x Abu Dhabi, UAEWednesday 26 July 2017

Asia expects signs of life after Japan goes to the polls

World To some, Japan is the sick man of Asia, its vital signs long ago shut down by poor policy making.

To some, Japan is the sick man of Asia, its vital signs long ago shut down by poor policy making, an inability to change with the times and simply awful demographics. For these sceptics Japan is yesterday's story, doomed to relative decline notwithstanding the inventiveness of its big firms and, in the short term, Monday's confirmation of its emergence from recession with 0.9 per cent growth last quarter.

Hobbled by the weakest productivity growth among the Group of Seven (G7) industrial powers, Japan has been supplanted by China as the region's economic dynamo. The IMF estimates Japan's annual GDP, expressed in dollars at current prices, will not get back to its 1995 level until 2014. During the same period, China's output will multiply more than 11-fold, and it will overtake Japan as early as next year to become the world's second-largest economy after the US, according to the IMF's April World Economic Outlook.

But, ironically, some of the reasons behind Japan's years of stagnation have a good chance of raising its profile in Asia once more, especially if the Liberal Democratic Party (LDP) loses its long grip on power in this month's general election. Faced with a mature home market and an ageing population, Japanese firms are increasingly likely to respond by shifting more production overseas to meet local demand and to make goods for re-importing back to Japan.

As rich countries tighten their belts, it makes sense for Japan to eye fast-growing developing economies, said Simon Wong, an economist with Standard Chartered Bank in Hong Kong. "Japan can be a positive force in pushing through technological upgrades in some of these emerging markets," he said. Japan is already pursuing this strategy. While the country's total foreign direct investment in developed countries climbed 70 per cent between 2003 and last year, it jumped 150 per cent in Asia, led by leaps of 526 per cent in India and 220 per cent in China.

Andrew Smithers, the head of a consultancy in London, said corporate behaviour in consensus-bound Japan changed slowly, so that when it did occur it was all the more significant. "We perceive such a shift today, as companies address the issues posed by a falling population and saturated domestic markets. The result will be a fall in domestic corporate investment, allowing for a rise in domestic consumption and welfare, and a rise in corporate investment abroad," he said in a report.

In what Mr Smithers and others see as a precursor of that trend, the Japanese brewer Suntory Holdings is considering a merger with Kirin Holdings, a rival, so they can increase market share at home and accelerate expansion abroad. Japanese portfolio investors, discouraged by low returns and dim economic prospects at home, are also increasingly turning their sights abroad, said Paul Smith, the chief executive of Triple A Partners, an Asian and emerging markets alternative fund company.

"When they look at how they're going to sustain their standard of living, they're going to have to be much more of a service-orientated economy that relies on overseas earnings substantially," he said. Mr Smith expects Asia to be a growing beneficiary of Japan's investment outflows. "We certainly see they are more active in looking to develop Asia-specific products than they have been before," he said.

A greater emphasis on doing business in Asia would dovetail with the embryonic foreign economic policy of the Democratic Party of Japan (DPJ), led by Yukio Hatoyama, a hot favourite to defeat the LDP in the August 30 election. Mr Hatoyama has spoken of improving ties with neighbours such as China and South Korea, integrating Japan in an East Asian Community trade bloc and even, one day, forming a regional currency union.

"The weight of external economic policy positioning would be towards a strengthening of East Asian arrangements," said Peter Drysdale, an economics professor at the Australian National University in Canberra. Under the LDP, which has been in power for all but 10 months since its founding in 1955, Japan has been wary of China's rise. Scarred by the legacy of Japan's wartime occupation of China, two-way ties have been characterised by competition as much as co-operation, which has hobbled Asia's economic integration.

But the DPJ has worked hard at forging relations with China, and Mr Hatoyama has defused one major source of tension by saying he would not visit the Yasakuni shrine in Tokyo while convicted Japanese war criminals are honoured there. "All this suggests that there are a lot more open channels for communication between the DPJ and China, so there should be a lot less controversy," said Mr Wong. All well and good, but Jean-Pierre Lehmann, a professor of international political economy at IMD business school in Lausanne, Switzerland, still says Japan faces a sustained decline and has yet to find its place in the 21st century economic order.

"As things stand, Japan is adrift, anchored neither in East nor West and scoring badly on virtually all globalisation criteria," he said. "Japan has been a mainly mute global player." But Japan would not be the first country to snap out of a seemingly inexorable decline. Britain in the 1980s springs to mind. Prof Drysdale said a decisive DPJ victory would be good for Japan's confidence. Asked, in investment parlance, whether he would be long or short Japan, he laughed.

"I'm long Japan, but I don't expect an immediate return on my investment," he said. "There'll be a bit of confusion, but by and large this change will be good for Japan." * Reuters