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Japan, Japan, Japan – so many people love you. I was pleasantly surprised that a good number of people, both Japanese and non-Japanese, watched our previous vlog on the Japanese economy. So, here’s a sequel.
Welcome to Art and Finance. We want to make understanding Business, Economics, and Finance accessible to everybody.
People from all over the world watched our previous video on the Japanese economy. Of course this includes people from the US and Japan and other Asia-Pacific countries, but also from places like Nepal, Bangladesh and Colombia. I think that’s fantastic, but I wonder why? One reason might be the global popularity of Japanese culture.
What is it about Japan that’s so alluring to non-Japanese? And, given the current economic malaise we described previously, is there a way for Japan to use its cultural capital to its economic advantage? In this video, we’ll examine this issue by looking at Japan’s corporate sector.
For the newcomers watching, it might help to watch our first video on the Japanese economy, or, if the terms I’m using sound like an alien language to you, check out the Quick Intro to Finance section of our website. I’ve pasted the links below. You can also find the link to this video’s script and sources.
And, as usual, we’re just going over the basics of the Japanese economy. I’m an equities research analyst, not an economist, so the following is the framework I would use when analyzing Japanese investments. Just the same, whether or not you’re in the Finance industry, this vlog post will give you insight into the Japanese economy, and maybe even your own.
Now, let’s take another trip to Tokyo.
One well-known, obvious reason for Japan’s popularity is the popularity of anime and manga, along with Japanese video games and food, among the global youth. People can’t get enough of anime and manga. Why is it so popular?
My own view, shared by others, is that comics and animation in Japan didn’t run up against much censorship in the 20th century, unlike what happened in the US. The result might have been a flourishing of different genres, aimed at different demographics, in these media in Japan, while US content had been largely relegated to childrens’ and teens’ entertainment. Although, to be fair, some of that content has crossed over in recent years.
I also share the view of Scott McCloud, who described unique visual techniques that were developed in Japan, such as use of speed lines, close-ups, and detailed backgrounds contrasting with simple, but expressive human characters.
Speaking of which, if you’re in Tokyo and into drawing manga and Japanese art in general, you should stop by Sekkaido, one of the largest art-supply stores in the city. They even have English-speaking staff! I passed by to buy my own art materials.
In a way, you could say that what might have been largely missing in US was a combination of the dynamic style of youth content, with adult themes. This combination was something unique that anime and manga provided.
I’m also partial to Japan’s artistic sensibilities. Here are some artbooks I bought this time around. This one is a fairy tale illustrated by Haruhiko Mikimoto, the character designer of Macross.
This one’s a book on wagashi, or Japanese deserts. Look at the color scheme in both books. I find Japan’s sense of color so unique. I wonder if it’s the influence of Zen Buddhism?
Anyway, given anime and manga’s global popularity, you’d think that Japan Inc. would capitalize and make a profit on this, helping Japan’s economy. But critics have charged that Japanese corporations haven’t been making a concerted effort to do so. Why not? Before we answer that, let’s eat some Japanese food. This is a vlog, after all.
This time around I ate in the following:
1. Shabu shabu (or hotpot) at Nabezo.
2. Sushi Zanmai. This is a chain of restaurants, found around Tokyo and Japan, that serves sushi 24 hours a day, 365 days a year. Yes, I know, that’s amazing.
3. Tempura (or batter-fried food) at Tenya, a popular tempura restaurant chain.
4. The Gundam Café in Akihabara.
5. This is Croquant Chou Zaku Zaku, a cream puff fast food place in Takeshita dori – it was trendy back in December, I wonder about now. From Hokkaido,apparently.
6. Matcha (or green tea) fondue at Kagurazaka Saryo.
I also want to highlight Birdland, a Michelin-starred restaurant that specializes in yakitori, or chicken skewers, among other things.
This tofu was served like buffalo mozzarella; you couldn’t taste the difference!
By the way, Birdland is right next to Sukiyabashi Jiro, you know, the sushi restaurant whose chef was profiled in the documentary, Jiro Dreams of Sushi. True story, I saw him and his elder son stepping out of their restaurant to see off their last customer for the night. Immediately, someone ran up from behind and put up a no-photo sign! I hope drawings don’t count…
Aside from passing by the usual places, this time I went to the Nezu Museum – a museum dedicated to pre-modern Japanese and East Asian art. Not only does the museum feature fantastic architecture and its own garden, but the area surrounding it has some amazing low-rise buildings.
Given all this fantastic stuff, it seems like Tokyo, and Japan as a whole, is a great place to visit. You wouldn’t be alone in this assumption. Last year, tourists flocked in droves to Japan, driven by a combination of the weaker Japanese yen and lower visa requirements, due to Shinzo Abe’s Abenomics program. Remember, one of Abenomics’ arrows is monetary easing, which involves low interest rates and the printing of money. As we know, all other things equal, more local currency makes it cheaper to buy with foreign currency.
This part of the program was so successful, in fact, that tourists reached a record 19.7 million visitors in 2015, just shy of the government’s 2020 goal of 20 million! Why do you think I visited again? The biggest group of visitors were from China at nearly 5 million, and they were also the biggest spenders. Locals have used the term “bakugai” (roughly translated as “explosive buying”) to describe Chinese spending habits in Japan. It’s also worth noting that the fifth largest demographic of visitors were Americans, passing the one-million visitor mark for the first time.
The government’s since raised the tourist goal to 30 million. Given that Japan’s tourism industry is taking off, its unique level of craftsmanship, and a competitive yen that could boost exports, it shouldn’t be too hard now to fix Japan’s economy – right?
It’s a bit more complicated and difficult than that. One reason is because of Japan’s big businesses. Let’s find out why.
The rationale behind Abenomics’ monetary easing is that the BOJ is trying to achieve what’s been labeled a “virtuous cycle”. Remember that Japan earns a lot of money from exports. A weaker yen, due to monetary easing, means that its exports are more competitive in the global marketplace. Theoretically, Japan’s manufacturers and exporters earn more because they sell more stuff and in turn, should pay their employees a higher wage. With a higher wage, Japanese workers can buy more stuff, stimulating the economy and help address longstanding issues, such as helping reduce the debt burden via higher tax revenues. Theoretically.
As you might’ve guessed by the tone of my voice, that hasn’t been the case so far. Japanese companies have been hoarding the cash they’ve earned, and when they do spend, it’s for investments abroad. Why?
Is Japan Inc. run by corporate fat cats who won’t pay a decent salary to their employees? Well, that might be one reason, depending on who you ask, but there’s a host of others.
The first reason is that corporate Japan doesn’t see any strong investment opportunities in Japan. After all, why would you invest large amounts of money in a developed economy with aging demographics and consumers who aren’t spending a whole lot?
And here we arrive at a cyclical argument. To get Japanese corporations to use their money in the domestic market, you need a growing economy where consumers are putting their money to use in spending and investments. BUT, to get people to spend more, you have to increase wages. It’s looking more like a vicious cycle, rather than a virtuous one.
Another, more complicated factor is the issue of entrepreneurship. Entrepreneurship is important because it increases productivity, which, remember, is often defined as GDP produced per hour of work. Productivity is one proxy for measuring a country’s standard of living, and can also be an input to a growing economy.
The problem is that the corporate environment in Japan isn’t conducive to entrepreneurship. The government support of established Japanese corporations, which we previously listed as a factor to Japan’s success during its high-growth phase, is now an impediment to entrepreneurship. After all, how would a hopeful entrepreneur disrupt an existing industry if the government won’t allow incumbents to go out of business? In another instance of Japan’s economy’s strength becoming a weakness, the relatively weak power of labor unions, which I cited as a factor in Japan’s post-war success, has diminished workers’ ability to negotiate for higher pay and potentially spend more.
The issue of government support of big business goes even deeper. For example, critics have bemoaned the scant respect corporate Japan has historically paid to corporate governance and shareholder rights. What that means in plain English is this:
When you buy shares, also known as stock, in a company, you become an owner. As an owner, you have voting rights in the company. Theoretically, shareholders are focused on a return on investment, which generally means that they make sure that policies are in place and followed that ensure that the company makes proper business decisions to maximize profit. Furthermore, on a broader level and all other things equal, companies working to maximize profit compete and innovate, benefitting society as a whole. Shareholder goals such as profit maximization is an issue that corporate governance, which is basically a system of rules that a company abides by, is supposed to address.
Historically, corporate Japan has had weak corporate governance. Few corporate board members, for example, are from outside a given company. The result has been fewer incentives to focus on profitability for shareholders. Instead, big businesses have focused on expanding market share, meaning that they sell more of a given product in a given market, rather than profitability, even if they are losing money. They can do so because of an implicit guarantee by the government to bail them out.
This model worked in the postwar period, but it’s tougher now, with more competition from other countries. In some cases, Japanese corporations have been slow to exit unprofitable businesses, as in the case of Sharp Electronics, which was recently bought, after much hand-wringing, by the Taiwanese company Foxconn. (the guys that manufacture iPhones).
The Sharp case brings up another issue, which is that Japan has traditionally been unfriendly to foreign direct investment, which is, at least theoretically, looking to maximize profit. The Foxconn takeover of Sharp presents a victory for the Abe administration given that Abenomics’ third arrow, structural change, includes corporate reform.
This tendency to just go for market share over profitability might be a reason why critics argue that corporate Japan doesn’t have a “global mindset”, which means, in my view, actively scaling its innovations and new products and services for the global market. More on this in a bit.
Anyway, changing a corporate system that has been the backbone of the Japanese economy for decades doesn’t happen overnight. The structure goes deeper than just shareholder rights.
Despite being founded by entrepreneurs, corporate Japan now tends to discourage innovation and risk-taking. Maybe you’ve heard of the Japanese “salaryman”, and sometimes even “salarywoman”. These are often employees of large corporations that are hired after graduation from university. Once hired, they are trained intensively over years in various departments of the corporation. Layoffs are rare, and pay is seniority-based, meaning younger workers are underpaid, while older workers can be overpaid – encouraging company loyalty, but also conformity. All of these schemes have the net effect of making it difficult to transfer to another company, much less start your own. By the way, it’s worth noting that some of the most vocal critics of this system are the Japanese themselves.
And despite the plethora of inventions and innovations, not to mention world-renown craftsmanship, that come from Japan, inventors and innovators are often not significantly rewarded on an individual basis. For example, the guy who invented LED lights – yes, same the lights that are used in your smartphone, among so many other things – only received a bonus of $200, on a salary of $100,000.
Given the culture of corporate Japan, it’s no wonder that entrepreneurialism and global thinking has been stymied. It also doesn’t help that the stagnant economy further disincentives individuals from risk-taking.
A popular example is the anime industry. Ideally, anime (and also, I would argue, sushi) should be the stepping stone for global consumers to buy more from Japan. But critics charge that the government hasn’t done nearly enough to promote anime. As one oped in the Financial Times puts it, there are fans abroad waiting to consume more and more anime, manga, and related merchandise. What consumers get abroad is only a fraction of what’s available in Japan.
Here’s another Japanese product that could actually gain more traction with the global public – advanced toilets. I know it sounds silly, but look at this. This is the Toto toilet museum in Narita airport. How cool is this? Those are computer images by the way, not actual people.
The Abe administration has taken steps, especially with its moves toward better corporate governance, to reform the corporate sector. Corporate Japan has had recent successes abroad as well, such as selling its train technology to India. These are great steps forward. But of course, change is often difficult and takes time.
And even then, if such reforms were to happen, they might create new problems. One could argue, for example, that allowing for competition, profit maximization, and fewer government bailouts in the US has led to larger inequalities and, potentially, current social issues.
At the end of the day, I’m not sure anyone has completely figured out how a developed economy is supposed to work, whether it’s Japan, the US, or other developed countries. In Japan, it’s up to the Abe administration, which has recently won re-election, despite the public’s dismal view toward Abenomics, to figure out.
And that concludes our video on Japan’s corporate sector. Maybe in the future, we’ll touch on other areas of the Japanese economy. Til then, hopefully this video had you thinking, not just about Japan, but your own economy as well. (Fin.)
I have an important announcement to make: after over a year and a half of doing Art and Finance full time, I have decided to make it a hobby going forward – meaning that it’s something I’ll work on when I have free time over the weekend. Right now at least, the economics of full-time are difficult, since, on the one hand, angel investors require on average a 20x return, and, on the other, Youtube takes a 45% cut on ad and sponsorship revenue (to be fair though, Youtube is reportedly just barely breaking even). Sigh, such is the problem with the media industry these days.
As result, I can’t do too many of the vlogs anymore, and I’ll probably limit them to travel videos, like the one you just watched. On the bright side, Ilusion will continue, and I’m launching a short-form comic, with the same characters, for complete beginners who want to know more about Business, Economics, and Finance. Thank you all for your support, and see you next time!! Over 150 Youtube subscribers! Awesome!
Ramon Rodrigo Cuenca, CFA
Art and Finance