Japan’s new-found allure

It’s time to get on board as the country’s economic engine is pulling strongly again

Japan is back. Canada’s largest export market in Asia is experiencing the second longest economic expansion in its modern history. By the end of April, Japan’s recovery equalled the 51-month long “bubble” economy of the late 1980s and was heading toward matching the Izanagi boom of 1965-1970, its longest expansion since World War II. While the annual growth rates may not be high (the rate since 2002 of 1.7% is well short of the 5% annual GDP growth during the bubble years), the current performance underscores a simple but crucial point: Japan has turned its huge economy around. Businesses that overlook this transformation may do so to their loss.

The innovative forefront

Japan’s economic outlook has improved steadily over the past two years. The gradual public and private restructuring of the last decade is paying dividends. GDP growth was 2.7% for 2005 and is predicted to be over 3% for 2006 —- about the same as for Canada.

Deflation appears to be ending, personal spending has risen for the last four quarters and capital spending for almost two years. Unemployment is down to 4.1%, wages have begun rising at large corporations and hiring of new graduates is expected to rise 20% or more for the third straight year. Household financial assets have hit a record ¥1.5 quadrillion (thousand trillion, equivalent to CDN$14.5 trillion) and the earnings growth of Japanese firms is expected to expand for a fifth straight year. All signs are that current growth is sustainable and quite real.

While there is so much attention being paid to China’s emergence as an economic force, Canadian business shouldn’t overlook Japan’s dominant commercial role throughout Asia. The country’s massive foreign direct investment and its leading technologies are at the centre of East Asian production, sales and distribution networks. They are an important engine driving China’s economic surge. Over the past two decades, Japanese companies have moved much of their basic manufacturing overseas. To protect their intellectual property, however, they have maintained the production of the most advanced models at home. Japanese companies also control — often discreetly, to minimize negative reactions — many companies around Asia that are part of the production cycle of Japanese products. So while a substantial portion of Japanese manufacturing has been outsourced, the high-value design, engineering and decision-making activities remain concentrated in Japan.

Japan remains at the forefront globally in such high technology sectors as bioscience, energy engineering, certain areas of nano and environmental technologies and is making great strides in aerospace, fuel cell technology and solar cells. It leads the world in electronic games and animation, accounting for close to 30% of the market for animation. It is the world’s top producer and consumer of both industrial and personal robots and has made huge investments in the commercialization of scientific innovation.

A responsive market

Between 1996 and 2005, the Japanese government invested about CDN$395 billion in its efforts to build a knowledge-based economy. The nation’s research and development-to-GDP ratio has been at or above 3.3% since 2003, substantially ahead of other industrialized nations. Its third Science & Technology Basic Plan, launched in 2006, has a budget of approximately CDN$200 billion and focuses on knowledge translation and commercialization. This investment and a series of reforms to encourage university-industry cooperation are paying off. In 2005, according to the scientific journal Nature, Japan easily surpassed the United States in the total number of patents filed.

Canada is currently underrepresented in the large, complex and innovative Japanese market. Canadian companies sell about CDN$1 billion a month of products and services to the Japanese market but could be doing much more, according to Canadian Ambassador to Japan, Joseph Caron. Recent changes in the Japanese economy have provided additional opportunities for international companies — both to sell products and services and as a source of commercial and product ideas. The Japanese government has identified a number of sectors expected to record high growth, including information technology (IT), communications and medical care and welfare. In the CDN$1.4 trillion IT arena, Japan offers one of the world’s most active, creative and responsive markets, particularly in mobile telephony, the internet and commercial applications of IT.

The “commerce of aging” is another vibrant sector in a society that is aging faster than any other. It encompasses everything from home health monitoring systems to food (the Japan Babyfood Association is now targeting seniors), to tourism to exercise equipment, clothing and a wide range of other products and services for the elderly. Regulatory changes, simplified new product approvals and a new long-term care insurance system have created new opportunities for foreign and domestic companies in the field. Japanese concern about healthy living has spurred increased interest in healthy foods (such as organic products), recreational and lifestyle services, beauty products and related items.

All of the Japanese recovery has come during the prime ministership of Junichiro Koizumi — although much of the groundwork of reform was laid down before he came to power. Still, he will likely be seen in history as a reforming leader who led Japan out of stagnation. With his planned departure in September, an element of political uncertainty will inevitably enter Japan’s economic outlook. However, it seems unlikely that any of his possible successors would do anything to derail the country’s impressive recovery.

Reprinted from Asia Pacific Bulletin, a weekly commentary produced by the Asia Pacific Foundation of Canada, an independent think-tank on Canada’s relations with Asia. Other copies of Asia Pacific Bulletin can be found at www.asiapacificbusiness.ca/apbn/bulletin.cfm.

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