Thomas Cynkin spoke with The Cipher Brief about Japanese Prime Minister Shinzo Abe’s recent economic reforms. Dr. Cynkin discussed potential sectors of the Japanese economy that may prove lucrative for western investors as well as explained the benefits in investing in Japan over other East Asian countries. Dr. Cynkin is a former Foreign Service officer and headed Fujitsu Ltd.’s Washington office. He is currently an adjunct professor of economics at George Washington University.
The Cipher Brief: In your opinion what have been the successes and failures of Abenomics? What will Prime Minister Shinzo Abe need to undertake to achieve his goal of strengthening the Japanese economy?
Thomas Cynkin: The first two of Abe’s “three arrows” — fiscal stimulus and monetary easing — succeeded at first in administering a shock to the system, with a major beneficial side effect on exchange rates. They also brought about a surge of public optimism, as has the mere fact of Abe’s continuity in office and the stability it betokens. However, Abe’s third arrow – structural reform – is absolutely essential for the long-term success of Japan’s economic recovery, and there Abe’s performance has been more lackluster.
In reality, Abe’s third arrow is now the Trans-Pacific Partnership (TPP), which Abe hopes will bring about massive gaiatsu (foreign pressure) in the form of international competition. Abe is counting on TPP to compel some critical sectors of the Japanese economy to undertake reform in order to remain competitive.
TCB: How do you see Abe’s economic reforms affecting U.S. companies operating in Japan? What advice would you give Western firms trying to operate in Japan?
TC: The U.S. business community has been encouraged by Abe’s three-arrow approach, particularly his efforts at reform in labor, agriculture, and bringing women into the workforce. And Abe’s success to date on TPP is particularly encouraging to U.S. business. There is also broad recognition that bringing about economic reforms in Japan is tough and requires patience and persistence, and some cause for hope, given that the Abe Administration could have nearly three more years to make further progress.
Continued reform is critical as growth has slowed, and Japanese companies are generally not investing domestically. Consequently, Abe is also encouraging and incentivizing Western firms to invest in Japan. Looking forward, the fields of healthcare, health technology, and energy may be particularly promising areas for Western firms. There may be new opportunities in the field of agriculture as well, given regulatory changes allowing companies to lease and operate large amounts of farmland long-term.
Investment in Japan tends to offer slow growth but good returns. Against the backdrop of a troubled economic situation in Asia, Japan’s advantages of strong rule of law and strong IP protection stand in contrast to the circumstances of some of its regional neighbors. Western companies operating in Japan should take a careful look now to determine whether they should expand their investments or operations.
TCB: Do you see Abe’s recent reform of the Japanese military having any economic impact? Will this create more opportunities for U.S. companies dealing with defense?
TC: Previously, Japanese firms could purchase a broad array of defense-related products and services from U.S. companies for use by Japan, but now the possibility of export to third countries offers new opportunities — not just for Japanese companies, but for their U.S. partners as well. Abe’s lifting longstanding restrictions on Japanese military-related exports will facilitate dealings by U.S. defense contractors — particularly the major integrators — which are interested in partnering with Japanese firms or pursuing joint ventures, and utilizing Japanese technology. The F-35 is an immediate example.
Among the compliance challenges facing American defense contractors is a domestic preference program under the broad rubric of the Berry Amendment and related legislation (e.g., Section 842 of the FY2007 NDAA), which requires specialty metals (including steel, titanium and other alloys) procured by U.S. Government funds to be melted in a U.S. facility.
One exception is specialty metals melted in, or incorporated into an article manufactured in, a “qualifying country,” generally NATO allies; Australia, Israel and Egypt. Historically, Japan was not included. However, apparently reflecting Abe’s fresh attitude toward U.S. defense cooperation, the U.S. and Japan have reportedly hammered out an agreement to include Japan as a “qualifying country,” which would simplify compliance for U.S. defense contractors conducting Japan-related business.
More broadly, Abe’s policy shift allowing Japan to participate in collective self-defense may lead increasingly to Japan taking on new roles and missions, and perhaps seeking greater power projection capabilities, which will require commensurate defense-related procurement.
It is also worth keeping an eye on whether a U.S.-Japan arms trade treaty, along the lines of those with the UK and Australia, could come about. If even a more modest version were to come into force, these trends would accelerate.
TCB: Japan is undergoing a demographic shift, how do you see this impacting the Japanese economy? In particular, what will a changing labor force mean for the Western companies operating in Japan?
TC: Japan’s population will decline from 127.5 million to 116.6 million by 2030, and to 97 million by 2050, according to the Japanese Government’s projections. And, as has been widely reported, Japan’s population will have declined one-third by 2060 and two-thirds by 2110 should present trends continue. Taking this extrapolation to the extreme extent, some pundits have observed that the last Japanese will be born in 3011.
Lower fertility and increased life expectancy are also leading to a dramatic aging of Japanese society. Presently, roughly 25% of the Japanese population is over 65; if present trends continue, by 2055, nearly 40% of Japanese will be elderly. By then, Japan will be the oldest society in world history.
These alarming trends have prompted the Abe Administration to talk up the long-overdue empowering of Japanese women, whose participation in the workforce is presently circumscribed by lax enforcement of such equal opportunity laws and regulations that exist. This situation has long been exacerbated by customs and procedures ranging from unequal pay and underemployment, to pressure to take the corporate “mommy track,” which effectively trades away career ambitions for the equivalent of flextime. It remains to be seen how effectively Abe will sustain his efforts to bring women into the workplace.
Debate also continues as to the advisability of more robustly loosening up restrictions on immigrants, particularly guest workers. Japan’s largely homogeneous society has been resistant to such policies, but the day has come when some consider that this option should be on the table.
Absent major changes, demographics demonstrate that the labor pool in Japan will continue to shrink, making the competition tougher for companies in general — let alone Western companies — to attract talent. Western companies in Japan may have a natural competitive advantage in recruiting skilled employees by offering a workplace and career path that afford career opportunities unaffected by considerations of gender.
TCB: Abe has led Japan down a path of significant reform. In your opinion, is there anything coming down the pipeline that the U.S. should be wary of?
TC: Simply stated, a robust Japanese economy will help make Japan an even more valued strategic ally and economic partner of the U.S. However, should reform measures fail, with TPP moldering on the shelf, continued stagnation could lead to increased nationalism with attendant political and economic frictions with the U.S. That said, U.S.-Japan political, economic, and security ties run broad and deep and are unlikely to be severely disrupted short of extraordinary, and unlikely, circumstances.
