for the Japanese government and private companies to raise money as their credit ratings continue to deteriorate. Reporting on impending hardships is actually good news to the financial markets, something that apparently has not been understood in Japan. I expect, however, that the Japanese media and government is actually prepping the populace for the inevitable and this, in turn, will mean that the financial markets could expect a positive surprise in the near future. The sooner this prepping is reported on, especially in New York, the better. Japan does not need positive PR, since that is one of the reasons why there are so many negative news stories at the moment. It needs insightful analysis of not only why things will get worse but why it is taking so long for the Japanese to correct the problems. This should be paired with reminders of Japan's position in the world economy, a position which will not be relinquished for a long time.
4. Japan's Main Bank System
It is impossible for the main bank system to continue in its traditional form. I believe this is slowly being understood in Japan, even with the new rules permitting holding companies which have led to a number of consolidations. What is going to replace it is the most important question now facing the economy in my mind. You will see a more competitive market for capital and more private equity transactions. You will see more foreign investors and more highly qualified Japanese with transaction experience (years from now), who would help facilitate things. The Japanese banking culture will surely change. It is clear the main bank system is fairly bureaucratic with a much lower skill level and slower reaction speed that those in New York, and it is impossible for the main bank system to survive in a technology-driven sophisticated global economy. They must change their culture. It would be wise not to protect every Japanese business practice under the cloak of "cultural differences" which must be maintained. If no changes are made, qualified foreign specialists will not work in the existing environment. I expect Japanese banks to make the right choices after a while. Those which can effectively integrate domestic and foreign staff, creating a globally professional environment, will do the best in the future. Banks, securities houses and other traditionally prestigious companies in Japan are slowly learning that being number one in Japan is meaningless if they are number forty-nine in the world rankings.
5. Geopolitics
Relationships among Japan, China and the U.S. are important. One trend that I am, that everyone, is seeing is the rise of positive media related to Chinese economic growth. In the meantime, Japan is being ignored. The built up expectations with China will far surpass those people had with Japan. China has been doing a good job promoting itself, with the aide of a large cadre of foreign educated overseas Chinese and also from professionals directly from the mainland. There are a lot of Chinese students in the U.S. that work in the financial sector with Americans, many more than the Japanese. This is certainly cultural. Money may go to China rather than to Japan in the future as a result. If, however, you look at the real numbers, the Chinese economy will take many years before it comes close to Japan. The same goes for a number of advanced technologies. If one plots the growth of foreign direct investment and GDP growth in China, he may quickly come to the conclusion that China is far from developing a self-sufficient, self-sustaining economy to rival the U.S. and Japan. If you add the fact that the rule of law in China is still, well, somewhat under-developed, then its easier to put things in perspective. China is essentially an emerging market, and Japan, the U.S. and other countries will help build infrastructure and expertise in that country. It will be up to the Chinese to build upon that and maintain economic and political stability. It will be a very difficult task. As a result, I maintain a "buy" on "the next dynasty" in China.
Title: "Japan as Reported in the U.S."
1. Importance vs. Change
I would first like to explain about our overall position in reporting Japan and then touch on my own reporting in our newspaper. As often reported in Japanese newspapers, there appears to be declining interest in Japan in the U.S., and in fact it is not easy to post news items on Japan in our newspaper except special features once in a while. But in my view this does not necessarily mean that interest in Japan has been declining in recent years. Of course, Japan matters, but there is not enough change in Japan to be reported in newspapers. This is a matter of importance versus change. If there is a clear message from Japan that would interest readers, we woudl certainly cover it. There are fewer news items on Japan because there is not much change in Japan.
2. China vs. Japan
One more factor is China, of course. There is an increasing number of news items on China. Our office is in charge not only of Japan, but also of entire North East Asia, so there is competition in our coverage among various countries over a limited space in the newspaper. Although there are quite a few articles on Japan in the past year, it is mainly due to Japan's recession and that is not good news.
3. Editorial vs. News Reporting
We are writing economic news on Japan, and some say our news reporting on the Japanese economy is too severe. But since ours is not an opinion paper, we are not intentionally severe on Japan but rather that is a reflection of the Japanese opinion on Japan itself. One more thing is that our news reporting from Japan is completely separate from our headquarters' editorial activity, and I do not know whether our newspaper editorial is particularly critical of Japan.
4. Long List vs. Pointed News
How do we see Japan's economic measures? We don't post a "long list" of policy measures in our newspaper. The point is whether it leads to a sustainable recovery of Japan by reducing non-performing loans in an essential way. It is not just reducing non-performing loans in the hands of banks, but rather disposing of those loans in the market. By using this criterion, we evaluate each policy measure to decide whether we take it up or not. We are trying to respond to our readers' needs in the U.S. in general and in Washington DC in particular.
5. Half Full or Half Empty
Regarding the Koizumi reform as a whole, I think that some progress has been made, but there is a gap between the speed of progress and general perceptions overseas. It is like a cup half full or half empty. Japan tends to be viewed as half empty from overseas. Whenever the government announces policy measures, I ask government officials how different those measures are compared to previous ones in terms of real effects, and do not obtain immediate answers. In that case it is very difficult to report it. I would like to interview as many people as possible to get answers for my own reporting.
6. Negative News vs. Positive News
There is so much for negative news about Japanese companies in our news reporting. There are potentially a lot of good stories out of Japan..such as a thirty something person becoming a president of a major company in Japan. In news reporting, we look for people who are representative of what's going on in Japan. The tone of news on Japan will depend on them.
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