The Rebirth of Japan Inc.

Considering that last quarter’s GDP figures were a minus .3 percent, the first negative reporting in the last five quarters, there is a surprising amount or optimism about the Japanese economy these days. The stock market is rebounding, and economists are looking past the negative last quarter toward gradual but sustained growth.

This is not just wishful thinking. Japan’s corporations are regaining much of the self confidence and footing that they lost during the downturn, the result of many adjustments and strategic moves that Japanese businesses have made to expand to emerging mrkets. Japan Inc. is going global again.

One might think that Japan has always been global. Are not the skylines of cities from Beijing to Bangkok festooned with electronic advertisements for such familiar giants as Panasonic, Sony or Toyota? Is Japan not an exporting powerhouse now and always has been?

Well, yes and no.

For one thing, Japan is not the exporting powerhouse of popular imagination. About 13 percent of the country’s GDP is earned from exports, not that much higher than the 11 percent earned by the United States, which is the least export-dependent developed country. That compares with 50 percent earned by South Korea and 41 percent for Germany.

It is true, of course, that many Japanese brands are household words in every corner of the globe. But many important sectors of Japan’s industry have been content to limit themselves to the domestic market, and many of the global brands have moved so much of their production abroad that the products are Japanese in name only.

The trend was best illustrated by the recent agreement between Nippon Steel Corp. and Sumitomo Metal to enter into merger talks. Should the merger be completed, it would create the world’s second-largest steel producing conglomerate just after ArcelorMittal of Luxembourg.

Nippon Steel, Japan’s largest producer, and Sumitomo are currently rank 6th and 23rd respectively in the world steel market. The as yet unnamed Nippon-Sumitomo entity would automatically vault over such worldwide power houses as South Korea’s Posco and China’s Hebei Iron and Steel Corp.

The merger of the two steel producers is meant to give them more heft in competing for global infrastructure contracts, especially in emerging markets, and to better compete with the iron ore mining conglomerates, which have had their own mergers. Indeed, the press announcements are dotted with the words “global” and “emerging markets”.

Nippon Steel president Shoji Muneoka said that the merged company would “aim to globalize at a faster speed than either Nippon Steel or Sumitomo metal could have done on its own.” Or as Prime Minister Naoto Kan said in the context of another such alliance last year: “Once again we have to reinvent Japan Inc.”

Even though the new combination will control about 40 percent of the Japanese steel market, the merger is expected to easily get the green light from the Japan Fair Trade Commission, which polices potential monopolies. In recent years, the trade commission has been more flexible in approving such mergers, even when they appear to restrain trade locally. It is more inclined to factor global market share rather than just domestic.

Like the trade commission the government-run Japan Bank of International Cooperation (JBIC) is going global too. Former premier Junichiro Koizumi had merged JBIC with other government financial institutions concerned with domestic projects. The new Democratic Party of Japan government wants to turn it back into an independent bank with a focus on exports.

The bank is already mulling whether to lend billions of dollars to help finance a nuclear power plant project in Texas. Two private corporations, Toshiba and the Tokyo Electric Power Co. (Tepco) have also invested heavily in the plant.

Faced with declining demand for electricity in Japan, Tepco, which supplies electricity to the capital, is becoming increasingly dependent on overseas projects, Its investment in the South Texas Project was the first time that a Japanese utility, as opposed to a builder, had invested in an overseas nuclear power plant project

Tepco’s president, Masataka Shimizu, in early fall of last year outlined a corporate plan to spend as much as one trillion yen ($10 billion) over the next ten years to expand into overseas markets, including in addition to nuclear power plants, new thermal power and other “new energy” sources in developing countries.

Japan’s major nuclear power vendors, Toshiba, Mitsubishi Heavy Industries and Hitachi all have international alliances of different degrees (Toshiba owns Westinghouse, for example), but they found that not even that is enough to compete globally when South Korea shocked the industry by snatching the contract to build five large nuclear power plants in Dubai.

The reaction was to form a new entity called the Japan International Nuclear Development Corp., incorporated in October, which is made up of the three major nuclear power vendors and ten utilities in Japan to gain added clout in competing for foreign nuclear plant projects.

Recognizing that they are often competing as much with foreign governments as much as with foreign corporations, (the Russians secured two new plant projects in Vietnam by promising to supply that country with submarines) the government has been attempting to hawk its famous bullet-trains round to secure orders.

Meanwhile, strong overseas demand, especially in emerging markets such as Central and South America has boosted the bottom lines of all seven Japanese automobile makers, helping to offset shrinking domestic sales and what Toyota hopes is a temporary downturn for its cars in North America.

The higher sales have also helped the automakers ride out the effects of the strengthening yen. In the past when the yen rose above 100, the newspapers were full of pictures of grim-faced currency traders and columns filled with doom. Last August it rose to nearly 80 to the dollar, yet there were hardly any remarks, and the stock market scarcely skipped a beat.

Toyota is even hoping that North American sales will begin to pickup in the new fiscal year, now that the memory of massive recalls that began in the fall of 2009 are fading. Toyota was buoyed when on February 8 the US government declared that no evidence pointed toward engine electronics playing a part in the mysterious acceleration.

In February too, Toyota announced that it was opening a new factory in a rural part of northern Honshu. It was the first assembly plant that the company has built in Japan in 18 years. Incorporating many cost-saving managerial techniques learned over the years, it will produce 150,000cars annually. It is part of the company’s promise to keep at least 40 percent of cr production in Japan proper.



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Shutdown!

If you think that President Barack Obama has trouble with gridlock in Congress, consider the position of Japan’s Prime Minister Naoto Kan. All the elements of gridlock are in place: a divided legislature, an opposition bent on obstruction, falling approval ratings a stagnant economy.

If Kan’s Democratic Party of Japan cannot pass the fiscal 2011 budget and related money bills by March 31, specifically if it cannot pass legislation enabling the government to issue bonds needed to finance the government, Tokyo could be looking at a $400 billion revenue shortfall. Roughly half of the budget is covered through borrowing.

One might wonder how a government with a more than 150-seat majority in the House of Representatives, the lower chamber of Japan’s bicameral parliament, could have trouble getting its way. If Japan were Britain with its weak upper chamber the House of Lords, this wouldn’t be the case.

Unfortunately for Kan, Japan is saddled with a constitution (written by Americans) that gives the House of Councillors, Japan’s upper house, virtually equal powers. It is true that the lower house can pass a budget by itself, but it would be an empty victory. Kan needs upper house concurrence to pass the related money bills, and it is now in opposition control.

The main opposition party, the Liberal Democratic Party (LDP), has apparently settled on a policy of pure obstruction in the hope of forcing Kan to call a general election this spring, a couple years before the current Diet’s electoral term expires in fall of 2013.

“This year’s goal is to drive the Democratic Party of Japan into a snap lower house and to re-establish an LDP –led government,” said the party’s leader, Sadakazu Tanigaki, at a party conference. Consequently, the LDP has also spurned overtures from Kan to enter into discussions for a compromise on the budget.

The premier has spent a lot of time trying to persuade some members to vote on an issue-by-issue basis, but this kind of American-style “nonpartisanship” is basically foreign to Japan, indeed to most parliaments around the world. Parliaments act on the basis of coalitions, not on shifting nonpartisan majorities.

Almost since he took office last June, and especially since his party lost control of the upper house last July, Kan has tried to cultivate expanding the government’s coalition, which now includes only the tiny People’s New Party. There are plenty of partners to choose from. Seven parties hold at least a few seats in the lower house, but looked at more closely there are few choices.

The Buddhist-based Komeito, has rebuffed any attempts to form a coalition. The PNP is already part of the coalition. That leaves only the Communists, who never join coalitions as a matter of policy, and the Social Democratic Party (SDP). At the moment, Kan is concentrating on its former partner the SDP.

Put together the SDP’s seven members and add a couple independents, and Kan just might get the 321 votes, or a two-thirds majority, which under the constitution would allow him to override any defeat in the upper chamber.

That assumes that all 311 DPJ members of parliament vote together. This is not a foregone conclusion, as many hold their seats because of efforts of Kan’s interparty rival Ichiro Ozawa. He was recently indicted for allegedly breaking political fund raising laws, though still a Diet member. He has many supporters, some of whom might vote against the government to protest the way he has been treated.

If Kan fails to put together the votes to pass the budget and associated money bills, he will be under enormous pressure to resign, never mind his party’s huge majority and his own pledge to hang on even if his public approval rating falls to just one percent. In parliamentary democracies, governments that can’t pass their budgets usually do resign.

The main opposition has an incentive to make Kan’s life miserable. Unlike in the U.S., where the Republicans are saddled with Obama for two more years because he has a fixed four-year term, the prime minister can call an election at anytime. Whether a new election will benefit the LDP is a question. It’s true the government is unpopular, but the LDP isn’t any more popular.

Kan may be banking that the opposition’s tactic of opposing everything will cost votes, or at least make them wary of facing the voters anytime soon. Many important issues are bound up in the parliamentary deadlock. The government tax commission has recommended boosting the sales tax to sustain the pension system, cutting the corporate tax to boost the economy and raising the estate tax to raise revenue.

Beyond the immediate and pressing financial issues, the government is eager to turn attention to the country’s faltering agricultural sector in such a way as to neutralize their traditional opposition to allowing Japan joining free trade zones. Japan is falling far behind regional competitors in this arena, especially South Korea.

Virtually all top-level diplomacy has come to a halt. Kan has postponed his planned trip to Washington to meet with Obama (just as well, as he may be a lame duck in a couple months) while a projected visit by Korea’s president Lee Myung-bak keeps getting set back while Kan focuses entirely on passing the budget..

Kan’s need to get the tiny Social Democratic Party back on his side might require him to change his party’ss support for implementing the planned relocation of American bases on Okinawa, which would annoy Washington. The SDP left the governing coalition over this issue.

The next few weeks will test Kan’s skills as a politician and leader to the limit. It is not impossible that he might pull something out of the hat. Party big wig Yoshito Sengoku hinted as much recently when he told people close to him, later reported in the Japanese press, “Late February will see an electrifying development.” He did not elaborate.

A kind of grand coalition with the LDP cannot be ruled out. Kan indeed first made a name for himself as a hard-charging health minister in a previous all-party coalition under the socialist prime minister Tomiichi Murayama, 1994-96. Ironic if he would end his career in another such coalition.

Indonesia's Lessons for the Arabs

A foreign dictator, leader of a large Muslim nation with radical Islamist elements, an ally and client state of the United States despite a horrible record for human rights abuses sitting astride a strategic waterway, critical to the passage of oil tankers. Egypt 2011? No, Indonesia, 1998.

Almost everything one sees unfolding in Cairo day-by-day took place thirteen years ago in Jakarta, capital of Indonesia, as street protests and riots that killed more than 1,000 forced strongman Suharto (like many Indonesians he went by one name) to resign as president after 32 years in power.

Would that the events taking place in Egypt and elsewhere in the Middle East work out as well as they did in Indonesia after the fall of Suharto. Since 1998 Indonesia has become a working democracy, an increasingly important friend of the U.S. an ally in the war on terror and a linchpin in a developing arch of democracies to contain any ambitions of China in Asia.

Of course in 1998 there was less concern that Indonesia was going to turn into an Islamic state. Suharto’s downfall came during a kind of window of more than usual American indifference to Asia’s most populous Muslim nation. The Cold War had ended and Suharto was no longer seen as an unsavory but needed bulwark against Communism’s spread in Asia.

At the same time, it took place well before the attack on America on September, 11, 2001 which overnight propelled fear of Islamic fundamentalism into the forefront of America’s national agenda and foreign policy and military concerns.

The main catalyst for Suharto’s eventual downfall was the Asian Financial Crisis that broke out in 1997. Indonesia was particularly hard hit by the precipitous fall in its currency, resulting in painful adjustments mandated by the International Monetary Fund, rising food and gasoline prices

One of the main lessons from Indonesia’s experience that can apply elsewhere is that democratic reforms don’t always have to come immediately. It is possible to open the system in an orderly fashion. It was only in 2004, six years after Suharto was deposed, that Indonesians were able to choose their president through direct elections.

Unlike Egypt (until recently) Suharto had always filled the post of vice president, so when he did resign, there was a figure, in his veep, B.J. Habbibie, a technocrat who had served as a minister for science and development, who seemed a tolerable replacement, at least temporarily. His two immediate successors were chosen in the old-fashioned way by an electoral college.

But all during this time there was a steady procession of reforms pointing toward more open democracy. The press was freed to report on political developments, more parties were allowed to contest seats in parliament, the army, which previously had a guaranteed block of seats in parliament, was moved totally out of politics.

All of this culminated in the first direct presidential election held in 2004, when 150 million Indonesians went to the polls to elect an army general, Susilo Banbang Yudhoyono, president after defeating the incumbent, the daughter of the country’s founder Sukarno. He was easily re-elected in 2008.

Did the democratization of the world’s largest Muslim state turn Indonesia into an Islamic state or hotbed of terrorism? The country does have an Islamist terror group known as Jemmah Islamiya, often referred to as the Southeast Asia branch of al-Qaeda. There have been terror bombings, most spectacularly in Bali October, 2002.

But Jakarta has been remarkably successful in suppressing terror groups. Its special anti-terrorism group Detachment 88, partly funded by Washington, has successfully tracked down terrorists and broken up their networks. Only last week it charged the country’s most senior radical Muslim cleric, Abu Bakar Bashir, with terrorism.

It is true that the fall of Suharto has been accompanied by a rise in Islamic fundamentalism. They and other conservatives were successful in enacting a very stiff anti-pornography law in 2008. However, fundamentalists have never won a majority in parliament, and in 2002 parliament rejected a proposal to declare Indonesia an Islamic state.

Meanwhile, Indonesia is once again becoming more and more important to the U.S. as a key link in a new ‘arc of democracies” stretching from India through Southeast Asia to Japan and South Korea. Among other things, it sits astride the Strait of Malacca, which is as important a waterway as the Suez Canal.

President Barack visit to Indonesia last year was more than a nostalgic return to a place where he spent part of his boyhood. It underscored how much Washington recognizes how vital this Muslim-majority nation has become to protecting and enhancing American interests in Asia, and an example that other Arab nations could follow.