The rebirth of Japan, the collapse of China

4th April 2012

Will Hutton should be the darling of the Guardianistas. He was editor of The Observer for some four years during the 1990s, he wrote the seminal "The State We're In"  in 1995, an analysis of the economic and political failure of the left during the Thatcher/Reagan years, and, more recently, proposed in a government-sponsored report that no local authority boss should earn more than 20 times the lowest full time salary. 

This week, he wrote about the "rebirth of Japan" in the Observer following a visit. The sub-heading promised: "The country's urge to reset its business culture is a lesson to Britain in finding the way back to prosperity."  It should have appealed to the many readers who admire the Japanese tradition of jobs for life as well as the Japanese love of gadgetry. Hutton was bowled over by heated loo seats and LED lighting apparently ten years ahead of the rest of the world.

The story concluded with: "The Asian story of the next decade will be Japan's renaissance and China's relapse."

Not the Hutton fan base

The article attracted some 250 responses. But – and this may not reflect the wider readership – the vast majority attacked his views. Some wondered at his conclusion or at the article's promise of lessons for the UK.

Others dismissed the piece, which stated he had been commissioned by the Japanese government, as an advert for his books or as a tourist trip by someone with little knowledge of Japanese society.

As he puts it: "Forces within the government are very much open to pondering where it should go next. Ten days ago, I was invited by the DPJ government to go to Tokyo to contribute to this ongoing conversation.

One post, typical of many, said:

"Heh the irony of the muliticultural Guardian shilling for the Japanese, the most monocultural society on the planet. Japan has a demographic crisis coming up real soon and with a government debt that is twice that of the UK actually desperately needs to open up it's borders. I love going to Japan and enjoy my time there but it is a deeply conservative and weird place, the whole system is based on people knowing their place in society and not rocking the boat." 

Pathological savers have to liquidate to live

Many were more aggressive. One said:

 "Perhaps the most ridiculous article I've ever read in the Guardian, which is saying something. He barely mentions the two over arching disasters afflicting Japan, the gigantic debt wasted on a doomed attempt to prop up asset prices and the associated demographic implosion.

"The Japanese were pathological savers, but a funny thing happens in an ageing society, old people don't save.

"Japan is the first example of a developed economy confiscating ordinary citizens wealth to bail out its banks, and we will soon have a close up view of the complete clusterf**k to entail."

Some posts had been removed by the site moderator as too offensive.  A number disliked Hutton's rationale for running the article.

He explains: "Cabinet members wanted to discuss what a 21st-century social contract might look like, respecting both necessary labour market flexibility and security. They wanted to understand the contribution that open innovation ecosystems and an entrepreneurial state can play in driving forward innovation and investment.

Japan needs to re-invent itself

"Above all, they asked: how could Japan reinvent its stakeholder capitalism of the second half of the 20th century so that it was more democratic? And they thought there might be something in my ideas rehearsed in the books The State we're in and Them and Us. In short, how could Japan do good capitalism?"

Of course, Hutton cannot claim an intimate knowledge of Japan, its political system or its economy. His final sentence about his predicted eclipse of China is not explained. His David Cameron-commissioned research into local government pay was widely derided for its twenty times multiplier suggestion between chief executive and lowest earner when that would actually increase top earnings in some authorities and cut it in just a few. His role as chief executive of the Work Foundation (formerly the Industrial Society) was not covered in glory. He has his enemies and detractors – both inside and outside the Guardian website.

But substitute UK for Japan in the above rationale for the piece and it starts to make sense. He wants to explore how Britain could do good capitalism.

Hutton's big picture is long term – it may not help investment decisions. But Japan's Topix index has started the year strongly – almost 20 per cent higher in the first quarter.

Look again at Tokyo

Taku Arai, a Japanese equities fund manager at Schroders, agrees that investors should look more at the Tokyo market. He says: "Despite remaining the world's third largest economy, Japan has been marginalised in the eyes of many investors on account of poor demographics, deflationary pressure and faster growth rates in emerging Asian economies. This was compounded by the earthquake and subsequent nuclear disaster. As Japan begins to emerge from an exceptionally difficult period, we are becoming more confident that the Japanese equity market could also be at a major turning point, especially when we look into the dynamics at corporate level."

New investors bring better managers

He points to one major factor that is now over the past decade or so – the replacement of "friendly" shareholders such as institutions with their cross-holdings by foreign investors, pension funds and individuals. The former were stable but imposed little pressure on managements to improve profitability. The newly dominant equity holder base is putting increasing pressure on managers to deliver shareholder focus, greater profitability and improved corporate governance.

And in more concrete terms, Arai sees possible yen weakness, which will improve competitiveness, and increasingly attractive valuation.

"As well as appearing undervalued relative to other developed markets, Japan also looks very good value compared to its own history," he adds.


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