Conventional wisdom on Japan is largely wrong

Conventional wisdom on Japan is largely wrong

GEORGE ABONYI

Globe and Mail Blog

Posted on Monday, March 12, 2012 3:56PM EDT

Canada and Japan are presently discussing an economic framework agreement, with Prime Minister Harper expected to visit Japan in the near future. Yet a recent article in a leading Canadian newspaper reflects conventional wisdom on Japan as a failing economy. It refers to Japan’s first trade deficit since 1980 as a sign of its continuing economic demise. It cites as examples of declining competitive position of Japanese firms Hitachi’s decision to stop making flat-panel televisions in Japan, and Canon’s decision to shift 60 per cent of its production offshore.

But conventional wisdom on Japan is largely wrong, the devastating impact of the recent earthquake and tsunami notwithstanding. A better understanding of Japan can provide important options for Canada, especially in Asia. Canadian firms could benefit from alliances with Japanese enterprises implementing sophisticated Asian regional strategies. And Canada could strengthen effectiveness of its development assistance programs in emerging Asia, with particular focus on the key role of the private sector, through partnerships with Japanese institutions in the region.

Seeing Japan’s first trade deficit in more than 30 years as signaling the end of its sustained export success is misleading. Japan has had a current account surplus since 1985 – the widest measure of trade that includes financial inflows such as dividends, interest payments and royalties – standing in 2010 at $196-billion (U.S.), a more than threefold increase since 1989, during which Japanese exports to China grew more than 14-fold. This helped turn Japan into the world’s largest creditor country, with net international investment position (total domestically owned assets minus its foreign owned assets) estimated in 2010 by the IMF at over $3-trillion. Japanese export performance thrived in spite of an appreciating yen that, paradoxically for a supposedly failing economy, strengthened during global (and domestic) economic crises from more than 120 to the US dollar in 2007 to around 80 today. Japanese households accumulated around ¥1.5-trillion in assets, which along with robust export earnings helped the government finance an extensive fiscal deficit, borrowing cheaply (less than 1 per cent for 10 years) from domestic investors, who hold around 95 per cent of public debt, suggesting that Japan does not have to worry about foreign investors losing confidence. The large public debt, in addition to contributing to oft-cited wastes in public investment, has also provided financing for restructuring Japanese enterprises.

The banking crisis and the rise of competitive Asian mass-manufacturers have led to big changes in Japan’s business environment over the past 10 years. Banks are becoming more efficient, shifting to the direct disposal of bad loans through the sale of assets, and focusing on credit ratings and expected returns in financing corporate loans. New accounting rules have included consolidated balance sheets and new disclosure requirements. Japan’s traditional business group (keiretsu) system is changing, including through the introduction of bankruptcy laws to replace informal bailouts, and greatly reduced roles of cross-shareholdings and of the “main bank” system. Corporate governance reform has included internal oversight committees; directors that are held liable; new rules on mergers and acquisitions; and stricter enforcement. The lifetime employment system is moving toward performance pay, flexible wages and increased labour mobility.

Meanwhile, Japanese firms have quietly achieved global market dominance by increasingly focusing on higher value added and higher technology materials and components, instead of more visible but lower value added consumer end products. For example in high technology materials Japanese firms control around 70 per cent of the market for fine chemicals for electronics; 75 per cent of the market for ceramic condensers; and 65 per cent of the market for carbon-fibers. In technology components, Murata makes around 40 per cent of the world’s supply of capacitors (a cellphone has over 100; a computer over 1,000), Nidec supplies 75 per cent of the motors for hard-disk drives, and Mabuchi supplies around 90 per cent of micro-motors for car rear view mirrors; and in key low technology components, Shimano supplies 60-70 per cent of global bicycle breaks and gears, and YKK makes more than half of the world’s zippers, by value.

All this means that Hitachi’s decision to stop making flat-panel televisions in Japan reflects not declining but strengthening competitive position of Japanese firms. Korea’s LG may dominate production of LCD panels, but Japanese firms make high value added and high technology layers, films and fine chemicals that are critical inputs in such panels. The iPhone may have counted (misleadingly) as adding $1.9-billion to the 2009 U.S. trade deficit with China, but 34 per cent of the value was added by Japanese firms, far larger than Germany, second at 17 per cent; and China, where most iPhones are assembled, but that added only 3.6 per cent of the final value.

In the face of an appreciating yen and declining labour force, Japanese firms such as Canon, have been shifting production offshore, a process on-going since the 1985 Plaza Accord revaluation of the yen. More than 20 per cent of Japan’s production is now abroad, with emphasis on emerging Asia. At the end of 2010 Japan had ¥251.5-trillion in net assets overseas, almost the size of Germany’s annual economic output in dollar terms. Japanese enterprises have implemented sophisticated regional (and global) strategies, sourcing components, for example for Hitachi’s hard disks largely assembled in Thailand, from producers throughout the region, within the framework of extensive cross-border supply chains. In the process, Japanese development assistance is contributing to emerging Asian economies in key areas such as logistics, labour skills, and product standards; and facilitating economic integration that increasingly drives Asian regional development. For example, Minebea’s recent investment in Cambodia for assembly of motors for office equipment and household appliances, using components from countries such as Thailand and Malaysia, will help diversify Cambodia’s economy, creating much needed incomes and higher skill jobs; also enhancing production efficiency and integration in the region. This builds on Japanese development assistance both in Cambodia and regionally, in areas such as logistics and skills.

What does all this mean for Canada? Economic cooperation with Japan can stress trade and investment liberalization, as does the framework agreement under discussion; however, it can do more. It can also focus discussion on ways of expanding and strengthening alliances between Canadian and Japanese firms in Asia, where Canada has had limited presence to date, and where Japanese enterprises have long experience in developing competitive regional production networks for global markets. Furthermore, development cooperation with Japan can strengthen Canada’s development assistance in emerging Asia, particularly as related to the role of the private sector, the key driver of development in the region.

George Abonyi, based in Ottawa, is Visiting Professor, Dept. of Public Administration and International Affairs, Maxwell School, Syracuse University, and Senior Advisor to the Fiscal Policy Research Institute (FPRI), Ministry of Finance, Thailand.

South Korea’s Smart Meters Program Averts Need for Nuclear Plant

South Korea’s plan to install smart meters in half the country’s households by 2016 could cut electricity consumption equivalent to the cost of one nuclear power plant.

“We want to make the utility industry intelligent and efficient,” said Choi Kyu Chong, director of the Smart Grid & Electricity Market Division of the Knowledge Economy Ministry. South Korea expects it will be able to save the cost of building a reactor by 2016 by helping households and utilities to manage electricity consumption through the meters, he said.

The country is investing in smart meters amid opposition from citizens and political parties over plans to expand its reliance on nuclear energy after the Fukushima disaster last year inJapan. State-run utility Korea Electric Power Corp. (015760), also known as Kepco, has awarded contracts to companies including LS Industrial Systems Co., Iljin Electric Co. and Nuri Telecom Co. to install the meters from a program that has won a 1.47 trillion won ($1.3 billion) commitment from the government.

Smart meters show customers what they pay for power at each time of the day, which utilities say will smooth demand fluctuations by encouraging more people to shift consumption to off-peak hours when it’s cheapest to generate electricity. The devices cost from 20,000 won to 140,000 won a unit, depending on whether they are for small or large electricity users.

Energy consumption in South Korea, the fourth-largest user in Asia, more than doubled in the 12 years to 2010, the highest rate among developed countries, according to the Korea Energy Economics Institute, a state energy policy adviser. Electricity prices in the country only cover 87 percent of the cost of generating electricity, according to the government.

“While Korea’s overall approach to smart grid has been technologically advanced, the program can be only effective if the country raises its electricity tariffs,” Ali Izadi- Najafabadi, an energy technologies analyst at Bloomberg New Energy Finance, said in an e-mail.

Analogue Meters

South Korea plans to replace all analogue meters at households with the new devices by 2020. The government on Feb. 28 said it plans a 14-fold increase in the number of meters to 10 million units by 2016.

As many as 30 bidders have participated in a series of tenders by Kepco to supply 2.3 million smart meters. LS Industrial Systems Co. (010120), Iljin Electric Co. and Nuri Telecom Co. were among companies selected to supply the meters to Kepco, said Sung Ki Jong, an analyst at Daewoo Securities Co. in Seoul.

Western smart meter makers like Landis+Gyr (LGYZ), the world’s biggest, may start to participate as Kepco ramps up the volume of meters to be installed, said Izadi-Najafabadi.

“As the government has focused on pilot projects so far, the demand for the meters is quite small, making it difficult for suppliers to earn lots of money,” Sung said. “With larger numbers to be installed over the next few years, there is scope for suppliers to make real money.”

Tender Program

Kepco plans to issue a tender for 1.5 million units in June or July, and in 2013 for more than 2 million units. It plans to install the meters at 15.2 million households between 2016 and 2020.

If South Korea meets its 2016 target to install the meters at half its households, it will be second in Asia only to China, which plans to install them at 80% of households by 2016, according to New Energy Finance. In Europe, Italy already has these meters in all houses, while in the U.S., they are installed in about half of all households.

The meters are part of the Smart Grid project announced by the government in 2009 to help reduce energy consumption by 3 percent and cut electricity consumption by 10 percent by 2030. In 2030, when the project is completed, it will lead to the reduction of 230 million metric tons of greenhouse gas emissions and 47 trillion won of energy imports, according to government estimates.

South Korea, the world’s biggest producer of ships, televisions and computer memory chips, plans to legislate a cap- and-trade carbon trading system.

To contact the reporter on this story: Sangim Han in Seoul at sihan@bloomberg.net

To contact the editors responsible for this story: Reed Landberg at landberg@bloomberg.net; Amit Prakash at aprakash1@bloomberg.net

Beware 'the housing wealth effect'

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Far more than stocks, a rising housing market makes us feel wealthy and sustains the economy. But the reverse is true, too.

“If you want to knock consumer confidence out from under people, just let their largest asset decline in value,” said Ben Rabidoux, who has been crunching data on Canada’s housing market on his blog, The Economic Analyst.

Consumer spending accounts for about 64 per cent of our economy, which is to say it’s crucial. And, it’s under pressure. The latest quarterly Consumerology report from ad agency Bensimon Byrne says half of Canadians feel worse off about their personal economic situation than they did a year ago, and they expect to feel worse in a year’s time. Overall confidence levels have fallen by levels not seen since the stock market crash of 2008, the survey found.

A reversal of fortune in housing would make things worse. While the risk of a real estate slump shouldn’t be exaggerated, it should be recognized – if only to provide perspective that may help people keep a level head.

Comments made about Canada’s housing market on Wednesday were typical of the lack of consensus on what’s ahead. The International Monetary Fund expressed concern about the hot housing market’s role in the build-up of consumer debt in Canada, while Finance Minister Jim Flaherty said the market has cooled somewhat and shows no clear signs of a bubble in prices.

While reporting average year-over-year price gains of between 5.7 and 7.8 per cent in the third quarter, realtor Royal LePage said the housing market in some parts of the country is softening and a broader slowdown is expected in the months ahead. And, last week, Bank of Montreal issued a forecast for a “soft landing” in which sales and prices remain steady. BMO summed up housing market supply and demand as follows: Low mortgage rates, relatively low unemployment and strong immigration versus high prices, elevated household debt and slowing employment.

Why worry about the possibility that the negatives in the housing market get the upper hand? For answers, let’s consider the wealth effect of a strong housing market.

Mr. Rabidoux, an instructor at Georgian College in Owen Sound, Ont., quotes an academic paper that found every $1 rise in the price of a house has an economic impact equivalent to 6 cents’ worth of increased consumer spending.

“People go out and buy stuff they wouldn’t otherwise buy if they didn’t feel so wealthy and confident,” he said. “People also feel richer, so they don’t feel the need to immediately save.”

Owning a house has been getting progressively more expensive over the years. So how is it that rising house prices feed higher consumer spending?

We can thank lines of credit for that, Mr. Rabidoux said. His data indicate that LOC balances increased 95-fold since 1985 while incomes and economic output have tripled.

Some of the money has gone into investments, he said. “But there’s no doubt that a good chunk of it has gone to support consumption to finance second cars, vacations or whatever.”

In a perverse sort of way, a drop in housing prices might actually be good for the country. Without the housing wealth effect, people might cut back on spending. This in turn would leave more money available for debt reduction and increased saving.

This is what’s happening in the United States right now and it’s seen almost as a detox process after years of consumer excess. But the healing process for household balance sheets has been a major drag on growth. Earlier this week, U.S. Federal Reserve chief Ben Bernanke described the economy as “close to faltering,” which is about as bleak as a central banker is likely to get in public statements.

Mr. Rabidoux thinks it would be a good thing over the long term if the housing wealth effect lessened and Canadians both saved more and spent less. “But my perspective is that you can’t have that shift without exerting some level of pain in the economy.”

Put your own financial security and that of your family ahead of what’s good for the economy. Cut spending and save more as required. If there’s anything left over, do your patriotic duty and buy something.

Follow me on Facebook. I’m at Rob Carrick – Personal Finance.

James Dyson reinvented the vacuum. Now he wants to remake the economy

James Dyson reinvented the vacuum. Now he wants to remake the economy

DOUG SAUNDERS

TETBURY HILL, ENGLAND— From Saturday's Globe and Mail

Published Friday, Mar. 09, 2012 6:39PM EST

Last updated Saturday, Mar. 10, 2012 10:35AM EST

You have to drive far out into the West Country, through forested hills and ancient villages, if you want to find the last of the mad British inventors. His wide glass desk perches amid a clutter of aluminum tubes, DC-pulse motors, lithium-polymer batteries and whirring prototypes in a distant corner of a sleek, silver building that contains 1,450 engineers, accountants, marketing people, managers and lawyers, and not a single labourer.

Behind that desk sits the silver-haired man who has become the only living British inventor every school kid here can name, a guy known for building actual things. Five years ago, that status would have been almost quaint. Today, it puts him in the political vanguard, both at home and, increasingly, across the Atlantic.

James Dyson's surname adorns an expanding array of bag-less vacuum cleaners, blade-less fans and washroom hand dryers that actually dry your hands. His private company claimed more than a billion pounds in worldwide sales last year, growing right through the recession.

Now, though, Mr. Dyson, 64, is even better known as the leading proponent of the suddenly popular idea that Western nations ought to return to manufacturing and exporting physical goods, after decades of shifting the roots of their economies to services, property and finance.

His call for an assemblyline renaissance has echoed far beyond Britain, where he was appointed a senior adviser to Prime Minister David Cameron's coalition government and has spawned a raft of policies.

In the United States, his argument has become a key front in the current electoral battle: Reindustrialization is a byword in many Republican primaries, such as this week's showdown in the Rust Belt state of Ohio. Meanwhile, President Barack Obama's lines on “green” manufacturing, innovation and education closely track with those of Mr. Dyson, who took to the U.S. airwaves last month, arguing that the school system should be far more oriented to science and engineering, especially in poor neighbourhoods.

The problem, he explains in his crisp middle-class English, is that countries such as Britain, which was known two generations ago as “the workshop of the world,” have had the factory stripped from their DNA.

“We're traders and exploiters, we're the City of London, that's our culture,” he says. “So you have a greater status if you go into banking than you do if you go to a manufacturing firm in Birmingham and make something real and export it, and create wealth that way. That's the problem – it's historical. It's in our schools, it's in our culture and it's in our government.”

In fact, Mr. Dyson, Britain's most famous manufacturer, doesn't actually manufacture anything in Britain. He hasn't done so for 10 years, since he was refused local permission to expand his Wiltshire factory and came to the realization, as thousands of other manufacturers have, that hardly any of the components of his machines were made in Britain any more. So why not move everything to Asia, where it's simply easier to build things?

“There ought to be huge advantages to manufacturing in England,” he says with an indignation that hasn't dulled over the decade. “This is where our headquarters are, it's where our managers are, our engineers. We've got two bigger offices in Singapore and Malaysia, and we don't want to do that – it's a logistical nightmare – but we're forced to do it.”

It's not the labour, he says. Few companies shift their manufacturing overseas because of lower wages; in fact, many of the factory jobs for companies like his require some postsecondary education.

“Wages are a tiny percentage of our manufacturing cost,” he says. “We'd happily pay British labour costs rather than Southeast Asian labour costs and not have to manufacture 8,000 miles away. The reason we went there is that we weren't allowed to expand, and all of our suppliers were in the Far East. Why buy a British plug cable made in Taiwan, ship that all the way back to England to install it, then ship that all over the world? The problem we face now is that China and the Far East are manufacturing economies, and shortly probably India and South America. And we can't compete with that. … It's the cost of our whole infrastructure, our employment laws and our skills … the management skills in particular. And we're a very expensive place to make things.”

Before 2008, this was simply the complaint of one businessman, railing against an economic system that was designed around services, software and real estate, and seemed to be running very smoothly indeed. But the global economic downturn has given his message a new universality. After all, it was the financial-services and property sectors that collapsed; industry-driven economies such as Germany and Singapore experienced record-breaking export booms and avoided the crisis.

Countries such as Canada and Britain have a weakness: Having abandoned manufacturing almost completely, they are vulnerable to the uncontrollable destinies of natural resources and the financial industry. But Mr. Dyson describes it as only one symptom of a larger problem: a Western world, especially the former branches of the British Empire such as Britain and Canada, that has lost its will to invent and make things.

“The trouble with Britain is that it built its success on the riches of its empire, rather than building its success on a manufacturing economy – we went out to the empire and flogged them what products we had, and took their resources, and made money off it. There was no need to be the best.”

Canada followed a similar path, shifting its economy away from manufacturing and into a greater reliance on natural resources and financial services (although not as much as Britain – Canada still maintains some export leaders, such as Bombardier and Research in Motion). This, Mr. Dyson says, is a recipe for vulnerability, as it has made his country, and ours, dependent on the shifting fates of resource pricing and market activity. The solid employment and export earnings of an industrial would provide more stability, he says.

Can we compete with Asia and South America?

But he fears it may be too late. “The problem now is that China is rising rapidly, the Southeast Asian countries, the United States is very strong on technology, Japan, Korea and now South America – so what on Earth is [Britain's] future going to be? No empire any longer, the North Sea oil drying up and we're not a cheap manufacturing nation; we've even lost our ability to manufacture.”

The Dyson solution involves shifting the education system, the tax system and the government's priorities to making industrial manufacturing something that is once again desired, supported and rewarded.

For example, Mr. Obama, buoyed by the success of George W. Bush's Detroit auto-industry bailout and the strong uptick in exports with the cheaper dollar, is pushing for a U.S. industrial policy designed to make goods exports easier. As he points out, manufacturing made up 25 per cent of the U.S. economy in 1980; it has now fallen to less than 10 per cent. A study last month by the Washington-based Brookings Institution makes the case for a reindustrialization of America, finding that manufacturing jobs boost average salaries and productivity, provides the research and development investments that are the main source of innovation for the service industry and, perhaps most importantly, provides a large-scale rise in foreign-exchange earnings that would reduce the U.S. balance-of-payments deficit – the fundamental cause of the economic crisis.

“Economists agree that the United States must rebalance growth, away from consumption and imports financed by foreign borrowing, toward exports,” says Laura D'Andrea Tyson, the economist who chaired Bill Clinton's Council of Economic Advisers. “The only way the United States can … make a significant dent in its trade deficit for the foreseeable future is by increasing exports of manufactured goods.”

In a tip of the hat to Mr. Dyson, George Osborne, Britain's Chancellor of the Exchequer, tabled “a budget for making things” last year and loaded it with tax relief for small business, laws to reduce planning and bureaucratic barriers, grants to entrepreneurs and plans to double the number of technical colleges and apprenticeship programs.

Indeed, Mr. Dyson played a large part in the election of Mr. Cameron's government: He wrote a report, “Innovative Britain,” calling for tax and education systems designed to move people into design and manufacturing; it was a major subject of the 2010 election, and almost all of its recommendations have been implemented.

Now, he is pushing particularly hard to reinvigorate the inventing trades in Britain: He points out that only 6 per cent of British graduates study engineering, compared with 13 per cent in Germany and 40 per cent in Singapore.

It could be a good moment to bring manufacturing back home: Overseas wages and employment costs are rising, as are long-distance shipping costs, and political instability and natural disasters have shown the weaknesses in long, complex, multinational supply chains. Perhaps it is easier, some companies now say, to have all your suppliers within driving distance, even if that costs more. That's what auto manufacturers have long done.

What is a job? What's a factory?

But this is not a simple or uncontroversial matter.

A big reason why manufacturing jobs and factories moved to the Far East was because Asia and the rest of the developing world have a very different definition of “job” and “factory.” Western manufacturing, by the end of the Second World War, had come to be based around what some economists called a Fordist model: After the innovations of Henry Ford and his industrial comrades, factory jobs became lifelong, secure relationships between employer and employee, and factories permanent features on the landscape.

When Mr. Dyson complains about the 25-year leases he is expected to sign on British factory land, or the employment laws that make it a big burden to hire an additional worker (in large part because it's so expensive to fire them), he is complaining about the legacies of Fordism.

Asian manufacturers work in a “post-Fordist” economy in which labour and capital are flexible and fast-moving. If he sets up a vacuum-cleaner factory in Malaysia, he can ask his aluminium-tube supplier to set up a parts factory down the road, and within a year it can be built, staffed and operational. If his sales fall, he can cut staffing levels quickly.

Millions of Westerners, perhaps the majority, live the post-Fordist life: the call-centre workers, the piecework food processors. But our governments and unions have spent generations making full-time industrial jobs secure and permanent. Changing that will be controversial and jarring. It's what the Detroit auto workers effectively did: In exchange for the Washington bailout, they and their unions agreed to sharp reductions in job security and benefits.

Some labour and political leaders argue that the sort of policies proposed by the Dysons of the world amount to the beginning of a levelling-down of Western standards to developing-world levels, when the opposite should be occurring.

Other economists argue that it isn't really about manufacturing: There is no reason, on paper, why a good is more valuable to the economy, more export-worthy or more productivity-enhancing than a service. Most employment takes place in services, and in many countries the lion's share of exports are services such as software, banking, consulting and things like waste collection. And the barrier between the two is breaking down: Is Amazon's Kindle operation really retailing goods, or are the readers themselves merely the physical front end for the much larger downloading service?

When people talk about using government to boost manufacturing, what exactly are they talking about subsidizing, and to what end? As Jared Bernstein, a former economic adviser to U.S. Vice-President Joe Biden, told a reporter after Mr. Obama proposed his industrial policy: “Every barbershop is now going to claim that they manufacture haircuts.”

Mr. Dyson and his allies dismiss such arguments. “It's a false view that services are just as good,” he says. “Services are very hard to export, and even if you do export them, they're very easy to copy. And manufacturing does provide a better living. The average salary at Rolls-Royce is £41,000 [$65,000] per year; the average salary at Lloyds Bank [Britain's largest service employer] is £17,500 [$28,000] per year. There's a very high standard of living in Switzerland and Singapore, and they're both manufacturing economies – the average salary in Singapore is $57,000 a year.”

He sees the source of salvation in Britain, Canada and similar countries in their universities – “our last remaining source of innovation and industrial leadership,” he says.

“It's always said about the British,” this quintessential Englishman says, “that we invent things and everybody else exploits them. And it's true. But I don't think it has to be that way, and now we have a grand opportunity to change it.”

It is perhaps fitting that this idea is being promoted by the man best known for reinventing the vacuum cleaner. This time, after all, what he is trying to fix is nothing less than a political and economic vacuum.

Doug Saunders is a member of The Globe and Mail's European bureau.