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GP19Nov03: The Sun Maybe Rises

Mr. Odalisque: “I feel so free.  I feel so free.”  During the 1970s and 80s, a Japanese investment banker would frequently visit us in New York City, and this refrain was never far from his lips.  The burdens of life lifted from his shoulders when he was out of Tokyo.  It was if he had just emerged from the Iron Curtain.   

Exquisite Sadness.  The Japanese may be the saddest people on earth.  They live in a social system where many do not feel free, especially if they have spent any time in the United States.  Even more than in the U.S. there is a tension between one’s work and responsibilities and the fullness of life.  They are famously insular, absorbing the ideas but not the people from the nations outside the imperial kingdom.  What is less well known is that they are even alienated from one another, isolated by all the conventions of their culture.  

Every haiku we have ever read has been beautiful and lonely at the same time.  This Japanese poetic form could even remind you of the autumn in the United States when the woodland color is intense and moving, but you feel yourself slipping into the chill of winter.  “Blood red yellow leaves pour onto the earth of autumn; they turn ashen.”   

The Birth of Democracy.  When Junchiro Koizumi became prime minister in April 2001, we predicted big things for Japan, opining that he would upset the political and economic applecart.  Those more familiar with the landscape there told us we were full of hot air and that nothing would change.  It turns out we were probably right that something momentous was going to happen, but not in ways that we or Mr. Koizumi could ever have predicted. 

The lower house election on November 9th gave Mr. Naoto Kan’s Democratic Party of Japan (JPL) 177 seats, with particular strength in the cities and suburbs, and sufficient power and standing to be a hardy challenge to the Liberal Democrats (LDP).  It’s the halting beginning of a real 2-party system. 

This Is a revolution.  After World War II some think General Douglas MacArthur installed a democracy.  He did not.  He enabled an oligarchy which has ruled Japan without interruption for almost 60 years.  This arrangement was helpful in the early years after the war when Japan had to bootstrap itself into prosperity.  But it has been stifling for Japan and the world economy ever since the Vietnam era. 

The agenda of the oligarchy has become more senile as the population and the leaders have become more aged.  Like all the developed countries, Japan is growing old very fast, and the geriatric time bomb is waiting to go off.  (In the U.S., senile governance and aging demographics have been slightly tempered by inward migration).  Japanese women now average 85-plus years and men 78-plus years.  All that said, the coming of the JPL may herald a new sense of freedom in the land of sadness, and young people may hazard more new ideas.  Even if it wanted to stand still, Japan is driven to change because the volcanic Chinese dragon is breathing such fire, making the Japanese look lifeless.  The nation’s competitive vigor depends on its ability to remake itself politically.   

Wal-Mart Is Coming.  The political awakening still has not brought much needed structural economic reforms, even if the economy seems to be recovering.  There are still the bad banks and non-performing loans; huge, unneeded public works projects; a dismal record in relation to women’s place in society; a postal savings system that needs to be privatized; a ridiculous immigration policy; an inordinate trade surplus; and public sector debt that’s 140% of GDP.  Investors in Asian equities are currently showing 30-40% returns for 2003, but given these structural concerns in Japan that are still mirrored elsewhere, we’ve told our clients to bank their bets in Asia.

As is usually the way in Japan, the real reform has come from foreign invaders.  In the present case, that often means American vulture capitalists.  Investment bankers (Goldman Sachs and Morgan Stanley) and private equity funds (Lone Star, Ripplewood, and Cerebus) have been active throughout the financial sector:  their takeovers are creating a domino effect in the banking industry that will force further restructuring.  Likewise, GE Capital has been an avid buyer, causing new chairman Immeldt to pay much attention to GE in Japan. 

But we are even more taken with the catalytic effect of foreigners in other areas such as manufacturing.  Nissan, with the arrival of Carlos Ghosn, is perhaps the most dramatic example in the auto sector.  Even more arresting, however, is the explosion Wal-Mart is making, as it takes its first steps in the world of retail.  For years Japan has maintained a complicated, archaic retail distribution system that has afforded lots of mom and pop employment but that has also provided fabulously overpriced wares to the Japanese consumer.  Wal-Mart is moving in slowly but surely, having bought into supermarket chain Seiyu Ltd. (37%).  We actually think it will be a more benign force throughout Asia than in the U.S., where it has shredded small towns and their businesses.  Aeon and other giant chains are overhauling some of their practices, hoping to stall the Wal-Mart juggernaut.  However the battle turns out, it is clear that retail, in Japan, will never be the same.  See The Wall Street Journal, September 19, 2003, pp. A1 and A6. 

The Japanese consumer has been changing, in any event.  He has always had an eye for quality, but not for price.  Now he has developed a yen for a bargain.  “Since 1996, sales of luxury goods have declined by more than one third, to 1.2 trillion yen ($10.8 billion)….  Japan’s population is aging rapidly and the sluggish economy, rising unemployment and higher taxes mean that the smaller new generation of young adults tend to have to less to spend....  This anti-luxury-brand crowd has come to feel that seeking personal validation in a pricey handbag is an empty exercise.”  See The New York Times, September 26, 2003, pp. W1 and W7.  For all sorts of reasons, the age-old system that sustains over-priced consumer goods is coming unglued.  The government is terribly out of touch with these new consumers. 

Application Engineers.  A very witty fellow in New York City once said to us, “The American dream has been interrupted by the Japanese clock radio.”  He was not referring to the events of dawn on December 7, 1941, but to the powerful attack by the Japanese on our microchip sector, where the fellows in and around Tokyo had learned to be cheaper, better, and faster.  The Japanese have a way of taking good American technical ideas and, all of a sudden, improving them to death. 

The trouble is, of course, that they embrace technologies and products and digital concepts, but pass over the more creative ideas out of the West.  Their closed society has equipped them to ingest the microscopic, but not to adopt the macro-economic.  They will, of course, do quite well in the emerging field of nanotechnology, the world of small potatoes.  We are reminded, in this regard, of the Japanese movie The Woman in the Dune, where the hero becomes lost amidst the grains of sand.  That’s why the Japanese are the ultimate application engineers. 

We never forget how they came to revere the Four Horsemen of NYU (Juran, Deming, Drucker, and Feigenbaum) decades ago, grafting their ideas onto the largest enterprises in their manufacturing economy.  It is no accident that these men achieved fame as teachers in Japan even before they found wide recognition back in America.  We estimate that their wisdom played some part in the formation of Japan’s most stunning economic achievement—the Toyota Production System.  But they are not as prone to celebrate a Milton Friedman, a Paul Tillich, or a Josiah Royce who might have brought them closer to the community of nations.    

One has to wonder why Japan, home of the world’s second largest economy, has not had a much greater impact on human affairs across the globe.  This is probably the ultimate sadness, the final frustration for men of quality in Japan.  It has not made its real mark on human society, and the world, incidentally, is less because of it.  A more global Japan would require deep engagement with the spirit and thinking of others—the start of intimacy.  Perhaps its recent tilt to democracy is a beginning.  This, in turn, would mean that the U.S. should frame its postwar alliance with Japan in entirely new terms.

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