The Journal The Authority on Global Business in Japan


April 2014
Capitalism Is Coming to Japan
By Jesper Koll

Yes, I continue to be an unwavering Japan optimist but, no, my optimism is not based on Abenomics alone. Rather, it is based on several fundamental changes that are now impacting Japan. They all force the same result: capitalism is coming to Japan.

Ask yourself, what has fundamentally changed over the past couple of years? First of all, Japan has turned from a trade-surplus country to a trade-deficit one. Indeed, recently Japan’s entire balance of payments has fallen into a deficit. The implication is basic, but hardcore economics: Japan has become an importer of capital and now relies on global savings to finance the domestic standard of living.

Naysayers suggest the current account deficit is likely to be a temporary phenomenon, supposedly forced by the shutdown of all nuclear reactors and the resulting surge in fossil fuel and energy imports. The facts tell a different story: over the past four years the total drop in the current account came to ¥16 trillion. Of this, only ¥1.5 trillion can be accounted for by the rise in energy import volumes.

In contrast, the real forces pulling Japan from surplus to deficit are a surge in product imports and very weak exports. On the import side, it is particularly a surge of intermediate and final products coming from Asia. Here, standout sectors are consumer electronics, white goods, and textiles, as well as IT-related and food products. About half of the rise in imports may be traced back to new offshore factories owned and operated by Japan Inc.

While imports are surging, exports are very weak. Despite the global economic recovery and the weaker yen, export volumes have been stagnant across both capital and consumer goods. Here, rising offshore production probably explains most of the cut in the elasticity to global growth and the currency.

Make no mistake, the fall from surplus to deficit in Japan’s external accounts is the logical consequence of a long-running structural shift in Japanese industry toward global production.

Large and stock market-listed companies have more than half their productive capacity outside Japan. These offshore assets generated slightly more than two-thirds of all corporate profits last year (for listed industrial companies). And when something is profitable, it won’t be shut down or brought back home, no matter how much team Abe deregulates or liberalizes the economy.

Why is this good news for capitalism? When imports exceed exports, the economy does not generate enough savings at home to fund its standard of living. Yes, Japan has become dependent on global savings and global capital.

Again, please look at the facts: non-Japanese ownership of the government debt has risen from around 5 percent to 9 percent over the past two years, and non-Japanese ownership of Japanese equities recently rose from around 25 percent to almost 35 percent.

Plainly put, the global savers are now the marginal buyers and investors in the two most important capital markets in Japan—debt and equities.

The implication is straightforward. Japan Inc. will have to sweat her assets harder to continue attracting global capital and global savings. Labor market reform, surging M&As, plant closures, increased spending on IT, better corporate governance, rising participation by the more productive part of the workforce (women) is all happening because of a powerful fundamental economic force. The pressure to perform is on, because without keeping global capital happy and attracted, Japan’s standard of living is now set to fall.



Jesper Koll is a managing director and head of research at J.P. Morgan Securities LLC.