Today was the second meeting of the WEF Blueprint for Japan 2020. Oki and I reported on our presentation in Geneva.

Richard Koo, the chief economist of Nomura Research Institute talked about some of the macroeconomic issues regarding the Japanese economy which was really staggering to think about. 85% of the value of the land disappeared after the bubble. This is 3 years of GDP. That's huge when you consider that the great depression in the US was only 1 year of GDP drop in assets. The savings and loan problem in the US was only a 20% drop in the value of assets. The scale of the Japanese problem is gigantic and unprecedented. On the other hand, this could happen to any country such as Taiwan, Thailand, China or even the US. The huge drop in asset value is causing another very unique situation where 70%-80% of companies are paying down debt when interest rates are basically 0% because they are so highly leveraged against assets that have lost so much value. The fact that the economy is even functioning is amazing.

We talked a lot about the issues and how to communicate our point. We decided to focus on how diversity enables markets and democracy since this point of view is rather unique and core. We decided to start a blog about this project. ;-)

8 Comments

Any ideas on what to do about the over-leveraging?

Did you talk about reducing the debt through some sort of 'restructuring'?

How come new players don't emerge in the Japanese economy who have the competitive advantage of not having the burden of debt?

I think that the buy-out of the Long Term Credit Bank by Ripplewood and the restructuring of Nissan are examples of people taking advantage of this. I think that there is still a great deal of inefficiencies as well too many players. I think that as some of the companies start to go bankrupt, the other players in the sector will thrive.

I think the "restructuring" issue is a key issue, but not one that I am very smart about. I think government bailouts are obviously on the table...

Well, when you hear a banker say 'restructuring', what he _really_ means is that he wants you to (a) get your small creditors to accept 20 cents in the dollar, (b) sell anything you can and (c) fire a lot of staff, especially the old, expensive ones who remember the old days.

In Ireland, we used to have a lot of government bail-outs. At one stage, we had the only state-owned coffee house west of the Iron Curtain.

The government also owned a couple of insurers as I recall. Oh, and a good few banks too.

Looking back, it's clear that the bail-outs did make the economy more sluggish. However, it's also true that the infrastructure of the country would have fallen to bits if the government hadn't saved some of these businesses.

Now, most people have money in their pockets, and there is a more favorable labour market. The government doesn't seem to do bail-outs anymore. The former state steel company closed a couple of years ago. The government-owned fertilizer company folded last week. The state airline got in big trouble earlier this year. The Government refused to put in more money. As a result, it knuckled down and dealt with its internal problems and is doing well now.

A lot of this results from EU regulations that prohibit state subsidies.

Of course, just because it is right in the EU doesn't mean it is right in Japan.

Here's another scary 85% statistic for you: Japanese companies are in debt to the tune of 216 trillion yen or $1.7 trillion. That's 85% of the Nikkei in total.

I've blogged Ken Belson's good NY Times article on this exact topic.

Yes, diversity may enable markets and democracy, but Japanese diversity, markets and democracy have a very long way to go in their evolution.

Nearly everyone forgets that Japan's post-war democratic institutions are not even 60 years old. I can't count the number of Japanese politicians I've met in New York who drop by places like the Council on Foreign Relations to give speeches stating how Japan shares the fundamental values of freedom and democracy with America. But it is a rare Japanese politician who can provide more than lip service to what this means.

The most significant constraint on Japan from getting its macroeconomic act together is its political system and the lack of political leadership. Japan's political system, which does not offer voters a credible choice, is stuck in a kind of twilight zone. The economic consequences have led to the unprecedented destruction of wealth that Richard Koo and Joi point out.

Unfortunately, political accountability in Japan is widely dispersed; in Japan, the buck stops nowhere. This kind of fragmented power base is not going to change.

Even if Japan could identify the core values on which it economic recovery should be based, its leaders are either unable or unwilling to communicate these values to the rest of the world. Japan's bureaucrats and political elite finds it virtually impossible to articulate a vision. They can't lead because they don't know where they want to go.

What Japan needs most is leadership that can stand up and articulate what the country stands for, where it's headed, and how it's going to get there. Yet this is the very antithesis of what is considered effective political leadership in Japan -- working behind the scenes as a powerbroker, wielding one's power in ways that are seen but not heard.

There are few genuine signs of a fix anytime soon. I get depressed just thinking about it...and I don't even live in Japan. Fortunately I have enough friends and business colleagues who do, I care about them, and I believe what happens in Japan matters to the U.S.

There are real reasons why being an entrepreneur in Japan is so incredibly difficult and why there are so few sources of Japanese entrepreneurial capital.

What's needed? As a start, how about some of Japan's highly articulate "next generation" business leaders speaking out about the problems and openly discussing what's truly necessary to fix them.

That's a forum I'd be willing to help create and support. We could put together a group of people in both countries that care about pulling Japan out of its decade-long abyss and offer some bottom-up, entrepreneurial solutions to help make it happen.

And blogging may not be a bad place to start. Joi?....

Agree Ken. Having said that, I believe in the "tipping point" where stuff may change quickly. I think it is important to identify "positive deviance" and try to spread it. I think Tanaka-san of Nagano is one. I think there are interesting success stories if you look. We have to find and amplify them...

And since I believe the media is one of the biggest problems against diversity, blogs are probably a very good thing...

Do you think Japan might be close to 'tipping point'?

Yes I do. There are a variety of indicators. The Governor of Nagano, breakdown in family, mental health, many indicators showing that we are at a breaking-point/tipping point... (I think)

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