Ja­pan - in despair there is hope

The Pak Banker - - Editorial5 - Adrian Clay­ton

Smart in­vestors grav­i­tate to­wards the un­known, fer­ret­ing in spa­ces where oth­ers fear to tread. It has struck me lately that out of all the strate­gists that visit our of­fice to present on world af­fairs and par­tic­u­larly mar­kets, with­out fail, not one ever talks about Ja­pan. In fact, the typ­i­cal dis­cus­sion roots on emerg­ing mar­kets, lit­tle of which we have not heard a zil­lion times be­fore.

Smart in­vestors grav­i­tate to­wards the un­known, usu­ally fer­ret­ing in spa­ces where oth­ers fear to tread and these are not nor­mally the sexy spots to be seen! Ja­pan comes to mind as pre­cisely such a des­ti­na­tion.

Now if your re­sponse to read­ing my open­ing two para­graphs is one of ut­ter dis­missal com­bined with a cyn­i­cal grin and pass­ing thought that this writer re­quires an im­me­di­ate dose of shock treat­ment as ev­ery­body knows that 'Ja­pan is an eco­nomic waste­land', then you are cer­tainly not alone, in fact, you are 'think­ing with the crowds'. This psy­cho­log­i­cal state is well doc­u­mented in be­havioural sci­ence and has its roots in the con­cept of 'safety in num­bers' and in­vestors typ­i­cally ex­trap­o­late past per­for­mance into the fu­ture! But as pro­fes­sional in­vestors, we know that when hope is gone, fer­tile soil for op­por­tunis­tic in­vest­ing is present.

Ja­pan has the world's 10th largest pop­u­la­tion with 127 mil­lion peo­ple and boasts ei­ther the most or sec­ond most pop­u­lated metropoli­tan area in the world, the Greater Tokyo Area, with 30 mil­lion res­i­dents. Strik­ing and a sign of the times, is that few peo­ple know that Ja­pan is still the world's sec­ond largest econ­omy by nom­i­nal GDP (ac­tual mar­ket value of all goods and ser­vices pro­duced within a coun­try). In­stead, we al­ways only hear about China, which is now quoted as the 2nd largest econ­omy on earth, but this is on the ba­sis of pur­chas­ing power par­ity which ad­justs for the rel­a­tive costs of liv­ing and in­fla­tion rates. It is un­de­ni­able that China's $5 tril­lion dol­lar econ­omy is a new power house; our point is sim­ply one that Ja­pan's econ­omy is a pow­er­house too! Ja­pan has the 10th high­est stan­dard of liv­ing in the world, the high­est life ex­pectancy (81.25 years), the 3rd low­est in­fant mor­tal­ity rate and is the world's third largest donor nation in terms of of­fi­cial devel­op­ment as­sis­tance for other na­tions.

As early as 1868, the Ja­panese peo­ple em­braced free mar­ket prin­ci­ples. Ja­pan re­ally came into its own as an eco­nomic gi­ant in the 1960's when real GDP grew for a decade at 10% an­nu­ally. This fell to 5% real in the 1970's and still pow­ered along at 4% real in the 1980's. As we all know, in the late 1980's, the eco­nomic mir­a­cle which was Ja­pan came to a calami­tous end with the burst­ing of the stock mar­ket and prop­erty bub­bles. One of the con­se­quences of the eco­nomic col­lapse was that the Ja­panese Govern­ment un­der­took many ill fated pub­lic fi­nanc­ing pro­grammes to reignite the econ­omy; this has led to pub­lic debt now ac­count­ing for 193% of an­nual GDP. But such de­press­ing macroe­co­nomic statis­tics dis­tort the eco­nomic pic­ture some­what. Ja­pan boasts very high lev­els of tech­no­log­i­cal so­phis­ti­ca­tion, the ser­vice sec­tor ac­counts for 75% of GDP. It is one of the lead­ing na­tions in sci­en­tific re­search with 700 000 re­searchers mak­ing use of the 3rd largest R&D bud­get in the world of $130bn and is the world leader in fun­da­men­tal sci­en­tific re­search. Ja­pan is the world leader in ro­bot­ics. Of the Forbes Global 2000 list, rep­re­sent­ing the largest com­pa­nies in the world, Ja­pan con­trib­utes 326. Whilst pub­lic debt is cer­tainly one of the se­ri­ous draw backs for the econ­omy, de­mo­graph­ics are too. The pop­u­la­tion growth is neg­a­tive and this im­plies that young peo­ple will in­creas­ingly be car­ry­ing the pub­lic debt in the years ahead. A shrink­ing work force also has se­ri­ous im­pli­ca­tions with re­spect to main­tain­ing dom­i­nance in global pro­duc­tion and con­comi­tantly, long-term eco­nomic growth. As an aside in­ter­est­ing point, Ja­pan suf­fers from a very high sui­cide rate; it is the lead­ing cause of death for peo­ple be­low the age of 30.

This is a fas­ci­nat­ing coun­try and one which can be spo­ken and writ­ten about for hours.

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