THE Japanese novelist Haruki Murakami once wrote about running: “Pain is inevitable. Suffering is optional.” After recent reports, his words could easily be used about the Japanese economy.
In the past few years, the country has had to work through demoralising deflation, the global financial crisis, a vast national debt, catastrophic natural disasters and the introduction of its first emphatic economic policy – in prime minister Shinzo Abe’s reform agenda – aimed at tackling its financial woes. The country is clearly beset by problems, the population’s trust in politicians and government officials punishingly low. And yet, for all that, it remains one of the world’s largest economies with the biggest electronics sector of any country, as well as the third-largest market for the auto industry.
“The big benefits in Japan are that it’s a huge market. For certain sectors there is huge market potential. It’s a population twice the size of the UK on a land area the same size as the UK,” says Steven Crane of advisers Business Link Japan.
Japan’s lost decade – the ten years of GDP shrinkage and deflation from 1990 – that followed the collapse of an asset price bubble is notorious. The country now talks about lost “decades” as its difficulties have extended into recent years (though, famously, writer Eammon Fingleton has insisted the “lost decade” is a misnomer). After the stock market crash of the early 1990s, GDP continued to grow in Japan, reaching $5,333bn (£3,282bn) in 1995. What then followed was years of painful shrinkage to $3,914bn in 1998, and then more years when the economy sluggishly recovered, finally regaining its peak in 2010 with a gross domestic product of $5,495bn.
Since then there have been more ups and downs. 2012 was another big year with more growth and GDP topping $5,937bn. The World Bank expects more shrinkage to follow. Policy in Japan, even now, is still resolving the problems that initially stemmed from the lost decade. The country has gone through periods of deflation and very low rates of inflation, and real wages have fallen and struggled to recover. Unemployment has risen from 2% in 1990 to 5% in 2004 where it has hovered more or less ever since.
That said, Japan remains the world’s third-largest economy by all measures (UN, IMF, World Bank, CIA Factbook), and it is a powerful influence in international markets and consequently difficult to ignore as a market for trade. Japan is one of seven markets targeted by the European Union for development for EU SMEs. In 2011 an EC survey, Opportunities for the internationalisation of European SMEs, found that just under 8% of EU SMEs that operated internationally were doing business with Japan. That compares with 13% for Russia and 10% in China. However, a 2013 survey by the EU-Japan Centre could only find 50 EU SMEs with “branch offices” in Japan, and not a single UK business was among them (the report concedes that unearthing the data for the study was tricky).
The most “represented” country, according to the report, is France. Intriguingly, and perhaps counter-intuitively, SMEs with branches in the country were mostly focused in high technology even though Japan famously has a love of European branded goods, especially high-fashion items.
Whatever the corporate structure, other figures claim that more than 400 UK companies, mostly very large listed or high-street brands such as Lush or Topshop, are currently operating in Japan. Smaller companies have had success too. Fashion manufacturer London Tradition attributes 50% of its exports to Japan while Brompton bicycles are now distributed through the Mizutani Bicycle Company.
Setting aside energy and raw materials, computers and electronic components figure highly in Japan’s imports. According to Crane at Business Link Japan, this is one of the areas in which the UK performs well.
“We’re very strong in technology. It doesn’t tend to be products; it’s more IP and know-how and patented technology,” says Crane. “We’ve got a lot of bright creative people, but we are not so great at turning those ideas into real products. In Japan they are brilliant at producing great products, brands and global distribution.”
Electronics is not the only area in which there are opportunities. Crane believes the renewable energy sector has potential. Since the Fukushima nuclear power plant disaster, Japan has shut down all its nuclear power plants and it is only now beginning to restart some of its reactors. It has increased the use of fossil fuels massively. Indeed, Export to Japan (a partnership between UK Trade and Industry and several other organisations) estimates that of the £9.4bn in annual exports from the UK to Japan, power generation equipment figures as one of the largest sources of trade.
Energy has become a major issue in Japan and has played a significant role in maintaining the Japanese trade deficit which has now run for 25 consecutive months and illustrates Japan’s apparent decline as an export nation.
The budget deficit and low rates of growth are further complications in the complex business of repairing Japan’s economy. That said, the country’s PM, Shinzo Abe, who was elected in December 2012, has tackled the issue head-on with “three arrows” of economic policy (now known as Abenomics): monetary easing, fiscal stimulus and structural reforms such as tackling the growing problem of an ageing population and a shrinking working-age group.
These issues were not helped by a hike in VAT which has been blamed for a sudden slump in consumer sales and an alarming contraction in GDP. The Financial Times reported in August that the economy shrank by 6.8% on an annualised basis to the second quarter of this year. It is the first contraction since Abe came to power and will be seen as evidence by his detractors that “consumer and business confidence remains fragile”, according to the FT.
Others are not so convinced and see Japan on a much longer journey. According to Janet Hunter, professor of economic history at the London School of Economics, the hike is likely only to have “short-term” implications. “Given the debt burden, it [the government] had to bring in more tax and the tax rate for VAT in Japan is very low,” she says.
For Hunter, the larger unresolved problem is energy. The increase in fossil fuel imports has increased problems for trade balances and the country has yet to make a final decision on what to do with its nuclear plants.
One thing this has done is increased interest in renewable energies inside Japan, though Hunter believes development of the sector has been surprisingly slow, given the country’s needs. She believes it may be because of “vested interests” in existing technology. UKTI is currently promoting the opportunity for UK companies in helping with the decommission of Fukushima while at the same outlining how the energy sector could reform in the future.
Others point to more prosaic opportunities inside Japan. Stuart Haynes, of Aaron & Partners, a lawyer specialising in working with exporters, points to the 2020 Tokyo Olympics and enquiries he has already seen from organisers that are looking for UK companies that could help with preparations.
Though it is six years away, he mentions the opportunity because of the time he says it takes to build Japanese business relationships. Typically, for foreign companies these are either built through setting up a Japanese corporate entity or finding a distribution agent.
Company formations in Japan have gone through recent reform and now enable foreign traders to set up within 14 days, a deliberate structural move to help improve trade relations. The most common structures are either a kabushiki gaisha (a joint stock company which attracts corporation tax rates) or the godo gaisha (a form modelled on the US limited liability company in which managers or partners are taxed at individual rates of tax). Both of these mean companies will bear the expense of building local marketing and distribution networks.
The other route is to find a local distributor to do the heavy lifting. But according to Haynes, working with a local partner in Japan may be unlike similar relationships anywhere else. UK companies undertaking due diligence on a possible agent may find themselves under equal, if not more, scrutiny before enough trust is built to agree terms.
“The cultural side does impact on finding a partner. What you tend to find is that you may want to undertake due diligence in respect of a partner you are going into business with, but you are faced with a barrage of questions that come back. In business they are very discerning,” says Haynes.
He warns that the tendency in Japan is to look for long-term partners which means the move to export to the country is a “strategic” decision that needs backing with investment, rather than an “opportunistic” tilt at the market. Relationships are built on patience and openness. Pressure selling or appearing to be working the back of partners can spell disasters for relationships.
According to Haynes, the meticulous approach to building relationship means disputes between partners are rare. And when they do arise, there is a drive to avoid court. “The culture is one of mediation as opposed to one of litigation,” says Haynes.
Stephen Crane echoes the view that Japanese partners are focused on detail. “The standards and expectations are high. Certainly much higher than we are used to in the UK,” he says. ?
Key facts: Japan
Population: 127 million
GDP: $4.9tn (£3tn)
GDP growth rate: 6.2% in Q1 2014 – quarter-on-quarter annualised rate
Market opportunities: Life sciences, IT, energy, advanced engineering & automotive, security & defence, financial & professional services, design, fashion, creative & digital content, food & drink
Primary UK exports: Electricals, healthcare, machinery, chemicals and transport equipment.
Gateways: Japan is one of the world’s largest exporters and overseas investors. Economic growth is heavily export-dependent. At 3.9% of GDP, foreign direct investment into Japan is low but the Japanese government is aiming to increase this. Small and medium-sized enterprises make up 99.5% of all Japanese companies. The service sector accounts for 67% of total gross value added with manufacturing accounting for 22%. Key challenges for the Japanese economy after 20 years of low growth include how to boost growth, reverse price deflation, deal with a high and rising public sector debt and adapt to a rapidly ageing society.
Market entry: For small companies entering the market, it is recommended that an exclusive Japanese distributor is appointed, performing product localisation and marketing. Large businesses have more freedom to find multiple non-exclusive resellers and recruit a sales and technical team to manage these channels, perform demand creation, and provide support.
Intellectual property rights: The Japan Patent Office is the government body responsible for registering IP protection. The JPO website also provides searchable trade mark, patent and design databases. Foreign businesses must file trade mark, patent and design applications through an attorney or agent based in Japan.
Source: Japanentry.com; UKTI
Join Financial Director, Oracle and a host of ‘Fast Data’ experts to discover how financial professionals can help create a Fast Data business
The biggest threat of turmoil relates to uncertainties over the US November elections. The markets will have to seriously consider the possibility of Donald Trump being elected
As the British government starts the complex process of considering the form of the UK’s post-Brexit relationship with the European Union (EU), one issue will be foremost in the minds of exporters – tariffs
Business whose operations span a number of sectors and a broad variety of projects put immense demands on FDs and their supporting finance teams