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Japan's private sector is optimistic about Abenomics

Interview - March 24, 2015

With over 40 years of experience in the private sector, Mr. Mimura gives his insights into why Abenomics will succeed and how Japan's economy will evolve to meet the demands of a more globalized world


Japan is truly going through an exciting time at the moment. In a period of global recession, Japan is making difficult choices to reorient its economy for a more globalized world. And as indeed as Prime Minister Shinzo Abe said: "These are once-in-a-generation economic reforms under this paradigm of Abenomics." Why do you think that Abenomics is different from other policies of the past and therefore will succeed in ending two decades of deflation?

Let me start with what I really want you understand. Many people understand the fear of short-term inflation, as well as the Great Depression. However, people are less aware of the fearfulness that can come with deflation of 0.5% to 1%, which we have experienced over the past two decades. Japan is the only country that knows the risk of the psychological impact on people imposed by the moderate two decades of deflation. 

What happened was a mild and persistent deflation that occurred over the course of two decades. It seems difficult for people to recognize the risks that such conditions present. What also happened was that people did not do anything to curb moderate deflation, and the value of the money in their hands increased. Such people should not be blamed, even though they did not take action because the value of money increased.

People did not have crisis consciousness because real GDP did not decrease due to decline in prices. People are not aware of the extent to which the nominal GDP has dropped—10%! Although people did not recognize it, what happened was that they were getting lower salaries; corporations were selling lower volumes as a result of the 10% drop in the nominal GDP. In addition, the competitive relationship with China has changed: China has surpassed Japan in terms of economic growth. In 2012, Richard Armitage and Joseph Nye developed a report called The U.S.-Japan Alliance. The main message of the report was "Does Japan desire to continue to be a tier-one nation, or is she content to drift into tier-two status?" The report shocked us.

Now let me talk about the core of Abenomics. It is intended to change the mentality of the people that "doing nothing is the best." We call this a "deflationary mindset." How can it be changed?

Mr. Kuroda, Governor of the Bank of Japan, carried out extreme monetary policy - quantitative easing. Governor Kuroda intended to raise the inflation rate to 2% in two years. As the result, yen was depreciated, and stock prices increased.

The essence of Abenomics is "demand-creation." As you know, in Japan, we once had an 8% demand-supply gap that was 40 trillion yen of demand deficiency after Lehman Brothers went into bankruptcy. As a result, wages decreased and prices dropped. This is "deflation." Prime Minister Shinzo Abe adopted a bold fiscal policy, and the Bank of Japan introduced quantitative easing. Those policy measures lead to a devaluation of the Japanese yen by around 40%, as well as to an increase in stock prices.

So this has been largely a success, then?

Largely. My understanding is that Prime Minister Abe's first and second arrows are demand creation policy. The demand-supply gap for the period from January to September last year might have been somewhere in the neighborhood of 1.5%. In the 4th quarter of last year, our real GDP increased by 1.5% annually, which means that the demand-supply gap still has room for improvement.

Mr. Abe implemented a demand creation policy to narrow the demand-supply gap. As a result, prices should increase, and so should wages although this is a more difficult task.

A new problem has emerged: we face a labor shortage along with a narrowing demand-supply-gap. Three factors can be used to explain any country's growth: they are accumulation of capital, growth of the labor force, and increasing productivity.

Right now, Japan's potential growth rate is around 0.6%. In the United States, the same figure is 2% or 3%, I think.

If the labor force participation rate or capital stock increases, it would be possible to grow more than 0.6%. But if we take too much time to decrease the demand-supply gap, we cannot grow beyond the potential growth rate. This is a fact.

Mr. Abe knows this, and what he's trying to implement is a supply-side policy to accumulate capital in the local market and to increase the labor force. Although the demographic situation is challenging, we cannot do many things in the short term, however, women’s participation in the labor force can be increased. Also, aged people like me can still work. Right now, the working age population comprises those between 15-65 years old. Even among those aged 65 and older like me, many people are still highly motivated to work. They have the capability to work, and they are experienced. We have to provide them the opportunities to work. Thirdly, the number of foreign workers is too small at present. We have to increase it somehow.

The most important issue is how to accumulate capital stock in Japan. That is, how to make each enterprise invest its capital in business. This is difficult, but without such measures, Japan can never grow.

There is nothing wrong with enterprises spending their money for future growth, but with deflation, they have been reluctant to do so. Enterprises were not in the mood for such outlays. But if Japan can grow and if we have a brighter future, many corporations will spend their money. At least until September last year, they had not been spending money. They earned a lot, but they were not spending. As a result, internal reserves had been increasing up to September last year.

But now, we have a negative interest rate. The ten-year national bond interest rate is 0.3%, while on the other hand, prices are increasing at a rate of 1%. Although Mr. Kuroda, Governor of Bank of Japan, wants to raise inflation to 2%, this means that the real interest rate is -0.7%.

If a company keeps money in reserve and does not spend it, the value of money will decrease. Why not just spend the money?

Many of these companies are members of the Tokyo and Japan Chambers of Commerce and Industry. How do you interact with them, and how do you open dialogue to persuade them to spend?

I think that there are two factors that will trigger companies to spend money: one is corporate tax reduction, and the other is the TPP. It is difficult for the Japanese economy to grow more than 2% because of the demographic situation. However, there is a huge global market, so why not enter the growing market?

Because of the demographics problem, there is serious concern regarding Japan's growth, since 50% of the economy is accounted for by domestic demand. So how important is international trade?

I am very sorry to say that Japan's export-to-GDP ratio is only 15%. If it were 50%, I would be very happy.

This is a very serious problem for Japan's economy. A figure of 15% means that Japan is near the bottom among the 180 countries concerning this metric. It is miserable export dependency. Some countries are highly dependent on exports. For example, take Korea; it has a 56% export-to-GDP ratio. For China, the figure is 27%, and for Germany it is over 40%. Numerous countries surpass Japan in these terms.

Why is this? Because our domestic economy used to be very big and was growing, so many people were satisfied with selling their products on the domestic market, and by doing so they were able to grow.

So now Japan is reorienting itself.

Take, for instance, the fact that the percentage of export-to-sales value of Japanese SMEs is only 2%. And for large corporations, the figure is 14%. These are very small.

One way to cope with low domestic market growth is to target foreign markets. It can be achieved, for example, by investing in foreign countries, which we had been doing very earnestly up to last year.

For instance, take the automotive industry. Its dependence on foreign sales last year was 60%, while in 2003, the same figure was 40%. So there has been a sharp increase. The automotive industry has many subsidiaries, or related companies, and their investments in foreign countries have significant influence upon local economies in Japan.

Do you think that investing in other countries is what has made the automotive industry so successful at exporting?

They set up factories and subsidiaries, and related companies, and spend their money as well.

You also take part in many high-profile international trade delegations. You were in Brazil and Mexico, and you just came from the Philippines and Indonesia, were you met President Widodo. How important are these high-level meetings between the private sector and the international community to the growth of Japan’s economy?

One countermeasure to the limited growth of the Japanese domestic economy is to invest in foreign countries and take the profits back to Japan. This is now yielding very positive results.

Do you mean taking businesses outside Japan?

Yes. Last year, dividends coming from abroad reached 4 trillion yen. In Japan, about 65% of revenues return to Japan. This is one of the solutions for us. But if this goes on, employment opportunities in Japan will be lost. We have a 40% yen devaluation and a corporate tax reduction, and we will have the TPP (Trans-Pacific Partnership). I'm very sure of that we will have the TPP, and I strongly hope it. Labor reform is underway. There are more women entering the workforce. For instance, women between 35 to 54 years old, their labor participation rate used to be about 59%, but now it is 66%.

We met Minister Arimura on Friday, and she was very enthusiastic and passionate about the women entering the workforce, and the good that it will do to the economy.

This point of view is held by many women, and I agree it is very important for our economy. Without the female employees, companies cannot survive when we consider the demographic situation in Japan.

The real problem is the cost of energy - electricity prices. After the Fukushima disaster, electricity went up by 28%. Even before that, Japan's electricity costs were probably the highest in the world, let alone what they became with a 28% increase. Many energy-intensive industries are suffering a great deal from this. At last, the Nuclear Regulation Authority approved 4 nuclear power plants to restart, although this requires the consent of local residents. We anticipate that this year, four nuclear power plants - at least two nuclear power plants - will start working again. It will make other power plants easier to be approved to restart generating power. I strongly hope this will happen, as it is very important for Japan's economy and the future.

And speaking of energy, the recent dramatic decrease in fossil fuel costs has had a very good positive benefit, taking down your energy bill.

That is correct. Oil prices have decreased more than 50%, and Japan's yen dropped 40%.

But it is not only oil prices that fell, but also the prices of other raw materials, such as coal, iron ore, steel, and nickel. Almost all the raw materials saw price decrease because China's growth rate fell from 10% to 6%-7%. As a result, the demand for those commodities and raw materials has decreased. This is also good for the Japanese economy. Why don’t you spend your money? A weaker yen, lower corporate taxes, more flexible labor regulations, and even environmental laws—they all help the Japanese economy.

In the past, Japan adopted a very strict environmental protection policy. As a result, Japanese enterprises have had to pay a high environmental cost while companies in the U.S. or China have not, which was a disadvantage. It is inevitable that the U.S. and China will have to spend more money on environment conservation in order for sustainable economic growth.

Yes, Japan is still leading. Japanese regulations are among the strictest, and it does put a higher cost on business.

The fact is that they are entering into a "normal" situation. This means that only we do not have to pay the extra cost of environmental protection. I may be too optimistic, but I think the situation is changing.

All of these - the negative interest rate, the accumulation of capital within the companies, and business environment surrounding Japan negatively - will discontinue.

Given this positive context, are companies starting to spend their money?

I am very eager to learn in what direction our capital spending is heading. In last year's fourth quarter, capital spending contributed -0.1% to GDP, which was unsatisfactory and disappointing.

My hunch is that since people are so used to having a deflationary mindset, it will take time for companies to start spending money. I would like to explain three factors as a hypothesis. First, corporate managers cannot have certainty about the exchange rate of around 120 yen for one dollar and fear that the yen might increase again. Second, it is unlikely that companies will increase domestic capital investment that compete with overseas projects directly. As many companies were spending a huge amount of money in their overseas projects until very recently, they are still in the process of harvesting profits from their investments. Third, due to the contraction in the domestic market and labor shortage, companies consider that they should produce in the overseas market where demand increases, and therefore they are reluctant to domestic capital investment.

It is unlikely that companies abandon overseas production and producing in Japan or switching from producing in the growing markets to exporting products from Japan. However, I think that it became crucial for companies to enhance supply capacity and increase export competitiveness by domestic capital investment taking the advantages of the weak yen that is envisaged to continue for some time.

There are several cases. Take Canon, for instance. Right now the figure for their domestic production is 40%, but in three years from now they will increase it to 60%. Because of the labor shortage, the company is trying to build an automated plant in Japan, so that they do not have to spend much money on labor. This kind of change is happening everywhere, but not on a large scale. I think it will take time. In the deflationary period, many manufacturing companies saved their money. Sometimes, even the maintenance costs were reduced.

With the yen having weakened by 40%, if you have sufficient capacity, why not use it and export more seriously? It has not happened yet. My understanding is that companies are adjusting now: spending a lot of money for maintenance and increasing their production capacity. So I am watching companies' capital spending very carefully. At the same time, I am also watching how our exports are evolving.

Regarding capital spending, do you think there is going to be an increase in wages?

For any economy to function smoothly, when companies make large profits, such profits should be distributed among the employees. Increasing wages will promote consumption, which is positive reinforcement. However, you can see large corporations that export a great deal, and earn a lot of money through exports. They also have plants in foreign countries and receive dividends from them, which are even larger when they are converted to yen. On the other hand, small and medium-sized enterprises (SMEs) have only 2% of export-to-sales volume ratio. In general, they do not have foreign factories, and, faced with a weaker yen, they do not have any way of making profits. As a result of a very weak yen, large-scale income distribution is going on within Japan.

JCCI’s viewpoint is as following. During the deflationary period, SMEs made every possible contribution to big companies. They are in the same boat. Otherwise, they could not have survived. SMEs understood big companies’ situations, so they did everything they could to help big companies to reduce costs. But now, big corporations are very happy. Why don't they help SMEs by spending more money in capital investment and increasing wages in change? This is very important. We hope big companies will do so. Why big companies increase purchase of parts and other products from SMEs? SMEs cooperated with big companies to such a great extent in the time of deflation. SMEs struggled together with large companies to overcome difficult times, and now big companies are in a much better situation. SMEs are wondering, “Why aren't we sharing happiness together?”

Are the big companies willing to do it?

This is what we are working on. Our views were reflected in the discussions of Government-Labor-Management Meeting for Realizing a Positive Cycle of the Economy of the Prime Minister’s Office. The primary intention of the government was to discuss how to increase wages. However, SMEs are not in the situation to be able to increase wages. It is because big companies have not increased the prices of products they purchase from SMEs at all, and they did not increase exports. If big companies exported in larger amounts using products purchased from SMEs, SMEs could have benefitted. Our intention was to make large companies help the SMEs. We are in a capitalistic market, and contracts should be made individually, rather than being forced by the government.

Although Government-Labor-Management Meeting issued a consensus document, I told our members that the document does not assure automatic purchase price increases; SMEs should make every effort to raise purchase prices. I think this could happen gradually. Toyota, for example, declared that they will not request any price reductions from their suppliers this year and next. I hope that this kind of policy will be widespread. However, these are based on the private contracts.

Up until two years ago, because of the existence of such a wide demand-supply gap, if the supplier asked big companies for a price increase, the big companies would not buy from them any longer. These things happen everywhere in the world.

I want to ask you about the TPP. It is great to hear one of the leading businessmen in Japan so excited and enthusiastic about the TPP. It will involve twelve countries, 40% of the world's GDP, and a third of its trade, and it will be an historic agreement. What sector would you say will have the biggest impact on Japan?

Well, the TPP is a contentious agreement. There are pros and cons. We have held seminars to promote a correct understanding of the TPP more than eighty times. In certain places, members were skeptical about the TPP, and in other places, members were for it. How can we unite all the 514 Chambers of Commerce in Japan under one voice? That is why we held a series of seminars nationwide. Finally, JCCI decided to "go for TPP."

With the TPP, we can modernize inefficient industries and improve access to overseas markets. We can increase the total productivity of the Japanese industry. JCCI was the first Japanese organization that expressed support for TPP to the USTR. Before we make a decision, we exchanged information with the U.S. business community including the U.S. Chamber of Commerce and the U.S. Business Coalition for TPP.

So you're one of the main voices advocating for these difficult economic reforms that are happening.

There are many industries that are suffering. That is why we should promote the TPP. Companies will be able to access a huge overseas market. As you know, Korea does not have many parts industries or SMEs. For this reason, to achieve the economic growth, imports from Japan will increase accordingly. Japan is the only country Korea has trade deficit with. However, many Japanese companies built their factories in Korea. The reason for having factories in Korea is very simple: we can export our products to the every corner of the world through the FTA network Korea has.

The TPP is good for the country, because it will increase productivity in sectors in which it might be lagging, and it will make Japan more efficient and more effective overall.

That is correct. Prime Minister Abe was very adamant about agricultural reform. He has done a good job, and a large mountain has moved. Agricultural reform relates to the TPP to a great extent. However, the SMEs' exports ratio is so small that they can benefit from a growing market. The TPP will open the doors for them. There are many opportunities for SMEs. That is also the good thing of the TPP.

How would you like Americans to perceive Japan?

Please, rediscover (and revaluate) Japan! Many Japanese companies will resume their inward investment. This means that the business environment and infrastructure in Japan is improving. Come and see it with your own eyes.