Conclusion: Japan Inc: Indestructible but Destructive

Chapter 23: Japan Inc: Indestructible but Destructive

This chapter reinforces the analyses in the previous chapters in the context of Japan’s current political and economic environment.

Whatever Happened to Mercian Inc.?

In the US and the EU companies are legally required to appoint the majority of directors on the boards pf corporations from outside of the corporations as opposed to Japanese firms which are not required to appoint non-execs externally. As of 2014, of the 8113 firms registered on the TSE, 39 percent had no external directors on their boards, 39 percent had one external director, and 22 percent had two or more. Abe requested that the TSE construct a “corporate governance code” by mid-2015 to bring listed companies’ policies up to international standards. However, since Abe’s plan called for the appointment of only one external director to serve on boards and there is no mention of directors who are in posts in companies connected through cross share- holding. Even though companies are slowly eliminating cross share-holding, the plan as it stands will not engender confidence in Japanese firms in terms of long-term commitment and investment by foreign firms.

As an affiliate of a multinational corporation Mercian was not in the same league as the larger zombie corporations like Daiei or Kanebo which was delisted from the TSE in 2005. The details regarding both companies are discussed in Japan Inc on the Brink. Nevertheless, Mercian is an excellent example of how the BOJ’s post-Plaza Accord monetary policy, the MOF’s sloppy regulation of financial institutions, along with the institutions’ willingness to provide questionable loans resulted in frenzied over-expansion and over-diversification from core businesses.

Mercian also is illustrative of many Japanese companies which failed due to shoddy management, inadequate corporate governance and is representative of companies in Japan which continued to receive loans from banks that owned equity even though the collateral was questionable.

 By 1999, within a decade after Sanraku had been rebranded Mercian Inc., the company was experiencing significant problems with choppy sales and questionable management. Suzuki’s message in the English version of the 1999 annual report included:

In fiscal 1999, the year ending December 31, 1999, Japan’s economy, unable to make full-fledged comeback, continued to be hampered by high unemployment rates and a prolonged lull in consumer spending. To acclimatize to the age of change, a series of large-scale mergers started taking place in the financial industry. Over the next few years, the nation’s economy on the whole will likely experience a huge transformation.

During the period under review, Japan’s alcoholic beverage market, affected by the trend for lower selling prices, continued to encounter intense sales competition. The Japanese wine market retreated, following an exceptional performance in the previous term. Fiscal 1999 saw a sharply growing demand for low-priced Chu-hi drinks, while wine sales declined, affected by inventory adjustments. [Chu-hai is a shochu highball beverage. Suntory was competing successfully in the chuhai market as well.]

Suzuki’s message in the 2000 annual report revealed a continuing contraction in profits and Mercian’s management problems which had been evident ten years earlier:

Conditions in the alcoholic beverage market were harsh owing to the trend toward lower selling prices, reflecting the stagnant economy … despite rationalization measures, consolidated sales in fiscal 2000 fell 10.1%. Operating income fell 39.6% …

To enhance corporate governance, we have improved the board of directors and appointed external directors, and introduced economic value added (EVA) as a key management indicator, adopted a new personnel system and a performance-based system … Price reductions are expected to continue hampering alcoholic beverages market, intensifying survival among companies. The Mercian Group is undertaking to enhance its management base … the board of directors will concentrate on policy making and operation monitoring. To this end, we have appointed external directors.

Mercian’s Annual Reports in English do not include the list of primary stockholders which is included in the Japanese version. The lack of continuity in the primary shareholders listed in the Japanese version was ominous.

In 2000 Shunsuke Inamori, the chairman of Ajinomoto and Yoshihiko Miyauchi were appointed as directors on the Mercian board. At the age of 78, Miyauchi retired in May 2014 as Chairman and CEO of Orix Corporation, Japan’s largest leasing firm and major provider of general financial services in Japan. Miyauchi maintained intimate networks with government and big business since the 1960s.In the same year Glenfiddich, dissatisfied with sales, transferred operations to a new Japanese distributor. The 2001 Annual Report portended Mercian’s rocky conditions and that the company was under financial duress:

…the stagnant economy hurt sales of wine to restaurants, market recovery remained slow, and there was insufficient inventory consolidation in the market. Consequently, sales fell, and it was primarily low-priced products for individual users that saw increased sales this fiscal year.

The sales of shochu increased from 2000, continuing to be a Mercian best seller. The Château Mercian series – Mercian’s wine – again received high praise in international competition, an example of Mercian’s technical merit in achieving a high standard of quality.

In March 2002 the firm of Deloitte Touche Tohmatsu was hired as independent auditors for FY 2001, 2002, 2003 and 2004. The auditors reported that they considered Mercian’s consolidated statements to be accurate. Nevertheless, the final pages in these reports carry a “Cautionary Remark Regarding Forward-Looking Statements”:

Statements made in this document with respects to Mercian’s plans, strategies, expectations about the future, and other statements except for historical statements are forward-looking statements. These forward-looking statements are subject to uncertainties that could cause actual results to differ materially from such statements. These uncertainties include, but are not limited to, general economic conditions, demand for and price of Mercian products, Mercian’s ability to continue to develop and market advanced products and currency exchange rates.

A more positive statement would have been helpful.

The  2002 Annual Report Suzuki continued to put a positive spin on Mercian’s conditions by touting Mercian’s management overhaul and the change to Japan’s new corporate accounting standards:

We achieved the above [reduction of interest-bearing debt] … despite a harsh operating environment, including persistent deflationary conditions in the domestic economy and the global economic slowdown, which depressed exports. These successes were made possible by the dedication and teamwork of our management and employees striving toward common goals.

Suzuki’s message to stockholders in the FY 2003 and 2004 Annual Reports focused on the success of Mercian’s restructuring and its core domestic liquor business. He pledged to improve operations in the feedstuffs business.

The 2004 report displayed color photographs of skin-care products Mercian was producing from grape extract labeled “Visage.” But the exit of Miyauchi as a director suggested an escape from a burning building. Takei Shiina, who had been the vice-president and chairman of IBM Japan Ltd., hopped on board as a director after his retirement.

Fire sale

The primary stockholders in 1999 were the financial institutions that provided loans to Mercian. The 1999 Annual Shareholders Report in Japanese shows that there were 17,012 stockholders and that there were ten main stockholders: Ajinomoto with 11.1 percent equity, Daiichi Life Insurance Company owned 5.5 percent, Daiichi Kangyo Bank (Mercian’s corporate bank) and Mitsubishi Trust with 4.7 percent each, Yasuda Life Insurance and Tokyo Mitsubishi Bank with 3.8 percent, Fuji Bank owned 3.4 percent, and Sumitomo Maritime and Fire Insurance Co. Ltd. and Greater Tokyo Marine and Fire Insurance Co. Ltd. owned 2.3 and 2 percent respectively.

The major stockholders remained the same in 2000 but due to the merger of Dai-ichi Kangyo, Fuji Bank and the IBJ, the shares were transferred to Mizuho. Ajinomoto had owned 11.1 percent of its affiliate’s shares until 2002 when the percentage of shares increased to 11.6 percent as indicated in the 2003 Annual Report. Also, Nihon Master Trust, a bank that was established in 2000, became a new shareholder with 12.5 percent. In 2002, Ai Oi Nissei, an Asset Administration Services took equity. Additionally, the list of key shareholders had changed from the previous year with other financial institutions holding smaller percentages of equity. Mercian’s annual report for 2005 is not available.

In 2006, Kirin Holdings, Japan’s top beverage producer, announced that it had purchased a 50.1 percent stake in Mercian to diversify assets outside of beer brewing.

Printed on the first page of Mercian’s Annual Report for FY 2009 is a ‘Note Regarding Revision of Financial Statements’:

In 2010, an internal investigation conducted by Mercian revealed major deficiencies in internal controls pertaining to Companywide management processes, financial accounts settlement and reporting processes, and business processes in the Fish Feedstuffs Division. As a consequence of this investigation, Mercian was obliged to revise its consolidated financial statements for fiscal 2009 and the preceding four fiscal years and to have the revised statements audited by its independent auditor, Deloitte Touche Tohmatsu.

Hiroshi Ueki, the president and CEO, who was also the president and CEO of Kirin Holdings, stated that in July 2007 Mercian had become a member of the Kirin Group of companies and that one of his primary responsibilities was to:

…reinforce Mercian’s corporate structure in terms of management, stimulating horizontal and vertical communication and promoting management that mirrors the perspectives of our customers. To these ends, we have implemented a broad range of measures designed to fortify our operating foundation …

Despite the positive impact of a value-based sales approach and efforts to optimize inventory and reduce sales, general and administrative costs in the wine business, and increased sales in the Pharmaceuticals and Chemical segment, the operating loss swelled to ¥1,579 million, from ¥1,303 million (¥93.50 = $1). This reflected a persistent downward trend in sales in other businesses, notably alcoholic drinks and feedstuffs segment and the worsening impact of rising prices for raw materials used in fish feed. Mercian’s net loss also worsened to ¥2,117 million, from ¥1,871 million … This was due to the application of a new accounting standard of inventories, as a result of which the differences between inventories at the beginning and the end of the fiscal year (¥795 million) was accounted for as a loss on write-down of inventories and included in extraordinary losses.

The TSE, which had been watching the company for a possible delisting, took action and delisted Mercian Inc on November 26, 2010 for the false reporting of net worth. On the same day that Mercian was delisted, Kirin Holdings announced that it would purchase Mercian Inc.’s remaining shares for $132 million in order to gain tighter control over the company, which had confirmed in May that it had inflated profits over losses for several years, booking a loss of ¥6.5 billion (¥87.10 = $1). Kirin was forced to revise down its forecast for annual net profits by 27 percent, partly to accommodate the loss. Kirin’s shares dropped 1.1 percent and the Nikkei 225 average also fell 1.1 percent. Ajinomoto took over Calpis in the 2010 deal with Kirin.

At a press conference Ueki told reporters that Mercian would decide whether to shut down the fish-feed division. He included that he would take a 50 percent salary cut for three months to take responsibility for the false transactions and that five executives and an auditor would have their pay reduced. In 1999, Mercian employed 2,000 staff. In 2014, Mercian was employing 500 staff.

“Creative METI”:  everything old is new again

At a press conference on November 22, 2002, Nobuteru Ishihara declared that to his and the Cabinet Minister of Economy, Trade and Industry’s astonishment JETRO was publishing a pamphlet advertising import promotion. Ishihara was implying that the importation of foreign goods was no longer a primary concern because of the recession and the contraction of the domestic market.

In 2007, the United Nations Conference on Trade and Development (UNCTAD) inward FDI performance index ranked Japan 137th among 141 countries, which constituted 2.5 percent of the GDP. Peter Mandelson, the former European Union Trade Commissioner, complained in a speech given at the EU–Japan Center for Industrial Cooperation on April 21, 2008 that Japan was “the most closed investment market in the developed world.” Ironically, the event was sponsored by METI and JETRO its Incorporated Administrative Agency. Mandelson suggested that Japan, whilst taking advantage of the openness of foreign markets was creating barriers to foreign investment. He cited figures showing that 3 percent of Europe’s total $300 million outward investment was invested in Japan, comparing it with Japan’s outward investment. “For every dollar Japan invested in the UK and the Netherlands alone, European companies were able to invest a net total of only 3 percent in Japan.” Since then FDI in Japan remains unchanged.

JETRO is replicating most of the services it provided in the 1990s. Market information published in the 1990s can be accessed on JETRO’s current website. There are the same small business support services, the same database of prospective importers and Japanese business partners, expert business consulting services, and “a global network of company executives, advisors and more…Because JETRO is an independent agency of the Japanese government we are able to provide many of our services for free.”

The Foreign Investment in Japan Program (FIND) was terminated on March 31, 2002. Edward J. Lincoln wrote in his book Troubled Times (1999) that it had been expected that FIND would assist in a concrete way with foreign investment, but the corporation was criticized because it did little more than propose joint ventures with Japanese firms that were members of FIND. It also charged a fee for introductions. Lincoln argued that since FIND was a government corporation, it was not free to give advice on mergers and acquisitions. He concluded: “Foreign firms were less in need of advice or introduction to potential businesses than the dismantling of the real obstacles to acquisitions.”

METI replaced FIND with INVEST JAPAN when JETRO was converted to an Incorporated Administrative Agency in April 2003.

The Manufactured Imports & Promotion Organization (MIPRO) was established in 1978 by MITI. As of April 1, 2013 MIPRO was renamed the Manufactured Imports & Investment Promotion Organization (MIPRO). It operates an office in Washington, DC where METI officials and Japanese trade delegations visit regularly. The MIPRO 2013 website includes a message from the president Tsutomu Higuchi:

Direct investment in Japan accounts for less than 2% of Japan’s nominal GDP, which is much smaller than similar shares in other major advanced countries, and nearly 80% of such investment is made in Kanto and Koshin-etsu districts. Therefore, extending foreign investment in Japan and promoting the penetration of foreign capital into Japan are urgent tasks. In cooperation with affiliated organizations, MIPRO is supporting global business activities and secondary investment in local areas by foreign companies in Japan. The investment branch wants to promote inward investment with a program called INVEST JAPAN.

INVEST JAPAN opened the INVEST JAPAN Invest Business Support Centers (IBSC) in Tokyo, Yokohama, Nagoya, Osaka, Kobe and Fukuoka which provide exactly the same services as the old Business Support Centers. The Financial Times was purchased by Nikkei Inc, for $1.3 billion in December 2015. Nikkei Inc. sponsored the INVEST JAPAN 2016 Forum run by METI and JETRO. INVEST Japan ran a two-page advert in the FT on December 6, 2016 promoting its services.

MIPRO’s services are designed specifically to support small-lot business imports and foreign small business start-ups in Japan. MIPRO’s investment division promotes inward investment in twenty designated cities in Japan’s six regions. Although MIPRO’s services are relevant to manufactured goods, some of them correspond to JETRO’s services. For example, MIPRO publishes information regarding industrial standards, regulations, market information and market trends, direct investment into Japan, activities of foreign firms in Japan, Japanese lifestyles and consumption trends and so forth. MIPRO also offers consulting services, seminars about how to do business in Japan and introductions to Japanese firms for potential investment.

Mr. Higuchi had been the director of Policy Planning Division, Energy, Conservation and Renewable Energy in METI’s Agency of Natural Resources and Energy (ANRE).

What Ever Happened to Ehime’s FAZ?

The 2012 “Promising Imports Exhibition” from three Asian countries held for three months at the Ehime International Logistics Terminal (I-Lot) by Ehime Prefecture and Ehime FAZ Co. Ltd is pertinent to the waste of tax revenue on infrastructure projects and the relationship of the national ministries with prefecture governments.

The exhibition was open to 240 companies in Ehime. The Thai Trade Center in Osaka supported the exhibitors by sending samples of Thai products. Korea, Malaysia and Indonesia were also represented. The target visitors to the trade fair were Ehime retailers and wholesalers.

At the end of the three-month period the results of the exhibition were released to reveal that 85 people and 48 companies had attended. The business leads were one Thai company and two Indonesian companies. One company was interested in the Mango wood products, one was interested in the Indigo hat, and one company showed interest in the solar plants flower. A Thai company, the Oriental Beauty Charm expressed interest in exporting spa products and Ehime FAZ followed up the lead. As usual, the producer replied that it did not have the experience or the license to export cosmetics to Japan or to employ an import agent in Japan. In other words, FAZ is an “empty box.”

Behold the Old World Order

On 23 July an independent lawmaker in the Upper House joined the ranks of the LDP giving the party the majority in the Upper House for the first time since 1989. Since the LDP and the Komeito control two-thirds of the Lower House there is a good possibility that the revision of the Pacifist Constitution will come to fruition.

In October the LDP voted to extend the cap on the term of the President from six to nine years. If Abe wins reelection as President in March 2018 he will be able to retain the post of prime minister to serve until 2021.

Like his grandfather, Abe’s political philosophy is immersed in nationalism and his 2006-7 administration focused on promoting bills that would serve the national interest, such as the reinstatement of the Ministry of Defence and an intended revision of Article 9 in the Constitution, renouncing war, to allow the expansion of the role of the SDF. Abe has been adamant that the US–Japan Security Treaty is at the center of Japan’s defence policy, which was also central to Kishi’s defence policies. However, Abe’s political motives focus on the perceived threat from China’s rise as an economic and military power in Asia.

Kishi attempted to centralize police power and restore to the police some of their former authority such as the right to search suspected criminals. In 1960 the Japanese were still enveloped in a shroud of war-time suffering and public protests erupted against what was regarded as the resuscitation of war-time “thought control.” There were strikes and demonstrations supported by labor unions. Socialist law-makers rioted in the Diet and tried to kidnap the Speaker to prevent a vote. Three members of Kishi’s cabinet resigned, forcing him to shelve the bill.

Shinzo Abe’s “State Secrets Law” enacted in December 2014 harkens back to Kishi. When it was pushed through the National Diet with little public debate the Japanese media, expecting to receive gag orders from the government and to be subjected to barriers to accessing information, protested vigorously. Also known as the National Security Act, the law defined “special secrets” as sensitive information on diplomacy and counter-espionage. Over 60 per cent of the electorate, comparing it to the pre-war and war-time Peace Preservation Act which was implemented by government to quell political opposition, objected to the law because of its lack of detail of what constituted “state secrets” and because it indicated that the government would have more control over the population.

People who are arrested on suspicion of leaking “state secrets” can be detained in prison without trial. Those who are found guilty can be imprisoned for up to ten years and journalists who are convicted of trying to obtain classified information can be imprisoned for up to five years. Although politicians denied that the law would be used to restrict the press or the public’s “right to know,” Justice Minister Sadakazu Tanigaki, the former LDP president who was defeated by former Prime Minister Yoshihiko Noda in the 2011 election, did not rule out the possibility of police raids on newspapers suspected of breaking the law.

In 2016 Japan had dropped in ranking from 11th in 2010 to 59th in 2014 and now ranks 72nd for freedom of the press. The World Press Freedom Index 2016 released in April placed Japan in the category of having “noticeable problems.”

Immediately after receiving approval from his cabinet for the reinterpretation of Article 9 to allow collective self-defence, Abe created a new ministerial post for security to revise existing laws and to introduce new laws in order to produce a legal framework regarding the right to exercise collective self-defence. The National Security Law implemented in September 2015 has given Abe’s government the opportunity to expand the role of the Self Defence Force (SDF) to include supplying fuel and ammunition to the US military if Japan’s national security is threatened. Japan’s military operations now include SDF engagement overseas in South Sudan as a part of the U.N. peacekeeping activities. Initially, SDF forces were allowed to use weapons only for self-protection but now they can use weapons to protect foreign worker.

On 22 December 2016 the National Security Council approved the extension of the SDF’s duties to include the protection of US military during peace times but does not exclude engaging in US military activities in defence of Japan. Defence Minister Tomomi Inada stated at a news conference that the SDF’s protective duties would act to strengthen the Japan-US alliance and ensure the “safety and security of Japan.”  Besides the US and Australia, Japan will also supply ammunition, food and fuel to the British military, bolstering Japan’s alliances in the face of China’s maritime expansion in the Pacific.

Nonetheless, according to a survey conducted by the Cabinet Office between 27 October and 6 November of 3,000 Japanese nationals aged eighteen or older, only 20 percent of the respondents were in favour of the SDF engaging in UN peacekeeping activities such as in South Sudan

Abe’s Army

Compared to his deputy and Minister of Finance, former Prime Minister Taro Aso, Abe can be considered a “dove.” Aso’s right-wing ultra-conservative ideology and glorification of Japan’s colonization days in East Asia replicates Abe’s. Aso’s opinions have been well publicized in the press during his political career. Despite his frequent public outbursts espousing his neo-nationalist sentiments, he remains as Abe’s second-in-command. In 2005, he touted Japan as a mono-culture with one race, one language and one civilization, excluding other ethnic groups such as Chinese and Koreans.

When he ran for president of the LDP in his bid for the office of Prime Minister in 2005, Aso’s platform regarding foreign relations was “Arc of freedom and prosperity: Japan’s Expanding Diplomatic Horizons” which may also be interpreted as a reiteration of the Meiji slogan, “Prosperous Country, Strong Country, Strong Military.” In 2006, Aso warned the Japanese that China, with a population of one billion people, possessed nuclear bombs and had expanded its military budget by double figures for seventeen consecutive years.

During Aso’s term as Prime Minister in 2008, the Western media reported that Aso Mining had forced 300 Allied prisoners to work without pay in the Aso Mining Company in 1945 and that two Australian prisoners had died. Furthermore, 10,000 Koreans were recruited to work under cruel conditions, many of whom had died. Although former labourers requested an apology, Aso refused to reply.

Aso continued his nationalist rhetoric at an ultra-conservative conference in Tokyo on July 29, 2013. He criticized the lack of support for revising Article 9, stating that the Japanese should follow the example of the Nazis who, in order to avoid protests, secretly revised the Weimar Constitution to the Nazi Constitution. Aso recommended that the Japanese should learn from these tactics. He also encouraged secret visits to Yasukuni Shrine in order to avoid diplomatic outbursts. He refused to apologize or resign from office but retracted his statement, blaming misinterpretation by Kyodo News the newspaper which reported the event.

Abe’s appointment of Tomomi Inada as Minister of Defence in August was not welcomed by South Korea because of her blatant nationalistic views. A right-wing revisionist, she denied the military atrocities committed in Nanjing in 1937 and claimed in a 2007 advertisement in the Washington Post that there was no evidence that Korean women were forced to serve as “comfort women.” In 2014 she was photographed with the leader of the Japanese pro-Nazi party. She claimed that she had met the leader only once.

Inada, who visits Yasukuni Shrine annually, supports prime ministerial visits. Aso visited the shrine in December 2015.

The Propaganda Machine

The Nippon Hoso Kyokai (NHK) is a public broadcasting system and, similar to the BBC, is supported by license fees collected from everyone who owns a television. Although the NHK is ostensibly an independent broadcaster, the twelve-member board of directors is appointed by Parliament, which also approves the NHK annual budget.

In the autumn of 2013, Abe appointed four ultra-conservative officials as members of the NHK board. The four officials then assisted Abe to appoint Katsuto Momii as governor who succeeded Masayuki Matsumoto after Matsumoto suddenly announced that he would not seek another three-year term as had been anticipated. The media reported that he had been admonished by Abe’s administration for allowing National Broadcasting System (NHK) coverage to be too critical of nuclear energy and American bases on Okinawa. Abe also established a new NHK Management Board in 2013 and appointed Michiko Hasegawa, a right-wing nationalist, to the board.

Right-wing nationalist sentiments are now being expressed openly by the directors on the board of the NHK. After only two days on the job as the governor of NHK, Momii stated at a news conference that the 200,000 women who had been forced to serve as sex slaves during the war was common practice in any country engaged in war. Momii cited France and Germany as examples. He later retracted his statement when he was grilled in Parliament. But Momii refused to retract his other statements, which included his support of Japan’s territorial right to the Senkaku Islands and rejected the view that NHK should cease criticizing the secrecy law. Despite the controversy sparked by Momii’s remarks, two days later Naoki Hyukuta, a novelist and who also was chosen by Abe as one of the twelve governors of NHK, stated that in 1938 Chiang Kai-shek had blamed the Japanese army for the Nanjing Massacre and that the event did not occur. Hyutaka also reiterated Momii’s statement regarding “comfort women.”

After the Kumamoto earthquake in April, Momii instructed staff to focus only on the government’s explanation of the safety of nuclear reactors in the neighboring prefectures and to dismiss the analyses of ‘outside’ experts. There is significant pressure on the government from citizen groups for his dismissal. Momii will be replaced at the end of his term by board member Ryoichi Ueda who was the CFO of Mitsubishi Corp.

The Japanese media is expressing deep concerns that Abe and his right-wing colleagues are interfering with freedom of the press and freedom of speech through the political appointment of people who will silence criticism of government policies, including restarting the nuclear reactors and denial of Japan’s wartime atrocities. The Japanese are increasingly worried that Abe is using the NHK as an organ to control the flow of information and as a mechanism which supports his political agenda.

Spreading the “N-Word”

Abe is also determined to spread his nationalist ideology in the ministries. In 2014 Abe established the Cabinet Bureau of Personnel Affairs which choose the appointments of 600 elite ministry officials for positions in their respective agencies. The previous system allowed the prime minister and his chief cabinet secretary to select 200 elite ministry officials for top posts in the ministries but the new bureau gives Abe and Chief Cabinet Secretary Yoshide Suga the power to screen and appoint 600 elite ministry officials for top positions in the ministries. Suga, who is Abe’s closest ally and who is known for his penchant for interfering in personnel affairs, explained that the objective of the bureau was to “cope with various issues quickly and in a united manner.” The new system allows Abe and his right-wing colleagues to spread an ultra-conservative, right-wing ethos in the bureaucracy through the appointment of senior elite officials who have similar political views and objectives. As an example, traditionally, a senior official in the Cabinet Legislation Bureau was appointed to the position of director-general but Abe preferred to appoint an official who would promote the reinterpretation of the Constitution to allow collective self-defence.

Newer History Textbooks

In my 2012 and 2014 books I detailed the territorial disputes with China which claims sovereignty over the Senkaku Islands and with South Korea which claims sovereignty over Takeshima. The government’s assertion that the islands belong to Japan was emphasized in the revised New History Textbook as well as in twenty four additionally authorized books published in 2014 by five publishers. The texts include claims regarding territorial conflicts which also include the Russian-occupied Northern Territories off of Hokkaido. The education ministry requested that the publishers avoid specific issues such as the Nanking Massacre and to include the government’s posture on compensation for forced wartime labor from China, for example “comfort women.” In other words, the publication of the first New History Textbook set the foundation for this nationalist propaganda.

China lodged a formal protest to the Japanese government for what it referred to as “historical errors,” claiming that the Nanking Massacre was an atrocity committed by the Japanese military and, also, that China had inherent rights to the Senkaku.

The media continues to cover Ehime. On 16 March 2016 the Ehime Prefecture board of education reached a unanimous decision that high school students who intend to participate in off-campus political activities must give prior notice to their schools. The new rule coincides with the government reducing the age of voters from twenty to eighteen and the Upper House elections in the summer. The risk is that if students violate the regulation, they could face disciplinary action. The scare tactic will ultimately inhibit political awareness among young voters.

The Power of the State

Abe’s “Basic Energy Package” declares that nuclear power is an “important base load electricity source” but it does not state specifics about the development of alternative energy sources, suggesting a long-term commitment to nuclear energy.

Japan’s Nuclear Crisis: The Routes to Responsibility (2012) exposed the former MITI’s- affiliated agencies and research institutes which have been at the core of the nuclear and electric power industries since the 1950s. The book examined how these and other government institutions served to promote interpersonal networks between ministry officials, politicians, the utilities and the nuclear energy industrial sector to answer why the nuclear crisis was an impending disaster, why the regulatory supervision failed and why there were fifty-four nuclear power plants on earthquake-prone zones.

Until the nuclear crisis the Nuclear Industry Safety Agency (NISA), established in 2001 was a division in METI. NISA’s website promoted itself as “an institution dedicated to ensuring nuclear power safety.” NISA declared that it was dedicated to “making a sustained effort towards on-site safety” and assured the public that it was committed to keeping the public informed. NISA claimed that first and foremost its mission was to recognize the impending risks that are intrinsic in nuclear installations and through regulatory measures to ensure the safety of the public. NISA also maintained that its objective was to respond quickly to accidents in order to control damage and the acceleration of events.

However, the vested interests in the nuclear energy industry shielded the utility company operators who falsified data regularly regarding the structural safety of their nuclear power plants such as radio-active leaks and cracks in the infrastructure. Following the crisis NISA was terminated and replaced with a new agency, the Nuclear Regulatory Agency (NRA) which charged the utility operators to install new safety measures to ensure that the plants would withstand tsunami and earthquakes.

Abe replaced two outgoing commissioners with advocates of nuclear power in order to ensure that the NRA would approve the restarts of a number of reactors. The independence of the NRA from government and the impartiality of the commission is questionable because the commissioners either received large endowments from the nuclear industry for research or had close relations with the nuclear industrial complex. Since the research and development of nuclear energy is protected by the state as one of its industrial policies and since it is also connected to issues of national security it is unrealistic to presume that the NRA can be separated from government and that guaranteeing a transparent and unbiased inspection of power plants is unrealistic as well.

The Tokyo Electric Power Company (TEPCO) admitted to falsifying reports sent to NISA which would have exposed the structural problems in the reactors. Ministry officials also refused to accept the claims of an engineer involved in the construction of Fukushima that the No 1 reactor was structurally flawed. After the crisis TEPCO continued to withhold data revealing the volume of nuclear waste seeping from the reactor. Japan’s Nuclear Crisis predicted that the government would continue to fund the consequences of the Fukushima disaster and that the burden would be assumed by the public who, in September, were advised that they would be invoiced in their electricity bills for the cleaning up of Fukushima and the decommissioning of reactors. The bill is estimated to be $118 billion, double of what was anticipated.

The book forecast that despite assurances from the government that evacuees would be able to return to their cities after a clean-up, the majority of evacuees from the cities affected by the nuclear event would either be unable to return to their homes, compelled to live in temporary housing or move to other regions. Sadly, the forecast was correct. The operator TEPCO is still struggling to contain the leakage of radioactive waste.

I predicted that the nuclear power plants would be reactivated as soon as new safety regulations had been established but due to vociferous public protests and the reticence of political parties to take a stance (even though both the LDP and DPJ were pro-nuclear prior to the Fukushima crisis), with the exception of four, the majority of reactors remained idle until this year. Despite the recent earthquake in Kumamoto Prefecture, the NRA, supported by the Supreme Court, has given the thumbs-up to restarting a number of reactors, including several  commissioned 40 years ago which were scheduled for decommissioning.

The towns where the nuclear plants are located which relied on subsidies and tax breaks for hosting the plants are now requesting the reactivation of the plants to ensure employment of workers and continued subsidies and tax breaks.

Abe’s administration targeted Ehime Prefecture’s Ikata as the first plant to go online as soon as the NRA gave the all-clear. In October 2006 when METI requested that Ehime host a pluthermal plant to become fully operational by 2010, in spite of vehement protests from civic groups, Governor Kato welcomed the project since Ehime’s economy would undoubtedly benefit from substantial government subsidies of ¥6 billion ($51.7 million). This was a hefty sum, especially for a prefecture which generated only about 36 percent of its tax revenue. On October 13, 2006, after obtaining the consent from Ikata mayor Kazuhiko Yamashita, the governor presented a written agreement to the president of Shikoku Electric Power Company (YODEN) which owns and operates the power plant.

Three years later, refusing to capitulate, on January 19, 2009 the Association of Ehime Prefectural People for Cooperation together with other citizen groups demanded that METI’s former Nuclear Industrial Safety Agency (NISA) force YODEN to cancel its plans for the pluthermal reactor. Their appeal was ignored and YODEN began commercial operations in March 2010. Kato expressed confidence about YODEN’s safety measures and his belief that the central government’s pluthermal policies were practical.

On August 3, 2011 Mainichi Shimbun reported that a retired METI official who headed the public relations in NISA admitted that NISA had asked YODEN senior officials to request that staff attend a seminar in Ikata in June 2006 where there was discussion of using MOX in Ikata’s No. 3 reactor in order to influence a positive response from attendees.

Kato’s successor was Torihiko Nakagawa, a local lawyer, who won the 2010 election on the LDP ticket. Applauding the initiation of a pluthermal plant, he agreed with Kato that the government’s screening methods and government nuclear policy were reliable. Although concerned about the safety issues, the majority of Ikata residents, many of whom worked in nuclear-related jobs and who were adversely affected financially due to the loss of subsidies and jobs, were clamouring for the restart of the reactors. In an interview in March 2014 Mayor Yamashita said that he would accept the restart of the plant if the NRA confirmed that the plant was safe. YODEN submitted an application to government to restart number three reactor which is 100 percent fuelled with MOX.

 In the summer of 2015 the NRA approved Yoden’s safety measures for reactor number three and on October 26, 2015 Governor Nakamura, despite the opposition from 54 percent of Ehime residents’ and appeals to the Supreme Court for an injunction, gave the all-clear for the resumption of the reactor. Ikata’s mayor followed suit. Commercial operations formally commenced on 25 August with 16 units of mixed oxide (MOX) in the 157 fuel assemblies.  In the eventuality of an earthquake, evacuation of the 120,000 people living within the 30 km radius of Ikata is problematic because of the likely collapse of the transportation infrastructure which would serve to cut-off the escape routes.

YODEN decided to decommission number one reactor because of the price tag of rebooting the forty year-old reactor. The decommissioning is expected to take forty years at a cost of ¥1 billion and government subsidies to Ikata will decrease by ¥400 million.


Despite the anti-nuclear protests and grave concerns about the reactivation of the Hamaoka Nuclear Power Plant (Chapter 2), otherwise known as “the most dangerous power plant in the Japan.,” which had been taken off-line, CHUDEN, after constructing a sea wall standing 22 meters high and1.6 km long at a cost of $3.56 billion, will reboot the reactors in the near future. According to records kept by the head of a residents group, the town received $28.3 million for over two decades from CHUDEN as “cooperation money.” The amount in government subsidies and tax breaks is not included.

Other prefectures are also caving in to the need for continued subsidies. After Kagoshima Governor Satoshi Mizazono accepted the restart of operations at the Sendai Nuclear plant even though neighboring Kumamoto Prefecture suffered a powerful earthquake in April, KUDEN rebooted the plant in December. Fukui Prefecture has also given the green light to the restart of the forty year old Mihama Plant even though the Fast Breeder Reactor has had a history of nuclear incidents.

A chapter in the 2012 book discusses pork barrel patronage in the prefectures and the consequences on the proliferation of nuclear power plants in less well-endowed regions. The Kashiwazaki-Kariwa nuclear power plant located in the town of Kashiwazaki-Kariwa in Niigata Prefecture is a classic example. The late Prime Minister Kakue Tanaka, a consummate user of FILP funds, represented the prefecture for many years and used his political muscle to bring numerous infrastructure projects to his constituents while realizing large personal profits through land-flipping deals. Despite serious accidents, the plant continued to operate until the Fukushima nuclear crisis when it was taken off-line. TEPCO, the operator is pressuring government to restart the plant.

On 17 October, Ryuichi Yoneyama who ran on an anti-nuclear platform was elected governor. However, on 20 November Masahiro Sakurai who is pro-nuclear, won the mayoral election for Kashiwazaki-Kariwa. He will approve a restart “if the safety is confirmed,” which, after his initial meeting with TEPCO management, could take several years, according to a government spokesman.

Japan’s Nuclear Crisis predicted that as a consequence of the decline in the construction of nuclear power plants domestically, the nuclear divisions if the heavy industries would struggle to earn revenue and that the government would aggressively promote the export of nuclear technologies and equipment to emerging markets. There was little success until November 11, 2016 when Japan signed a civil nuclear energy agreement with India. Toshiba, through its Westinghouse subsidiary, is set to build six nuclear power plants in India. Toshiba, which purchased Westinghouse in 2006 for a whopping $5.4 billion was subsequently investigated for inflating profits to conceal the dire financial state of its nuclear arm. In December 2016, Toshiba admitted that it had overestimated the value of Westinghouse and had paid far too much for the nuclear arm. On January 18, 2017 Toshiba’s shares plummeted 16 percent when it announced that the loss was even larger than anticipated at $6.1 billion and is applying to the DBJ for financing ( FILP).

Since India possesses nuclear weapons, anti-nuclear activists and pacifists were protesting vigorously at the outset of the negotiations in 2010. But the government and the heavy industries were determined to seal the deal. There are also concerns that the government has been storing plutonium for military purposes. On June 7, 2014 Kyodo News Service confirmed that Japan had omitted declaring 640 kg of unused plutonium to the International Atomic Agency (IAEA) in 2012 and 2013. Japan possesses as large an amount of plutonium as countries with nuclear weapons and is closely monitored. On 17 September the cabinet office reported that Japan’s stockpile of plutonium was 47.1 tons up 2.9 tons from the end of 2013, which is enough to produce 6,000 nuclear weapons.

Until the Fukushima nuclear disaster, Sellafield, located in Cumbria, was reprocessing the spent fuel from not only Fukushima but, also, from other reactors in Japan. The crisis served to halt operations until recently. Sellafield will be the recipient of a £10 billion nuclear power plant to be constructed by Westinghouse which purportedly will create 21,000 jobs in a region which has high unemployment. The investment for the plant, which has been named “Horizon,” is under consideration and is being led by the JBIC and the DBJ, two corporations in the FSC and funded by FILP.

The Public Pension Investment Fund: the big squeeze

The prefectures where the nuclear plants are located were experiencing depopulation for years and the majority of residents in many towns were senior citizens. Why Japan Can’t Reform (2008) argued that an aging population together with a decreasing population and the rise of welfare costs would increase public spending and serve to raise the government debt. The low fertility rate at the time was causing major worries since 25 percent of the population was over 65 and the longevity rate was the highest in the world. In 2005 the National Institute for Population and Social Research predicted that the portion of the population aged 65 and older would rise to 27.8 percent in 2020 while those aged 15–64 would fall to 60 percent. There were also concerns that with little immigration and a birth-rate that was below replacement (at 1.32), the population of 127 million was already shrinking. Pension and health-care pay-outs were swelling as the number of elderly was increasing. The productive population was shrinking and premium payments were also decreasing.

According to a survey released by the Ministry of Internal Affairs and Communication (MIC) on April 15, 2014 the total population of Japan fell 0.2 percent from the preceding year and the main working population fell below 80 million as of October 1, 2013, for the first time in thirty-two years.

As of September 2016, 27.3 percent of the population was 65 years or older. The decline in the working population aged 15–64 was significant and, therefore, wage-earners will be burdened with the responsibility of paying for the social welfare costs of retirees. MIC reported in July 2016 that Japan’s population had fallen to 125,891,742 as of 1 January a decline for the seventh straight year. To make matters worse, the number of babies born during 2016 fell below one million for the first time on record, a trend that predicts a demographic catastrophe and an unsustainable burden on the state pension unless the retirement age is extended.

Abe’s “Industrial Revival Plan” promised a long-awaited overhaul of the public pension investment fund (GPIF) to reduce exposure to JGB and invest in other assets that promised higher returns. In 2014 the $1.3 trillion fund, which is the largest in the world, invested fifty percent in both domestic and foreign equity and returns were initially positive at 12 percent.  However, due to the downturn in global equities, the fund suffered a $52 billion loss in FY 2015, the biggest since the global financial crisis. The GPIF managed to recoup some losses in the third quarter of 2016 when it posted its first profit of 1.8 percent due to the rise of domestic and foreign shares on the stock markets. Nevertheless, the turbulence in global markets is an ongoing concern.


Will He or Won’t He?


The OECD reported that the ratio of Japan’s primary debt balance to GDP for 2015 was 4.84 percent, the worst figure among the thirty five OECD member nations. It is projected that the government will be unable to wipe out its primary balance deficit by 2020 which is calculated to be approximately $53 billion because of decreasing tax revenue. It had urged Abe to pursue structural reforms and to raise the consumption tax in 2015 from 8 to 10 percent.

Former Prime Minister Noda who criticized Abenomics as “voodoo economics” stated in his book in 2009 that the consumption tax must be raised to 15 percent by 2013 in order to fund burgeoning welfare costs.

At a press conference on 13 June 2014 Abe announced that the government would decide by year end whether to raise the consumption tax to 10 percent.  However, even pressure from business leaders and members of his cabinet to raise the tax did not dissuade Abe from postponing because he feared that a hike would trigger a recession close to the elections. To justify the postponement of raising the consumption tax in 2017 and to justify further QE, in March, Abe called on Paul Krugman and James Stiglitz, both proponents of stimulus. Without considering that minus interest rates were counterproductive and served little more than to monetize the sovereign debt, both economists, signaling the global economic downturn, advised Abe to freeze the consumption tax, consider other forms of taxation and indulge in more stimulus, but with the caveat that consolidation with fiscal policy was essential. Their recommendations conveniently gave Abe leave to announce in June 2016 that he would postpone the tax hike from 2017 until 2019.


Getting it Right about the Sovereign Debt: QE

In all of the books I focused discussion on Japan’s escalating sovereign debt, asserting that it would continue to rise despite the BOJ’s accommodating monetary policies. In 2002, the sovereign debt was 140 percent of annual GDP and by the end of Koizumi’s term in office (2006) it had climbed to 180 percent. When Prime Minister Abe entered office in 2006 government debt had escalated to over 200 percent. In 2016 it stands at 250 percent. Sixteen years have passed void of little fiscal rebalancing or structural reforms of the administrative system. FDI is still the same at 2-2.5 percent.

Currently, fiscal consolidation and rebalancing is not being given serious consideration as Abe’s fiscal policies continue to mirror policies implemented since the 1990s with huge stimulus packages and secondary budgets to support infrastructure projects, benefiting the larger companies and exporters and gaining support in key constituencies.

Former BOJ Governor Masaaki Shirakawa was opposed to further purchases of JGB which is referred to as QE or “quantitative easing” but he suggested the purchase of riskier assets such as exchange-traded funds, real estate investment trusts (REIT) known as “qualitative easing” (QQE). Nevertheless, he expressed concerns in May 2011 that Japan would lose market confidence if the government failed to deal with its finances. He also worried that the weakening of confidence in the private sector financial firms, which were heavily invested in JGB, would lead to higher borrowing costs. The economy would suffer, tax revenue would fall and the government would have difficulty paying off its debt. The following July, the BOJ was not prepared to guarantee more JGBs to fund growth because it would undermine the trust in the currency, increase long-term interests rates and pose difficulty selling JGB on the market.

Shirakawa emphasized the limits of an enormous increase in the monetary base particularly within the context of Japan’s deflation and other economic problems and that fiscal policies must complement monetary policies. He urged the government to address Japan’s slowing growth rate and low productivity as well as the rapid decrease of the working population and to implement structural reforms. Shirakawa retired from office in April 2013, two months before Abe installed a new governor who was enthusiastic about QE as a means to end deflation and to depreciate the yen. When Haruhiko Kuroda, a former MOF international vice minister became the new governor he wholeheartedly supported Abenomics and set an inflation target of 2 percent within two years.

In April 2013 the BOJ began its extreme monetary easing measures by purchasing large amounts of corporate bonds from banks and companies. By December 2013 as Japan’s money supply had reached $1.83 trillion just short of the $2 trillion targeted, the BOJ purchased additional assets while the government launched a $910 billion package to compensate for the April 2014 rise in the consumption tax from 3 percent to 8 percent. Even though BOJ Governor Haruhiko Kuroda was not concerned about a 2 percent rise in long-term bond interest rates, at a news conference on April 8, 2014 Kuroda told reporters that, although the BOJ was not considering exiting from QE, spare capacity in the economy was “approaching zero.” His hint that the BOJ might cut asset purchases caused bond interest rates to spike briefly. Some of the bonds purchased are so-called Zaito bonds, also referred to as FILP bonds or FILP agency bonds (chapter 22) and issued by designated Zaito institutions similar to the FSC. However, these bonds are not guaranteed by the government.

On June 18, 2014 the BOJ announced that at the end of FY 2013 the bank was Japan’s biggest debt holder with 20.1 percent of JGB or $1.97 trillion, the highest on record. According to the report, insurance companies held 19.3 percent of JGB, followed by small and medium-size financial institutions with 13 percent, government public bodies with 8.9 percent and households holding only 2.1 percent. The BOJ is purchasing JGB worth $750.32 annually. QE continues, effectively transferring interest-risk from the private sector to the bank and bringing the relationship between the BOJ and government even closer.

Nevertheless, in an interview with the Wall Street Journal in May 2014, Kuroda was beginning to sound like his predecessor. He stated that Japan’s medium-term growth was less than 1 percent: “Unless this growth potential is raised, the end result will be only the 2 percent inflation target achieved but real growth is meagre.”

Kuroda also expressed his concern that despite 2 percent inflation, growth would be tepid and urged Abe not to rely on monetary policy alone but to implement structural reforms that coincided with BOJ’s policies.

As of October 17, 2016 the BOJ-held bonds exceeded $3.8 trillion for the first time. The bank’s bond-holdings are 40 percent of all outstanding JGB and it is projected that it will hold over 50 percent by 2018. In other words, the BOJ is assuming much of the government debt.

Since inflation is a mere 0.3 percent and since its policy tools of minus-interest rates and purchasing JGB has failed to spur the economy, in order to shore-up the TSE, the BOJ is expected to purchase more exchange-traded funds and release more stimulus.

Getting it Right: QQE and QQE2

On 29 January the BOJ announced that it would hold interest rates for long-term bonds at zero percent and pull 3-6 month bonds into minus interest rates (QQE2). Since yield is “zero” or lower foreign asset management houses and private investors are exiting the market and domestic institutional investors and asset management houses are following suit. Since the demand for loans is low the FSA is concerned that negative interest rates will cost the three largest Japanese banks $2.96 billion. If interest rates go further into negative territory, the banks’ profits will decrease even more as they struggle to pay-off savers. Regional banks are particularly vulnerable because the banks cannot sustain losses due to zero and minus interest rates. It is forecast that by 2025, sixty percent of regional banks will be in the red.

Japan Post Insurance which is listed with the Japan Post Bank on the TSE holds three-quarters of its assets in domestic bonds, of which 50 percent are JGB. But this year it is shying away from traditional investment and avoiding the purchase of negative yield government bonds and investing in stocks and foreign bonds, including junk bonds, private equity and real estate trusts (REITs). Other institutional investors are actively searching for profit-bearing investments and avoiding JGB. The BOJ will struggle to sell government bonds on the open market.

But the bank is facing yet another problem. It is running out of the means to continue its stimulus policies through JGB and riskier exchange-traded funds. When there were indications earlier this year that the BOJ might reduce its purchase of long-term bonds, yields spiked briefly. The spree of risky asset purchases has resulted in drying up the amount of assets available in Japan and REIT assets are proving even riskier because of the weak real estate market.

I have been cautioning colleagues for years that Japan’s escalating sovereign debt should be of major concern because Japan owns considerable equity in foreign markets and is one of the world’s largest net creditors. In order to avert a funding crisis, Kuroda, who is due to retire in 2018, has accepted that his extreme policies have not served to raise inflation and he has given up on a 2 percent inflation target. Kuroda announced again at a news conference in December 2016 that there is no limitation to loose monetary policies but that monetary and fiscal policies must be consolidated in order to bring the economy out of deflation. To put it mildly, monetary policies alone cannot correct the deep seated problems besetting the Japanese economy.

It is clear that Abe is asking the BOJ to soak up the debt but as the debt continues to rise, as the economy continues in mild deflation and consumerism is weak, as the population continues to decline, and as liquidity dries up and cheap credit is exhausted, the government will become a pauper and the BOJ will ultimately be pressured to create new money to fund the budget.

Nevertheless, Abe whose cabinet received over a 67 percent public approval rating in November will appoint a BOJ governor who will continue to pursue QE, QQE and QQE2 policies. Finally, other commentators are beginning to agree with me. For example Oliver Blanchard, the former chief economist of the IMF wrote recently in the Telegraph that there would be an “ugly end game” in Japan in relationship to its debt spiral.

The Same Old Story

In June 2010 METI released its “Industrial Structure Vision” which stated the ministry’s objectives to “launch a nation-wide effort to boost its industry’s global competitiveness” to stimulate Japan’s economic recovery. METI’s aim included a shift in industrial structure to encourage “potential strengths in businesses, the creation of jobs by aggressive globalization and by building world-class business infrastructure” and to change the government’s role to “win the fierce competition to acquire added value among countries.”

The vision, which described Japan as a “deadlocked economy,” included data from the IMF World Economic Outlook Database that showed the general deterioration of Japan’s competitiveness in global markets and the effects on the stagnated economy. IMF figures revealed that Japan’s global ranking in terms of GDP per capita was third in 2000, falling to twenty-third in 2008. In 1990, Japan’s share of the global GDP was 14.3 percent while in 2008 its share had decreased to 8.9 percent.

The METI vision reported that, although the economy was growing during 2000-7, wages remained stagnant or had declined. The number of companies going out of business exceeded the number of start-ups. MOF data revealed that while outward investment had increased, domestic capital expenditure had decreased. From 2006, domestic investment plummeted 37 percent. There was a significant shift by businesses to produce abroad. In 2011, Toyota was producing 50 percent of its cars outside of Japan and Honda and Nissan were each producing 70 percent of their vehicles abroad.

According to the World Economic Forum’s Annual Global Competitiveness Report released on September 28, 2016, Japan slipped from sixth place to eighth in the ranking of 138 countries. The reasons given were: (i) difficulties in firing staff; (ii) ratio of women to men in the workforce; and (iii) difficulty attracting foreign talent.

METI announced that industrial output in February 2016 this year had fallen 6.2 percent month-on month, the worst since March 11, 2013. The big manufacturers were cutting capital expenditure for FY 2016 and their business sentiment was the lowest since June 2013.

The Tankan quarterly survey taken by the BOJ in September 2016 also revealed the continued deterioration of business sentiment due to the failure of Abenomics to eliminate deflation and fuel economic growth. The reasons given were the slowdown in demand for manufactured goods from China and weak domestic consumption. Almost 80 percent of the top 100 companies viewed Japan’s economy “at a standstill.” The yen’s appreciation was also eating into profits for exporters. One of the reasons for the currency’s appreciation in spite of QE was its role as a safe haven given the uncertainties in the global economy.

Exports fell in October 2016 for the thirteenth consecutive month due to the currency’s appreciation. But in November the rapid depreciation of the yen against the dollar (¥105 to ¥114) may give exporters some relief in the short term. However, real growth depends upon consumer spending which accounts for 60 percent of GDP and consumer prices fell 0.4 percent from last year, the largest since 2011.The unemployment rate is 3 percent but wages remain flat.

Devolution:  too late?

The government’s push for devolution should be considered within the context of Japan’s continued severe economic conditions and not because the national ministries prefer passing the powers to local authorities to plan and implement policies.

In order to downsize subsidization and conserve national budget outlays, the government is requesting that local authorities assume more of the financing of infrastructure, public works projects, education and welfare thus reducing the dependence on central government support. The Ministry of Internal Affairs and Communication (MIC) acknowledged on its 2010 website that Japan’s economy had been in a state of recession since 1992:

Regional finance therefore plays an extremely important position, so to speak, as one of the two wheels of a vehicle together with national finance. Increasingly important will be the roles of local governments and accompanying financial measures, such as promoting regional sovereignty reforms, supporting nursing, medical parental cares designed for the society with a declining birthrate and ageing population…

Regional finance totals the finance of about 1,700 local governments, most of which are financially weak municipalities. The shortage of funds for regional finance increased swiftly in and after fiscal 1994 due to the decline in local tax revenues:

Moreover, the balance of loans in regional finance grew rapidly in recent years due to the decline in local tax revenues, compensations for tax cuts, and the increased issuance of local bonds for stimulating the economy. The end of fiscal 2011 saw the loans growing to 200 trillion yen, accounting for 41.4% of GDP. This marked a 2.9-fold increase since fiscal 1991, showing an increase of 130 trillion yen.

Local governments, especially in the weaker localities, shared with central government about 30-40 percent of tax revenue, the costs for public works, educational programs and social welfare. However, now the tables are turned to accommodate “such a severe financial situation.” Although local authorities must still adhere to ministerial edict, local governments are expected to assume more of the finances because they are being given more “autonomy.”

Since the structure of Japan’s governing system remains hierarchical with the national ministry officials at the top and local government officials on the lower rungs of the governing ladder, since ministry officials regard local government officials as generally inadequately prepared to plan policies and since many local government officials have for over a century been pressured to accept policies planned by the national ministries, the pace of  “a government that can adapt to changing circumstances in an economic society during such a severe financial situation” will take decades.

Back to Basics


Blaming BREXIT for having a negative impact on the economy, in September 2016 Abe announced the planned release of a stimulus package worth $265 billion to spur the stagnant economy and induce consumer spending. The package is slated for the construction of infrastructure projects and supporting local and national governments.

When President Donald Trump announced his intention to withdraw from the Trans-Pacific Partnership (TPP).Abe’s hopes that the trade pact would serve as a buffer against China’s economic and military expansion in Asia were shattered.

Abe’s visit to Hawaii to hold talks with President Obama on December 27, was choreographed with a visit to Pearl Harbor to express his “deepest remorse and “sincere condolences” to the victims of Pearl Harbor. Suga emphasized that Abe’s visit should not be interpreted as an apology because the victims of the US atomic bombing of Hiroshima and Nagasaki were civilians. Undoubtedly, Japanese conservatives were not happy with Abe’s visit but Abe wanted to “use the opportunity to signal the value of Japan-US reconciliation” and “to send to the world that we will further strengthen and maintain our alliance towards the future.” Abe also took the opportunity to pay respects at the memorial for the nine crew members of the Ehime Maru. A day after Defense Minister Inada returned from Pearl Habor where she accompanied Abe, she visited Yasukuni Shrine, a move which served to nullify Abe’s conciliatory PR objectives. Her visit was sharply criticized by China, South Korea and, also, by the US.

The Trump administration will ask Japan to assume far more of the budget for the US military presence in Japan, pertinent to discouraging China’s expansion in the East China Sea.

However, the PHP Institute founded by Konosuke Matsushita released a report on January 18, 2017 stating that rather than footing the bill of US military operations in Japan, the government budget for defense spending should be increased to 1.2 percent of annual GDP. But Abe’s government had already announced Japan’s record defense budget at $43.6 billion for FY2017, an increase of 1.4 percent, putting pressure on national finances and driving up the sovereign debt.

Déjà vu?   

On 17 January 2017 the Asahi Shimbun released a public poll revealing that 48 percent of  Japanese surveyed were pessimistic about Japan-US relations, partially because of the President elect’s criticism of Japan, China and Mexico for America’s trade deficit. Japan was given a taste of things to come when Trump tweeted a month before he took office that Toyota would pay a “border tax” if Toyota went ahead with its planned new production plant in Mexico and sell the cars in the US. Toyota argued that it had been a “good corporate citizen”, investing $21.9 billion in expansion in the US, employing 136,000 workers and producing 25 million vehicles over 30 years.

Trump had previously warned both Ford and General Motors that the manufacturing of small cars currently produced in Mexico to take advantage of low wages should be relocated to the US. Ford, while denying the Trump effect, announced that it had cancelled plans to build a $1.6 billion small car factory in Mexico.

Suga also stated that Japanese investment provided a “vitality to the US-Japan economic relationship.” The Japanese government emphasized that the trade deficit with the US has shrunk to less than half of what it was in the 1990s and its cumulative investment in the US was $47 trillion while China’s was a meagre $15 billion. Japanese companies employed 890,000 US workers while China employed only 38,000.

The Trump administration will focus on bilateral trade policies which will return Japan once again to one-on-one negotiations at the table with the USTR.

Unfortunately for Japan, Trump appointed Robert Lighthizer as the USTR trade representative. He was the deputy trade representative under Ronald Reagan who participated in the US-Japan trade disputes on autos and steel in the early 1990s. He probably had met Masahisa Naito during the semiconductor negotiations in the 1980s. Most likely JETRO will invite Lighthizer’s colleagues to seminars on doing business in Japan, escort them to the BSCs and even to FAZ to explain how Japan is trying to deregulate markets and increase imports and inward investment to three percent. Inside/Outside Japan which was terminated at the end of 1990, may go online!

Foreign asset management firms are questioning the existence of the “third arrow.” Well-invested in Japanese equities, the firms were pulling out of the market to the tune of $46 billion by April 2016. The Japanese are tired of peddling their economy with no relief in sight. But Japan Inc. is mired in a system that is unforgiving. Regardless, Abe will not be deterred. At a news conference on 4 January 2017 he emphasized that his chief priority was the economy.”We will keep shooting the three arrows of monetary policy, fiscal policy and growth strategy to beat inflation.”

The consequence of Japan’s ongoing financial woes matters. It is the world’s third largest economy by far, is the largest holder of US Treasury Securities reported in October to be $1.13 trillion and holds substantial foreign assets. The repatriation of funds could happen at any time, creating havoc in the global financial system.