History Repeats Itself in Japan
By William Pesek Jr.
Bloomberg News
Monday, March 21, 2005Japan has a unique talent for killing economic recoveries just as they get going. The latest example came last week, when the governing party scrapped plans to make acquisitions easier for overseas companies. The reason: It wants to give companies more time to adopt takeover defenses.
In that case, why even consider the reforms? If you are giving already change-resistant executives time to polish up on the art of "poison pills" to circumvent new reforms, why bother? Regardless, one of Japan's best hopes of prolonging the current recovery has now been delayed by at least a year.
"The news is quite disheartening," says Richard Jerram, chief economist at Macquarie Securities in Tokyo.
It doesn't take much to recall episodes where Japan created fresh economic headwinds. In 2001, it tightened fiscal policy, worsening a decline. In 2000, the Bank of Japan raised interest rates amid modest growth. And in the late 1990s, politicians increased taxes, scuttling a pick-up in demand.
History is repeating itself at a time when the central bank says Japan is poised for a sustained recovery as exports and production pick up and companies hire more workers. The economy fell briefly into recession last year, but is estimated to have recovered in the three months that ended Dec. 31.
Yet delaying until 2007 changes that allow overseas companies to use stock traded in other nations to pay for takeovers in Japan dashes one of the best hopes for the nation in the long run. A mergers and acquisitions boom is badly needed to unearth hidden value in companies, reduce overcapacity in the economy and trim debt.
Such a trend could help end Japan's six-year-plus bout with deflation. Improved corporate profits could lead to higher wages. Rising incomes could lead to stronger household demand, and, eventually, rising consumer prices.
It's not to be, though. Japan may be the world's second- biggest economy and the year may be 2005, yet the nation still seems remarkably indifferent to attracting overseas investment, an area in which it lags major industrialized nations. In 2003, it received just $6.2 billion compared with $39.9 billion for the United States and $15.5 billion for Britain.
Things seemed to be changing as Prime Minister Junichiro Koizumi stepped up efforts to double overseas direct investment. The plan hit a wall last week. There also are signs that if finally enacted, the overseas investment reforms will be watered down.
The about-face comes as a hostile takeover battle shakes up Japan's business and political worlds. Politicians have watched in horror as Livedoor, an Internet services company, and Fuji Television Network, Japan's biggest broadcaster, battle for control of the Tokyo radio network Nippon Broadcasting System.
While it's a domestic affair, politicians fear local companies will become too vulnerable to foreign influence. The trouble is, there's no time to waste. Japan ranked 132nd in the latest measure of global foreign direct investment by the United Nations Conference on Trade and Development. That puts Japan between Burkina Faso and Bangladesh.
It's one of those facts that has the average Japanese rubbing their eyes, wondering how it's possible. Many Japanese still have trouble fathoming how Moody's Investors Service could give their economy a lower credit rating than Botswana for local-currency debt.
Ditto for Koizumi. In May 2002, when Moody's downgraded Japan to a sixth-ranking A2, on par with Kuwait and one level below Botswana, Koizumi seemed less outraged by the rating than by the countries with whom it was being shared.
"For Japan's rating to be lower than countries in Africa to which it provides foreign aid - can that really be?" he complained, forgetting that Japan is the world's most indebted nation. Its debt load is approaching 150 percent of gross domestic product.
Maybe being ranked below an African economy in yet another category will be the wakeup call that politicians here need. Japanese leaders are likely to require a considerable shock before they give foreigners -and, by extension, their capital - greater access to local companies.
Aberrations do occur. One was Sony Corp.'s recent decision to name a U.S. citizen, Howard Stringer, as chairman and chief executive. The Japanese Ministry of Finance also may add Calyon Securities, a unit of France's biggest bank, to a list of 26 dealers required to bid for government bonds under a plan to ensure global demand.
Yet conventional wisdom is that extensive foreign participation would be too disruptive to Japan's socioeconomic structure. The fear, Jerram says, is that "inflows of foreign firms that bring managerial accountability, job losses and less intra-industry collusion could imply significant change to the status quo."
That would be bad news for the bureaucrats and business people with an interest in avoiding change. It would be great news for Japanese citizens hoping for a more vibrant future - and investors betting that the economy's revival will continue. Sadly, the politicians are holding all the cards.