Illustration by Rio Sleue

Style or Type?
DiSC® (and its near-twin Tracom’s “Social Styles”) aims to educate you about your preferred communication style, and it does so by asking a series of questions that you are expected to answer while keeping a specific, common work situation in mind. By doing this, DiSC® identifies behavior preferences (not personality types) that normally fit into one of four boxes (“Dominance/influence/Steadiness/Conscientiousness”). DiSC is provided in Japan by HRD through certified users.

Myers-Briggs (MBTI Step 1), based on Jungian psychology, asks 93 forced-choice questions and results in one of 16 “reported types.” Then, with the help of a certified practitioner, you can determine your “best fit” type. The 16 different types are made of the various combinations of eight dichotomies (Introverted/Extraverted, Sensing/Intuition, Thinking/Feeling, Judging/Perceiving). MBTI is available in Japan through certified users.

Or a Combination?
Lumina Spark, from Lumina Learning® is the newest psychometric assessment of the three. Lumina Spark combines elements of DiSC® and MBTI and asks 144 Likert-scale questions (from strongly agree to strongly disagree), some of which describe your personality, and others that focus on your behavior under various circumstances. The result with Lumina Spark is three different profiles: your “underlying,” “everyday,” and “overextended” personas. Lumina uses similar dichotomies as MBTI, including extraverted vs. introverted, but the other three use more everyday language (people vs. outcome focused, inspiration vs. discipline driven, big picture vs. down-to-earth thinking). The result is an individual report rather than a “type.” Lumina Learning® is now certifying users in Japan as well.

Why Use These Tools?
Over the years, I’ve heard just about every type (no pun intended) of response to these assessments. Paul B., a DiSC® champion, has taken the assessment seven times, and while his style has hardly changed, he found that sharing his communication style with his colleagues and subordinates has improved his leadership and self-awareness. Also, knowing his current colleagues’ styles, along with a refresher of how each of them likes to communicate, he has strengthened his relationships within his teams.

Paul is someone who really likes (and effectively uses) DiSC®. I’ve worked with and heard many similar positive responses to MBTI. Some go so far as to say the results and subsequent follow-ups changed the way they manage. And yet here’s one who was violently opposed to it. An MBA student of mine started off our review session with the following (paraphrased) rant: “I don’t like anything about MBTI. Carl Jung refused to endorse it. It has no validity. I see no point in discussing it.” Others (often SPs in MBTI terminology) do not like being “put in a box,” and thus might prefer Lumina Spark’s individual approach, as long as the “no boxers” are not against all assessments – like that feisty MBA student seemed to be.

I’ve seen vast differences between business and academic users of such psychometric tools: students and psychologists want to know if the tools are “valid and reliable” (that is, do they measure what they are supposed to measure and they are consistent over time), whereas business people want to know “if it works,” i.e., is there something practical to be taken as a result of the assessment? Since this is a business journal, I am assuming you’re more interested in the practical. And I promise you this: DiSC®, MBTI and Lumina Spark can all be of great practical use – or not!

A Few Right Ways to Use Psychometrics
The single best reason to use a psychometric assessment is not for applicant screening or for career promotions or the like. It is for “self-awareness.” Learning how and why you might clash with other people or tasks can help boost your own productivity. Learning what stresses you out versus what tunes you up can help you better plan your day, your week, and even your whole career. You will certainly shine brighter in your next interview, whether as the interviewer or the interviewee. How? By better knowing your strengths and potential blind spots as a communicator.

Within a team, you can also use the assessments to find out how others you work with prefer to communicate, what types of assignments they like, how to better use deadlines, what types of rewards work best, and many other insights.

Misuse?
Users of these types tools often misuse them. Unfortunately, some psychometric tools come out with incorrect assertions right on their websites; for example, the Hogan Personality Inventory’s description states that “extraverts are needed for sales positions; introverts for long distance truck drivers.” This is a common misuse of a personality tool – assuming that some personality characteristics automatically portend well for certain tasks. That may be a tendency (yes, many people in sales are extraverts), but I have several clients here in Tokyo whose best salespeople are introverts.

One consultant in town said that during his master’s degree in education, the professor used the MBTI and then asked why all the I’s (introverts) are in the program. “You need to be an extravert to be a good teacher.” Hogwash.

So the most common misuse is turning “type” into “stereotype.” A second misuse is deciding that the newly found insights generated from a psychometric tool now explain everything about a person you work with (or yourself!). “He’s a “D” (in DiSC®), so of course he thinks that way.”

For one thing, when talking about DiSC® or Social Styles, you’re best staying away from “he’s a” or “she’s a…” anything; they are style preferences, not personality descriptions. And secondly, even if talking about personality, such as with the MBTI or one of the Lumina colors, you’re better off confirming how the person views a given issue at a given time; the tests explain some but not all motivations and behaviors. The danger of creating armchair psychologists is actually quite real.

Most Importantly
If your company is already using one of these (or other) tools, it’s a good idea to be familiar with the one they are using. Find a certified user/distributor and learn the language of that tool. It can help all of your communications and accelerate your personal development. And it can give your team the same company-wide common language and create deeper relationships as you explore the drivers behind different behaviors. As one of our clients said, “The best insight for me was in learning why I wasn’t getting along with one of my colleagues. It was like a light bulb going on!”

That light bulb shines brightest when using one of these powerful tools. As Jung said, “Everything that irritates us about others can lead us to an understanding of ourselves.”

If you’re managing a bilingual team, make sure you’re confident with the reports and facilitation done in both languages. DiSC®, MBTI and Lumina Spark all were originally developed in English, and all have been translated into Japanese.

Above all, note that these are self-development and self-awareness tools, first and foremost. If you believe (as I do) that self-awareness is a key leadership skill, invest in self-awareness from different angles. Be sure you know the tool that you would have your team use.

My Preferences

Andrew Silberman is chair of the ACCJ’s Membership Relations committee, president & chief enthusiast for AMT Group (www.amt-group.com) as well as the lead vocalist & rhythm guitar for the roots rock band Moonshots (www.moonshots.net). Direct comments or questions to him by e-mail: Andrew@amt-group.com

Lumina Spark is interesting to me due to its modern and individualized reports and the fact that one of its partners, Elizabeth Handover, is a fellow ACCJ member. After taking the assessment, I found it both consistent with the other assessments I’ve taken and also interesting to explore my three different personas – as well as my team’s, who are also certified in MBTI and DiSC®.

In terms of “time investment to benefit ratio,” that’s something you’ll want to assess for yourself. DiSC®, since it measures behavior, takes the least amount of time to administer and to understand. MBTI goes deeper into psychology and has nuanced terminology that requires native or near-speaker fluency, both for participants and facilitators. Lumina Spark delivers the most individualized of all the reports.

Whatever your own preference, I do recommend you find out more. Why? Because as the good doctor C.G. Jung said: “Your visions will become clear only when you can look into your own heart. Who looks outside, dreams; who looks inside, awakes.”

Rather than talking in generalities, let me tell you about my latest concrete recruiting experience. We all know Japan is special and in the case of recruiting globally-minded Japanese, it really is. Could not be easier, could not be more efficient: every autumn, Japan organizes the “Boston Recruiting Fair” – the Boston Convention Center is rented for three days and students from around the world who are interested in getting a job with a Japanese company – or in the Japan business of a global company – come together. It’s very convenient and very efficient. Last year, about 25,000 students came from all sorts of universities around the world – Japanese kids studying overseas, globally-minded Japanese studying in Japan, or overseas kids interested in Japan. Companies from all industries and sectors are represented – from Japanese and global fortune 500 players, to small/mid-sized niche players.

Even the Bank of Japan and several other local bureaucracies are there to meet new talent. It could not be easier, better organized, or efficient. The truly global nature of this Boston Forum certainly stands in sharp contrast to the local domestic practices. Also, I know of no other country where global recruitment is organized in such efficient manner.

Jesper Koll is a Managing Director and Head of Research at JP Morgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.

The real excitement, however, comes through the applicants. Last year, I received notice from about 200 students wanting to come and work in financial research in Tokyo. So much for Japan no longer being “interesting.” Most interestingly, slightly more than 40 percent of the applicants were Chinese. And of these, almost all had spent at least two or three years in Japan during high school or
doing undergraduate studies.

Four or five years ago, barely 10 percent of applicants had been Chinese. So yes, a tremendous shift is going on. And yes, those Chinese kids are eager and keen to work in Japan. Clearly competition for jobs is getting tougher for Japanese kids, no matter what the official immigration policy says. And clearly, from a hiring managers’ perspective, those “tri-cultural” students are very attractive – fluency not just in the languages but also the cultures of Japan, China and America carries a premium.

So why does this make me optimistic on Japan’s youth? That’s because the real surprise came from the Japanese nationals applying. With 40 percent Chinese and about 10 percent from other nationalities, the Japanese were still about half of all applicants – now studying in America, the UK or Australia. The surprise was that of the Japanese applicants, more than one-third had been studying in China for at least one or two years prior to their studies at English-speaking universities. How impressive, and what a clear sign that competition always works both ways: we’ve got a more global, more competitive job market with more students from China competing for Japan-related jobs. At the same time, my experience from the latest student recruiting fairs has been that Japan’s youth is responding and not afraid to compete. Tri-cultural Japanese kids can do, hands down. If at all, the only problem is my own incompetence – while I am perfectly capable of checking the Japanese language ability of Chinese students who claim to speak Japanese, I am absolutely incapable of testing a Japanese applicant’s Chinese language ability. I guess I am the one getting old and expendable…

Now, the flipside of all this is the fact that almost none of these tri-cultural, aggressive kids were actually interviewing with Japanese companies. Why not? The answer was almost always the same – they were worried about limited career prospects relative to true global companies. They do not want to spend the first four of five years of their working lives being the nail that’s hammered back in.

Indeed, how aggressive and impressive some of these Japanese new global youth were left me very optimistic. One kid was
studying at an extremely competitive US university, double major in mathematics and economics with a GPA just a smitten from perfect. Twenty-two years old, two years in China, sharp as a tack. So after a while during the interview I asked him:hey, let me ask you a real ‘gaijin’ question – where do you see yourself in five or ten years and who do you want to be?” He replied, “Well, Koll-san, until six or seven months ago I had the perfect answer to this – I wanted to become the first Japanese national to win the Nobel prize for economics.”

Then he paused, leaned across the table and said “But Koll-san, now that I have been working with two Nobel prize-winning economists, I realize that academia is not for me. I want to work in the real world!”

What more do you need to know? See what I mean – I’m very bullish on Japan’s new global youth. Whether Japan Inc. can adapt to their raw energy and global outlook and ambition is, of course, a different question.

Illustration by Rio Sleue

In Japan however, traditional business practices dictate what most market participants can and cannot do. Tokyo is the world’s largest metropolis with a population of some 30 million people and no geographical constraints limiting supply of land. With a falling, aging population, earthquake risk, expensive and limited supply of electricity and a strong yen, there are many reasons not to invest in Japan. Yet since the earthquake last year, yields on income-producing property have fallen, showing that investor demand is buoyant. It is unlikely that many of those recent acquisitions have been by foreign investors.

In fact, JETRO statistics on inbound foreign direct investment (FDI) showed a net outflow of $2.255 billion in 2011, a huge turnaround from the peak of 2008, when FDI increased by $24.55 billion, a large chunk of which was likely in real estate. Although the JETRO data is not separated by asset class, making it impossible to be sure, one of the few bright spots in the 2011 data was the $781 million increase from Singapore investors, which have been active buyers of Japanese hotels, logistics facilities and seniors’ homes.

Seth Sulkin is the President and CEO of Pacifica Capital K.K., a Tokyo-based real estate asset manager specializing in commercial properties.

Overall, an outflow of FDI shows poor prospects for both M&A and real estate investment in Japan. Private equity investors who raise equity or debt in Japan typically limit their activity to friendly deals, so corporate divestitures are a key source of deal flow. Yet even domestic buyout shops are grumbling about the recent news that the Development Bank of Japan (DBJ), 100% owned by the government, would buy the chemicals division of Sony Corp.

With privatization plans apparently on indefinite hold, the government needs to review the appropriateness of allowing DBJ to intervene in the private sector and use its enormous market power to grab deals that would otherwise be made by private companies. The megabanks are not allowed to own more than five percent of non-financial companies, yet still exercise outsized influence as both lenders and shareholders. DBJ is like a mega-bank on steroids given that it is an arm of the government.

As far as I can see, demand for income-producing property is being driven by low interest rates, a massive pool of bank deposits and stagnant loan demand in other sectors. Japanese banks are desperate to lend money, so they beg their best customers to borrow to buy real estate to the point that the blue chip companies are only paying interest rates of 50 basis points or so. With the cost of capital so low, companies can therefore accept a lower return on their investments and still obtain a large positive yield spread. Unless real estate fundamentals like rents and occupancy improve, this inevitably leads to lower return on assets (ROA) and return on equity (ROE) over time, both of which are already low by international standards.

Low interest rates and strong mega-bank influence must have been the key factors driving the merger between listed real estate companies Shoei and Hulic that I described in my March Journal column. The annual meetings of both companies turned out to be anti-climatic. Despite being asked to throw away half the value of their investments, more than 98 percent of Shoei shareholders approved the merger with barely a whimper from those in attendance. Shoei’s largest shareholder, New York-based fund International Value Advisers, with 22.6 percent, could have almost single-handedly blocked the merger, but it must have accepted the dire warnings of Shoei management at face value that without the merger, the company would not be able to survive on its own.

While Mizuho Financial Group is the main bank to both Shoei and Hulic – and likely was heavily involved behind the scenes to help keep Shoei out of bankruptcy – another one of its real estate affiliates, unlisted Kowa Fudosan, stepped across keiretsu lines on March 26 to announce a merger with Nippon Steel City Produce, developer subsidiary of Nippon Steel.

It is clear a constantly shrinking domestic market keeps the pressure up to transform or die.

Ask anyone who attended the Asia Pacific Council of American Chambers of Commerce (APCAC) meeting about their experience March 1 and 2 and, with very few if any exceptions, you’ll hear that it was great. Whether or not you attended yourself, ask participants what they learned – or re-learned – and you will learn even more.

Thomas R. Nides, US Deputy Secretary of State, signs for ACCJ President Michael Alfant (Photo by Genki Art Photography)

“You live, you learn.”
Canadian singer Alanis Morissette has a song called “You Learn” on her album Jagged Little Pill. I quote from the song at the start of Chapter 23 of my book Get a G.R.I.P. and suggest her video for the chapter’s exercises for a reason. Watch the video and you will be inspired. The video can be a testament to everyone who worked so hard to make APCAC the success that it was. Let’s look at a few more of the song’s lyrics and apply them to the conference. My aim is to share with you some of my learning, as well as give those of you who missed the event some of its flavor.

“I recommend biting off more than you can chew, to anyone.”
Lest there be any doubt, APCAC was a full-course meal (actually five). Clark Griffith of GE Capital who, like me, joined the Chamber in 1993, said, “This is not the same Chamber we joined.”

Having nine US ambassadors in a third location (away from the US and their assigned country) sharing the same stage doesn’t happen very often. It’s a major endeavor. Nor do you – as a regular ACCJ member – get a chance to schedule one-on-one sessions with senior commercial officers from over a dozen countries in a single two-day period. Nor do you get a chance to ask questions directly to the Deputy Secretary of State, the founder of Rakuten, or a vice chairman of one of the world’s largest and most successful American multinational corporations. How often do you see the Japanese Prime Minister in person, let alone hear him make a newsworthy statement about an upcoming visit to the USA? APCAC 2012 offered star power.

The ACCJ President was on his game at APCAC (Photo by Genki Art Photography)

Sure, over the course of a year, ACCJ membership affords you that kind of access – but not all at once. Everyone who attended learned something, and every ACCJ leader will take away something they can use as they go back to “normal” events.

“Wait until the dust settles.”
As I write this, the dust is still swirling from the event, and it may have settled only by the time of publication. Let me reflect both on the dust as it was swirling and on what ACCJ leaders and members can learn from the event itself.

The swirling dust included differing opinions on the role of government in PPS (which are either Public Private Partnerships or Private Public Partnerships, depending on who you speak with). Many found that discussion fascinating, while one person told me he thought of the Japanese English pronunciation of PPP (“Three P” can come out sounding like “sleepy”). Like most panel discussions anywhere at anytime, how much you enjoy it often depends on your area of interest. Every panel discussion offered something of value to every participant and the networking that followed the Q & A sessions in such company was truly energizing.

The moderator plays a key part in the success of a panel. We saw competence personified from many (several women played that role with aplomb) as well as one moderator who may have confused “moderate” with “dominate.” A successful panel discussion depends on three human elements: the panel, the moderator and the audience. If two of the three are excellent, you’ll get at least a very good session. That was certainly the case at APCAC.

“You choke, you learn.”
In Morissette’s video, there’s a scene where she enters a gym on horseback. She dismounts the white stallion and saunters up and through a group of tough-looking inner city men playing a heated game of basketball. She takes the ball, eyes the hoop and sinks a swish.

ACCJ President Mike Alfant wanted to visually demonstrate Hillary Clinton’s APEC proclamation that the US is making a ‘pivot’ in its foreign policy, with the focus now on Asia. He asked someone to toss him a basketball. For the audience, wondering why he was suddenly talking about basketball, it looked like Mike was the typical software geek. He bobbled away my pass that hit him right in the chest. After his able demonstration of the pivot, Mike then went off plan and decided to pass the ball back to me.

To my surprise and horror, Mike sailed his pass a good three feet over my head and, had it not been for David Wouters (ACCJ member since 1969) reaching up and hauling in the errant ball, 50 journalists present would have been scribbling headlines like “ACCJ President Injures 2 Japanese to Open US-Asia Business Summit.”

So what was the learning there? You might think it was, “No more props” or, “No more off script.” Or maybe you learned that Mike has never played basketball. And surely you would think, “You’ve got to practice every part of a presentation.” All those would be incorrect.

First, the facts: the bright lights shining on the stage meant that Mike (a former competitive basketball player who might have played with some of the guys in Morissette’s video) could not see the ball as it came toward him. So even if we had practiced – unless we had done so with the stage lights on (rarely a possibility) – he was not going to catch that pass. You plan, you practice, and the only thing you can count on is that something will not go according to plan.

Practicing the return pass would have made sense. Mike would then have been able to compensate for the one-meter-high stage that, along with the distance, gave Mr. Wouters his chance to save the show. But think about this: if Mike had practiced, surely one of the organizers would have advised against the stunt. One of the key takeaways from the event – and one of Ambassador John Roos’ longstanding aims while here – is to encourage more entrepreneurship. Entrepreneurs take risks that don’t always work out.

Andrew Silberman is chair of the ACCJ’s Membership Relations committee, president & chief enthusiast for AMT Group (www.amt-group.com) as well as the lead vocalist & rhythm guitar for the roots rock band Moonshots (www.moonshots.net). Direct comments or questions to him by e-mail: Andrew@amt-group.com

This was a much more welcoming and interactive ACCJ than the one Clark and I joined almost 20 years ago. Our current ACCJ has something for everyone. Looking back at all the presentations – and all my interactions – my real learning boils down to this: real relationships.

Real Relationships
Many of the APCAC speakers referred to the warm relationship between the US and Japan. One of the best speeches was delivered by Ichiro Fujisaki, Japan’s Ambassador to the US. He spoke from the heart, in fluent English, without notes. I re-learned how much better a speech sounds when delivered his way. He spoke authentically about the relationship, echoing and amplifying feelings expressed in an emotional eight-minute video that participants watched on APCAC’s first day.

APCAC 2012 allowed for the creation of new friendships and strengthening of existing friendships. That might sound like a cliché, and again, every ACCJ event offers that kind of opportunity. But when you blend the organizational skills, participants, speakers and an excellent venue, you get what we got: exceptional opportunities to learn.

Note:In researching Dr. Moore for this article, I learned with sadness that my former professor passed away last November 27. I also found out about his background: that he dropped out of high school to join the Navy and enter WWII, served our country in WWII, Korea and Vietnam, rising through the ranks to become a captain. He later earned three master’s degrees and a doctorate. Most of my fellow students knew him as “Loren,” one of the most personable and accessible professors you could imagine. It is with continuing gratitude for all he taught us that I’d like to dedicate this Andrew’s Ax to his memory.

A classic example is the Volkswagen ad that aired in 2011 featuring a child dressed as Star Wars’ Darth Vader. The boy struggles to make his power felt on various parts of his home until he comes face to face with his dad’s new VW and starts the engine – just using the power of “The Force” (helped by his dad using a remote start button behind the scenes). For the 2012 Superbowl, VW continued the Darth Vader theme, albeit with a somewhat witty and unexpected twist. Both campaigns are great pieces of advertising, and well worth checking out on YouTube.

It’s hard to imagine a similar level of cultural anticipation around a television campaign in this country. Japan is the land of the 15-second spot – bite-sized chunks of often celebrity-driven TV that, to the untrained eye, seem to have little narrative or strategic meaning connected to the brands they advertise. None have reached Superbowl levels of cultural interest, but one campaign has come close: the multi-year “White Family” series for mobile carrier Softbank. This campaign, which has aired over 100 different versions since June 2007, has captured the hearts of the Japanese public and has coincided with several years of strong market progress for Softbank.

Dominic Carter is CEO of CarterJMRN KK, a Tokyo-based global research company. He is also a former chair of the ACCJ Marketing Programs Committee.

However, Sawamoto has a close connection with dogs. He writes, “I’ve never thought deeply about it, but I felt like dogs do preach or give you advice when you’re in need. I simply thought it would be nice if the father was a dog.”

The African-American man first appeared in Softbank’s Aquos cell-phone ads as the “yoso guy” – which in Japanese literally means ‘unexpected.’ His character and blank look have not changed since he began appearing in the White Family series.

The campaign reflects Japanese family life as well as popular culture, using common “gal” slang (“Gals” are cute young Japanese females like the ones you often see in Tokyo’s Shibuya district). Lately, the ads have taken an even more fantastical tack, like being set inside a space rocket, racing with famous Japanese superhero Ultraman and batting in front of famous baseball player Sadaharu Oh. The dog-father, who reflects in some ways an idealized Japanese father, even has his own Twitter account with over 180,000 followers.

The White Family campaign is unusual in Japan in that it is relatively uncommon to carry the same themes over a period of years – for domestic advertisers at least. Advertisers commonly believe that they are battling such a crowded media marketplace – and jaded consumer – that constant “freshness” is a must. In the same way that Hollywood constantly pumps out movies hoping for hits, domestic marketers are always churning out new products and campaigns. Given this notion, Softbank appears to have struck an interesting balance between freshness and consistency, which provides some useful pointers for foreign brands pondering their strategy.

White Family remains a very Japanese advertising campaign in that it doesn’t always make sense as a story (unlike the US VW ads) and does not overly dwell on product stories or reasons to buy. In this sense, its seemingly postmodern course would be anathema to most American marketing directors.

However, there are some characteristics of Japanese advertising and marketing in general that are worth knowing about if you are marketing your brand here:

■ Frugal Japanese consumers tend to be more defensive about spending money than their American counterparts
■ Trusting the seller is even more critical in Japan before transactions take place
■ Endearing or appealing celebrities and characters are often used in ads to get around these first two barriers
■ The way brands are created and marketed is very different and based on emotion that often doesn’t directly relate to product attributes or reasons to buy
■ Campaigns, packaging and whole sub-brands are often used for short bursts and then discarded in favor of the next big thing

Marketing in Japan, like so many other things, often bypasses the critical mind and works on pure emotion. That Softbank can carry on this campaign over such a long time – and still hold the interest of consumers – carries many worthwhile lessons for those trying to connect with consumers in this market.

In my view, chances are very good that yes, this time is different, that the BOJ action is fundamentally different from what we have seen in the past. I say this for two reasons. First, the timing of the move is a marked departure of previous BOJ practice. Just a couple of weeks before the move, central bank technocrats actually revised up their economic outlook. Over the past thirty years, whenever this happened, it meant the guardians of Japanese money were bound to turn conservative – the outlook is improving, so no need to stimulate growth anymore. The fact that this time they actually eased policy and injected more money into the system – after becoming more upbeat on the economy – tells me that something has changed. To clarify, the BOJ now wants to be part of a pro-growth policy coalition. Monetary policy complacency is a thing of the past.

Why the change of heart? From a global perspective, there is clearly a lot of pressure on Japan to follow the US Federal Reserve and the European Central Bank, since both have become much more outspoken and active in supplying liquidity to their economies and markets since the start of this year. Also, China has begun to ease policy. No doubt peer pressure from other central bankers was part of the reason for the BOJ move.

However, in my view, domestic pressures and dynamics are the more important factors. Many key inflection points in Japan can be traced back to key decisions on senior level appointments – get ahead of jin-ji and you’ve got a map of what’s really driving things. It just so happens that the current Governor’s termends in February next year. So slowly but surely, the jockeying for positions is starting, particularly since the last time around Japan was placed in the awkward position of not having a Governor for several months because the nemawashi consensus building of who should get the job had not been done effectively. The BOJ’s position is simple and straightforward – a BOJ man should get the job. Against this, the Ministry of Finance is lobbying hard to get one of their people, or at least an independent non-BOJ person, to run the bank.

The reasons for the MOF’s frustration with the BOJ – and hence its push for a non-BOJ man as the next governor – are understandable. Yes, the central bank should be independent in its choice of how policy should be implemented, but the policy goal should be aligned and in-sync with the other big policy goals of the nation. In other words, the central banks should be independent but accountable. This is why, in my view, the BOJ made the surprise move on February 14. The bank actually adopted a de-facto inflation target by publishing a hard-number goal to reach one percent inflation. This is a big step. Previously, they had a range of acceptable inflation running from zero to two percent. In practice, this meant that zero inflation was acceptable. Now, with the one percent target, zero is no longer tolerated. It’s a subtle difference but, in reality, a big step towards the MOF’s overriding policy goal of getting out of deflation and moving towards some
positive price dynamics in Japan.

Jesper Koll is a Managing Director and Head of Research at JP Morgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.

But will it work?
So Japan now has a positive inflation target and to achieve it, the BOJ will purchase another ¥10 trillion of government bonds. This means that, de-facto, Japan’s central bank will now be buying almost all of the net new bonds issued by the treasury. So the government is now getting all its new debt “for free” – the MOF issues the IOUs, the BOJ buys them and pays for this by printing money. The big question is whether this money will actually find its way into the economy – demand for goods and services – or whether it will just end up under the mattress or be used to pay-down debt. Over the past 20 years, that is effectively what has happened whenever the BOJ eased policy. However, this time ’round, it could be different. The reason is simple: the bulk of this additional fiscal deficit this year is actual re-construction spending. So the money raised will actually go directly to small/medium sized companies in Tohoku, or into support for affected families who do not have any other income.

So chances are good we’ll get a real “multiplier” of the money making it into demand. It is this combination of real demand fiscal spending – combined with the BOJ printing the money – that makes me confident that, yes, this time it will be different. Technocrats unite, so 2012 brings better growth prospects to Japan.

Illustration by Rio Sleue

The Japanese government regulates electricity rates for individual homes, but TEPCO is essentially able to charge whatever it feels like to large-scale corporate users. Although technically, the market for large-scale electricity users was deregulated several years ago, practically speaking, most corporate customers such as our shopping center do not have any real alternatives to buying electricity from TEPCO. I was surprised, therefore, when TEPCO contacted us in January for a meeting to discuss its “request” for a 14.8 percent rate hike.

Two extremely polite but downtrodden-looking employees from a TEPCO branch office in Chiba visited my office in early February to explain their request. They handed us a one-page explanation signed by TEPCO’s president using the word “onegai” in the heading. According to the New Century Japanese-English Dictionary, the word “onegai” means a wish or request. I interpreted the president’s words, therefore, to mean that we were not obligated to accept the rate hike.

According to the Japanese media, TEPCO’s board is refusing to allow the Japanese government majority ownership of the company despite a huge injection of taxpayer funds.I explained to the TEPCO Chiba representatives that, as of that time, TEPCO shareholders had not made any sacrifices other than losing their dividends, which they should not be entitled to anyway since TEPCO is now losing money. TEPCO creditors had also not made any sacrifices. TEPCO employees have been forced to take salary cuts, natural under the circumstances, but as a Japanese taxpayer, I feel like TEPCO is ungrateful for the government bailout.

The letter from TEPCO’s president says that in order to maintain a stable supply of electricity, the company has been forced to import more fuel to replace the nuclear plants that were shut down following the accident in Fukushima. While I don’t dispute those facts, it is not clear why customers should have to bear responsibility for TEPCO’s own mistakes in design, planning and judgment, when shareholders have not given up any ownership or control in the company.

Seth Sulkin is the President and CEO of Pacifica Capital K.K., a Tokyo-based real estate asset manager specializing in commercial properties.

I also told TEPCO’s representatives that I found their request for a rate hike especially galling as it occurred before they had ever apologized to us individually for all of the trouble that they caused – or made any offers of compensation for the losses suffered as a result of the electricity shortages last year. Our shopping center lost a huge amount of business as a result of shorter opening hours for several months as a result of a “request” from TEPCO to save electricity.

In a second meeting with TEPCO’s Chiba branch in late February to discuss the compensation issues that I raised in the first meeting, I was told that the “request” made to large electricity users last summer to cut demand by 15 percent was merely voluntary, so TEPCO had no obligation to offer compensation for business losses suffered.

If the request to save electricity last summer was merely voluntary, then TEPCO’s onegai now is certainly just as voluntary. So I intend to say “no”. I strongly encourage all readers to do the same.

PetrVaclavek - Fotolia

Another big thank you to ACCJ members for reading—and to the Journal for inviting me—to keep swinging the Ax in 2012. Last month, we chopped up Global Readiness and this month I’d like to return to the business of meetings – a place where Global Readiness can either shine brightly or dull everyone down when not adequately developed.

In January’s Strokes to the Finish Line column, we covered the rowing analogy for meetings: “three strokes” (compliments, questions, and validation), and we examined one of the most common momentum killers for meetings – the word “but.”

But… I mean AND there’s more!

ENEMY WORDS, PHRASES, AND FROWNS
Now that we’re into the Year of the Dragon, let’s hone our slaying skills. In January, we shared that “keeping the ‘buts’ out of your mouth” encourages more contributions and builds momentum. However, several other silent – and not so silent – killers lurk. Let’s start where communication began.

ROLLING EYES & HEAVY SIGHS
Long before we came up with words, we communicated through gestures and vocal utterances. Guess what? We still do. It’s our primary form of communication. That’s why how we look and how we sound take precedence over what we say. Clients who see themselves video-recorded during one of their meetings often express shock at how “bad” they look or sound. They feel embarrassed and had no idea what they look and sound like to others, whether when speaking up or remaining silent. Watching themselves, they can see how their unconscious reactions serve to either help or (in many cases) hinder a meeting’s progress. This knowledge is especially valuable for leaders, due to the asymmetric influence on meetings you attend.

Even if you don’t record your meetings, go into your next one aware that your visual and vocal reactions will either negatively or positively influence others, and thus influence the outcome of the meeting. You might even want to assign “Angel’s Advocates” to ensure the first response following any suggestion is positive. That way, you remain free to disagree later and choose another course of action and you will encourage more contributions.

Many visual and vocal expressions are subtle and tough to catch, and even tougher to counter. On the other hand, a trained ear can easily capture words and phrases for later slaying, like the enemy dragons they are. There are five enemy words and phrases that sap the energy from you and others who aim to drive a meeting towards its goal. Note how often (or not) they’re used in your daily meetings, conversations, and presentations. Ready your swords!

HAVE TO
“Well, we have to put in more time on this project….” “I have to check with the CFO…” “You have to understand.” Let’s take these one at a time.

“Well, we have to put in more time on this project.” How does that make you or your team feel? Could you inspire the team more by saying, “Let’s put some more time into this project”? Or, “I’d really like this one to impress the client, big time. How about another two or three hours to really nail it down”? Saying, “We have to” places a burden on the team and, as we’ll see below, it’s a false burden.

“I have to check with the CFO…” No, you don’t. In fact, you don’t have to do anything – anything, that is, except to live (until you die). That’s it. Think about it. What else do you “have to” do? Some will say, “Well, I have to go to work.” Do you? Or do you choose to go to work because you want to receive a paycheck, or to maintain a certain social status, or to contribute to something bigger than yourself?

“But Andrew,” I hear some say, “I have to eat.” Not as much or as often as you think. Ask a hunger striker. You eat because you prefer not to be hungry, not because you have to eat. You won’t die for 30 days or more without food and even then, you only “have to” live until you die, remember? Oh, by the way: keep that ‘but’ out of your mouth.

“I have to pay taxes.” You choose to pay taxes because you want to avoid the penalty that comes with non-compliance. By now you’ve got the picture. There’s only one legitimate “have to”: live.

What about that pesky CFO who requires that expenditures above a certain amount go through his or her office? Well, yes, there are consequences for failing to gain approval from the CFO, who may hold final authority. That differs from having to check with them. Much better to say something empowering to yourself and your team, like “I’m on board with this and with the CFO’s approval, we’ll be set.” Saying, “I have to check with the CFO” makes you sound passive and less powerful than you are.

The worst offender in the “have to” world is one we so often hear in heated discussions: “You have to understand that…” Just as you don’t “have to” do anything except to live, neither does the other side. Beware of the person who knows this truth the next time you say or hear, “You have to understand.” They’ll reply, “Why?” or simply, “No, I don’t.”

JUST
“I’d just like to add…” When you’re in a meeting, driving towards a goal, everyone is there to contribute. Whenever you say, “just,” you’re giving a half-power stroke that only serves to delay the finish. “Just” diminishes your contribution. Catch yourself and help others eliminate “just.” Use “Let me add,” or “To add to Satoshi’s point…” With apologies to Nike, “Do it!”

SORRY (and other apologies)
Speaking of apologies, most that happen during meetings are unnecessary and most are not really apologies at all – rather, they’re habitual phrases. “Sorry to interrupt…” Never interrupt. Add value, and return the floor to the other speaker when you finish your 30-second or less contribution. That’s positive, right? So why apologize? Pull your oar –take your stroke – and keep the meeting going. An interruption interrupts; a contribution contributes. The difference? Check others’ reactions. Are meeting participants more or less engaged? Was the person you spoke over irritated or enthusiastic – or even, as is often the case, relieved? (How many times have you or someone else droned on a bit too long and forgotten the main point? Someone jumps in with a compliment or quick paraphrase. That’s nothing to be sorry for!)

Andrew Silberman is chair of the ACCJ’s Membership Relations committee, president & chief enthusiast for AMT Group (www.amt-group.com) as well as the lead vocalist & rhythm guitar for the roots rock band Moonshots (www.moonshots.net). Direct comments or questions to him by e-mail: Andrew@amt-group.com

When you apologize, it’s most likely out of habit or to sound polite. What you may really be saying is, “I’m sorry to be helping us clarify where we are going and for helping us get there quicker.” See how ridiculous that sounds? Yet so many of us fall into the “sorry” trap.

Sort of, Kind of, and other modifiers Even professional broadcasters fall victim to these worthless modifiers. A recent KCRW program Left, Right and Center, a radio show dedicated to debating political issues of the day, featured the host and one of his regular contributors continuously modifying their remarks with this self-limiting language. “Well, I’d sort of like to point out …” Sort of? You’re getting paid to sort of express an opinion?

Why chop your oars off at the handle? Dig deep into the water and express your point. If you’re not sure where you stand on the issue, you can still declare: “We’ve heard good arguments for direction A and solid reasons for B; let’s take a few more minutes to hash this out, and if we need more information, we can postpone the final decision until next week.”

Rather than expressing politeness, most of these modifiers are simply habits. Space-fillers, as useful as, “You know,” “like” and “and so on.” Once you start looking for these non-contributors, you may be surprised how often you find them. Then, recalling a message on my father’s office wall: cut them. No, Dad wasn’t an L.A. gang member but an orthopedic surgeon. That somewhat self-serving sign on his wall said, “A chance to cut is a chance to cure.”

So cure your meetings by slaying these self-limiting demon dragons.

Illustration by Shane Busato

Does this story sound familiar? No, I am not talking about Olympus, but a real estate company called Shoei (TSE:3003). On December 20, Shoei announced plans to merge with another real estate company called Hulic (TSE: 3265) that effectively valued Shoei’s shares at about half the price they were prior to the merger announcement. [Full disclosure: my company is a small shareholder in both companies]

Olympus is of course a well-known brand globally, so its troubles naturally attracted much more attention, but there has been little media coverage of the Shoei/Hulic merger. While disgruntled individual shareholders have been venting on various financial message boards, the Tokyo Stock Exchange and government oversight bodies do not seem to be focused on why Shoei shareholders are getting such rough treatment and whether Shoei’s disclosures to shareholders were complete and accurate.

Seth Sulkin is the President and CEO of Pacifica Capital K.K., a Tokyo-based real estate asset manager specializing in commercial properties.

Given that Shoei’s largest shareholder is a US investment fund, International Value Advisers – with more than 20% of voting rights – the annual general meeting this month should be extremely interesting. It will also test the power of the Mizuho Group, the main bank for both companies, which is rumored to be pulling the levers behind the scenes on this deal. In another sign that the prolonged economic slump is triggering big change in domestic business practices, the Japan Retail Fund (JRF) announced last November 24 that popular variety retailer Tokyu Hands had filed a lawsuit seeking to cut the rent paid on its Osaka Shinsaibashi store by 20 percent retroactive to December 2009 and by 30 percent from December 2010 forward.

While rent reduction requests and litigation are all too common these days,what made this particular request unusual was that the suit apparently seeks to overturn an agreement that Tokyu Hands itself executed with JRF in October 2008 to keep the rent same for a period of three years until 2011.

According to the real estate web site Nikkei Fudosan, Tokyu Hands has so far declined to comment on its rationale, so we don’t know if it has found a specific contractual basis to ignore its previous agreement or if it is questioning Japan’s lease law generally. If the court ultimately finds in favor of the tenant, it could have a profoundly negative impact on real estate investment and valuations.

The head of one major foreign bank’s real estate lending group told me that if Tokyu Hands wins this lawsuit, he would immediately shut down the lending business and go home. As an investor and landlord, the prospect of tenants being able to overturn executed agreements on rent at will is a scary one indeed.

Preckas - Fotolia.com

What entity has the power to impose its dictates upon all of us, and in doing so exposes all of us to the same risks? Yes, the government. Only government can legally coerce people to act in ways that they would not otherwise choose. And only government can direct subsidies, money and capital on a scale that directly affects how all other resources in an economy are allocated.

All over the world governments have been busier than ever, as testified by an unprecedented surge on fiscal deficits: in a feat never seen before debt-to-GDP ratios have risen by almost 10 percentage points here in Japan, in Europe, in the US and in China over the past 15 months. French economist and politician Frederic Bastiat put it well, “Everyone wants to live at the expense of the state. They forget that the state lives at the expense of everyone.”

How long can this borrowing spree last? When will the next Greece happen?

Why does the increasing bond buying by central banks fail to kick-start a private credit cycle? To answer, my New York partner Ken Landon reminded me recently of something that happened 100 years ago. In December 1912, John Pierpont Morgan was called to testify before a congressional committee that was investigating the role of large banks in capital markets.

The exchange between the committee counsel Samuel Undermeyer (SU) and JPMorgan (JPM) went like this:
SU : “Is not commercial credit based
primarily upon money or property?”
JPM : “No, Sir. The first thing is character.”
SU : “Before money or property?”
JPM : “Before money or anything else. Money cannot buy it… because a man I do not trust could not get money from me for all the bonds in Christendom.”

The truth in what JPMorgan spoke 100 years ago is that credit is primarily about trust – trust in lending money to a borrower who will pay back the capital under the agreed terms. The word credit comes from the Latin word credere which means “to entrust.”

Lack of trust and ‘feel good factor’ in the current global economy go hand-in-hand. Europe is the most obvious example. Bond yields of various countries – most recently Portugal – keep rising (which is another way of saying that the cost of credit for this country is getting more expensive, because lenders do not trust that they will be paid back).

The problem, however, is not Portugal (or Italy, or wherever). The problem is that the political leaders of Europe and the Euro have been insisting that Greece is a ‘special case’ when it comes to private creditors: yes, owners of Greek bonds will have to take a ‘haircut’ – the bonds they own will not be worth 100 Euro as originally stated, but will be worth only 30 Euro or 50 Euro. So far, so good. But what makes Greece a special case, and on what basis exactly is Greece unlike any other country borrowing in Euro has never been stated. No reasonable explanation has been offered. That’s exactly why markets are nervous and why bond yields of various European countries keep rising.

Of course, the purpose of the European official statements on Greece ‘being special’ are obvious. Eurozone leaders are trying to undo a financial panic that they actually created in the first place and the decision to offer ‘haircuts’ for Greek debt is perfectly reasonable. However, it immediately triggers contagious worries in other European countries, particularly Portugal, Italy and Spain. Please do not misunderstand me. The essential problem of Europe is not whether Greek bonds are ‘special’ or not. It is profligate governments who are afraid to cut funding of massive Social Welfare States.

Having witnessed how the private holders of Greek bonds have been treated by Europe’s political leaders – who insist, by the way, that the European Central Bank will be treated differently from private bond holders – investors are perfectly right to mistrust public pronouncements that Greece is in fact ‘special.’ Add to this the current push by Eurozone leaders to impose a Financial Transactions Tax, and you get a clear message that in Europe the interests of the owners of capital are secondary at best when political leaders sit around the table and discuss plans to deal with the crisis.

Jesper Koll is a Managing Director and Head of Research at JP Morgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.

Importantly, the European Central Bank is incapable of providing real capital to the economy. No central bank can do this. True, central banks can electronically print up new currency and inject this into banks. But these are merely claims on real capital. Real capital are actual things that are in existence, whether buildings, machinery, or other hard assets – also intellectual property, the creativity, mind and skills of individuals and their partners and workers. No central bank has the power to produce these things – they are the essence of growth and prosperity and without them, money is, well, just numbers on paper. The central bank can produce more and more pieces of paper with numbers, but all this will ever be is a claim on those private sector hard and soft assets. However, the private owners of the capital are free not to accept the claims.

They can, in effect, go on strike and send their wealth elsewhere. The continued surge in the price of gold suggests this is exactly what is happening, as does the fact that private investment is falling. Europe and its crisis is only the most obvious – and urgent – example of a general lack of trust in government and central banking policies. Next month, I will go back to being my optimistic self and will highlight why Japan’s relative and absolute position in the world is about to improve.

For now, let me end by quoting my favorite economist, Frenchman Jean Baptiste Say, who wrote more than 200 years ago (in 1803): “In times of political confusion, and under arbitrary government, many will prefer to keep their capital inactive, concealed, and unproductive, either of profit or gratification, rather than run the risk of its display. This latter evil is never felt under good government.”

While Tohoku’s population has been falling steadily, Sendai’s has been gradually rising, reflecting its status as the regional capital. Sendai’s real estate market had been a different story during the few years prior to the earthquake. The global financial crisis caused many investors to stop buying property in regional cities, and companies shrank or closed their Sendai branch offices, leading to the extremely high vacancy rate.

While there is no question that the Sendai market is hot at the moment, real estate investors look for consistent, longterm cash flows. And even after the very personable Yoshihiro Murai, Governor of Miyagi Prefecture, spoke to the ACCJ on December 5 to appeal for foreign investment, he failed to persuade me that local governments in Japan have sufficient power to offer attractive incentives.

When asked the most important factor differentiating Miyagi from other prefectures making similar appeals for foreign investment, Murai made a not so subtle comparison to Osaka’s feuding politicians – saying that he gets along extremely well with Sendai Mayor Emiko Okuyama, who was also on hand at the ACCJ presentation. Otherwise, Miyagi’s benefits and financial incentives are neither large nor unique enough to make much of an impact on the thinking of foreign investors. In a telling sign of where the Governor’s real priorities lay, he rushed out of the meeting after his remarks to return to Sendai for the prefectural assembly meeting, rather than stay for an extended dialogue with ACCJ members as did Mayor Okuyama.

Seth Sulkin is the President and CEO of Pacifica Capital K.K., a Tokyo-based real estate asset manager specializing in commercial properties.

When Toyota or Nissan seek to build a new assembly plant in the US, governors from many states make direct appeals to Japanese corporate executives. They also offer hundreds of millions of dollars in grants, subsidies, educational and training incentives. When the Chicago Mercantile Exchange and Sears recently threatened to move their headquarters out of Illinois, the governor and the state assembly worked together to quickly pass a bill offering sufficient tax breaks to keep the companies from leaving.

Compared to the federal system in the US, where states have the freedom to set local income, sales and other tax rates, Japanese prefectures have virtually no control over their income, which limits their ability to offer incentives to attract investment.

Governor Murai’s unique background as a helicopter pilot with the Self-Defense Forces and three years at the Matsushita Institute of Government and Management may give him a broader perspective on the world. But the merits he lists of investing in Miyagi – cheap and plentiful land, low labor costs and proximity to Tokyo – can be said of many other prefectures. He also has not fought hard enough with the central government to secure the kind of incentive packages that will really lure more investment.

I look forward to Mayor Hashimoto’s upcoming battles with the central government. If he is successful in combining the Osaka city and prefectural governments, and wrenching away more local autonomy, we might start to see a real difference in what can be done to attract foreign investment.

Sayonara global creditor, yokoso global debtor Japan.

The dynamics forcing a switch from creditor to debtor have been well documented for many years: as society ages, sooner or later people will begin to “consume” their savings. In an economy where birthrates have been falling for generations and the population is declining, this is manifest “demographic destiny” – and it’s not difficult to forecast the basic trend.

However, experts could never pinpoint the exact timing of when the switch from “savings” (building up assets above funding living expenses) to “consume savings” (drawing down assets to pay for living expenses) would happen. We now have the answer: NOW.

NOW is the fact that in 2011, Japan ran its first full-year trade deficit since 1963. This is a sharp departure from the average trade surplus of 2.7% that Japan ran over the past half century. We – and here I mean the macro research team at JP Morgan – think that the turning point has been reached; within a couple of years, a full-blown structural current account deficit is likely to follow. Why is this happening?

The first key is the change in global growth dynamics. Basically, the unprecedented global economic boom during most of the first decade of the 21st century obscured the underlying trend of Japan’s savings decline. To put it plainly, Japan’s exports were booming, boosted by easy-credit fuelled U S-consumer demand and, importantly, the relentless acceleration of demand for capital goods from the BR IC economies. Exports grew 7.2% during 2000-2007 – until the “Lehman Shock” put a stop to it. Since then, global growth has downshifted significantly – triggering a structural decline in exports from Japan. The numbers tell the story: for every 1% drop in global growth, Japan’s exports fall by about 1.4%. In the new global economic realty, Japan’s export growth rate is down to about one-third of what it was during the 21st century boom decade.

The second factor behind “sayonara creditor Japan” has been a persistent fall in the nation’s terms-of-trade. This is the ratio of export prices relative to import prices – kind of a profit margin for the national economy. If export prices rise relative to import prices, the terms of trade are rising and the country is better off. However, if import prices rise faster than export prices, the terms of trade fall and the country is being squeezed. The latter is exactly what has been happening to Japan; over the past decade, import prices have been rising about 5.4% per annum, while export prices actually fell by about 2.1%.

Here, import prices have been pushed primarily by the surge in global commodity prices, which in turn was forced by the relentless surge in demand for commodities to feed the BR ICs growth surge. Japan’s imported energy price bill, for example, has been rising by almost 10% every year in the first decade of the 21st century. At the same time, the drop in export prices has been forced by the relentless rise in global competition for Japanese products. In particular, the rise of Korean competition in key industries like cars and electronics has forced a de-facto loss of price-power for Japanese makers.

All said, Japan’s terms of trade have fallen 5.5% every year since 2000 – the relative cost of imports-to-exports has basically doubled since the start of this century. Given that total trade is about one-third of Japan’s national income, the net “loss” – or de-facto cost-increase – is equivalent to about 15 trillion yen per annum. This is equal to roughly one month of average pay per household, wiped-out by the loss of Japan’s relative competitiveness. No doubt this relative income drop has been a significant factor contributing to the drop in household savings, over and above the standard demographics argument: the relentless drop in the terms of trade has made the average Japanese much poorer.

Note here that it is the terms of trade that matter, not the exchange rate. Specifically, while the rise in the yen against the dollar makes imports of oil and other dollar-priced commodities cheaper, this positive has been more than off-set by the actual price appreciation of these commodities. Clearly, it is the net effect that matters and the sad reality is that Japan’s yen appreciation has not been enough to cushion against a higher import bill.

Forecasts, please So exports have been slowing while the import bill keeps rising. Where does this leave us in terms of a forecast? If we assume 3% growth in the global economy and 1% growth in Japan as well as a continued 5.5% drop in the terms of trade, Japan’s trade account will keep on falling into a deeper deficit and, by early 2015, the trade deficit will be larger than the income account surplus (interest, dividends etc. earned by Japanese overseas factories and portfolio assets). To put it plainly again, by early 2015 Japan’s trade and current account will likely be in deficit.

Jesper Koll is a Managing Director and Head of Research at JP Morgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.

Obviously, some might quarrel with these big-picture assumptions. However, it appears the current dynamics of aggressive overseas expansion by Japanese manufacturers are poised to actually dampen the nations export dynamics. Specifically, Japan’s car industry – which makes up nearly one third of all exports – is set to produce more than 75% of all cars in overseas factories, up from barely 50% in 2003. Made-By-Japan is poised to be a powerful force in global markets – but Made-In-Japan is set to become increasingly rare. As export earnings dwindle, so will Japan’s global creditor status.

Of course, the switch from net creditor to net debtor will have significant implications for yen asset prices – bond yields in particular. In my personal view, the fact that the nation is running out of money is poised to be good news, as it is bound to instill a new sense of urgency in the minds of policy makers. As a wise man once said: “nothing focuses the mind as much as running out of money.”

GETTING A G.R.I.P.!
As you may know, the Ax’s ultimate purpose is to cut through the BS and help you develop your own strengths as a leader, as a manager and as a “globally thinking communicator.” Each topic stands alone and each one can and should inspire you to lead more effectively. This month, at the risk of taking on too big of a tree, we’re chopping into a giant Redwood: Global Readiness.

What do we mean by “Global Readiness”? You’re not the first to ask. At AMT Group, we have been “Developing Global Thinkers” since 1992, and this remains the hottest topic at every annual planning session. With so much rapid change all around you, and the globe seemingly shrinking by the minute, being “globally ready” has taken on even greater importance today.

Let’s take the second word first:Readiness. When you are “ready,” how do you feel? Prepared. You actually expect and welcome surprises. You’ve taken the courses, practiced the lessons, experienced enough to know there’s always more to learn. You’re rarin’ to go. It doesn’t matter if we’re talking about being ready for a night on the town, a day on the greens or your most important IR road show to date. We all know when we are ready, or at least ready enough to give it our best shot.

Today, we’re talking about a specifictype of “readiness” – global readiness. Do we mean you need to be ready for anything, anywhere at anytime? That you’re an expert in everything from social networking to low-latency trading programs? Only if that’s your business. But you do need to be more prepared for the challenges of a global business environment than you have ever been. We all do. We need to consider the characteristics, attitudes and skills necessary to function well in a “global” or international team.

So why don’t we call this “international readiness?” Several reasons. For one, “international” refers to countries and is limited to cross border relations and transactions. “Global” goes well beyond that. Your diverse team of 10 today requires more global skills than large corporations needed in decades past.

What “global skills” are we referring to? Beginning in 2000, and having already worked with over 1,000 MBA candidates, business owners and managers, my company began to develop a prototype Global Readiness Profile. The request came from a multinational pharmaceutical firm which was having difficulty choosing Japanese candidates for short and long-term overseas assignments. Together we identified 25 key (and now customizable) “elements of Global Readiness.”

Here’s how it works: after completing the Global Readiness Profile (GRP), the candidate receives an accurate snapshot of where they score on these 25 key elements,with both qualitative and quantitative results. We add value through an in-depth review of the profile together with the GRP candidates, helping them develop personal “Global Readiness Improvement Plans.”

I’d like to share with you how we go about printing the most accurate snapshot, one that encourages those who take the GRP to take action and Get a GRIP!

First, the GRP uses six human evaluators who, taken as a whole, should comprise the most trustworthy team you can find. Here they are:

1. YOU
If you are the leader of a company or team that is implementing the GRP, then you can tailor the GRP to your current needs. For example, control who takes the GRP, which elements you want to emphasize, de-emphasize or modify, and how the GRP will be used.

2. THE GRP CANDIDATE
One-third of GRP is direct self-assessment and over half is scoring of elements the candidate can confirm for him/herself through video review. The merits of self-assessment (at least with this tool) are huge. When someone sees that their own evaluation suggests they need work on a certain element, they’re more likely to put in the time and effort to improve.

3. COLLEAGUES
Who else can better judge, for example, the interpersonal skills or technical ability of someone than their direct co-workers? And the GRP’s methodology protects you and your candidates from typical abuses and pitfalls of so many so-called 360-degree evaluations.

4-6. GRP GUIDES
The business communication portion (the lower portion of the globe described later, from achievements down around through to negotiations) is scored by three AMT Group certified evaluators, from three continents (Asia, Europe and America). When their opinions differ (which does occur on occasion), you will know why, and you will see what the next best step to take is, depending on the particular “global environment” the candidate faces, either now or in the future.

This chart shows 25 elements that define core skills for Global Readiness. The closer to score to the end of the globe, the better is your GRP.

There are a couple of reasons for this. Most of you reading this article are based in Tokyo, and for you, the center of the world is where you are. While we’re using the GRP for clients in several countries, our primary focus for now is on helping those of us here to expand our influence and leadership to a wider audience. Hence, the higher scores on the profile take you further out from Japan.

(You receive your individual snapshot and you are eligible to receive two customized Guided G.R.I.P. sessions focusing on your most pertinent areas of improvement. This total package costs about ¥90,000 per candidate).

AUTOMAGIC IMPROVEMENT
So the GRP is all about “readiness.” The profile itself helps you identify who’s ready for action, and what they need to do to be “readier.” The stories that come from clients who’ve taken it convince me of its value. One international banker said, “My self image was entirely different to what I saw through this program. Now I know what I need to change.” And even better, anyone who’s that ready for change will change.

Every single GRP candidate has been able to identify the behaviors that enhance – and those that inhibit – positive interactions and influence outcomes. The increase in self-awareness by itself leads to improvement.

NON-VERBAL BLINDSPOTS
In future issues of Andrew’s Ax (and in the book), I will go into greater detail on each of the 25 elements. For now, let’s take a look at one element in particular.

Andrew Silberman is chair of the ACCJ’s Membership Relations committee, president & chief enthusiast for AMT Group (www.amt-group.com) as well as the lead vocalist & rhythm guitar for the roots rock band Moonshots (www.moonshots.net). Direct comments or questions to him by e-mail: Andrew@amt-group.com

Note that under interviews and presentations, candidates are scored on both “responses” and “delivery.” One reader asked us if the GRP covers “non verbal communication,” and indeed it does. In fact, non-verbal communication is a blind-spot for many candidates. By “non-verbal,” we mean anything beyond the words that are spoken. If “verbal” is the words that are said or written, then “visual” (how you look) and “vocal” (how you sound) make up the universe of “non-verbal” communication. (Albert Mehrabian demonstrated that in terms of likability and impact, 93% is generated by non-verbal cues.)

With so many cultures in the world, is there a “global” non-verbal communication that is more or less effective? When describing impact on global teams, yes there is. Can you tell if someone is positive, confident and energetic? Sure, even though there are cultural nuances. Thais and Vietnamese tend to smile more than others, and for some different reasons than people from
other countries. Japanese in particular and Asians in general tend to make less eye contact than westerners. But let me put it this way: I’ve yet to find the culture where slumped shoulders, a drooped head and heavy sighs signaled to others, “Let’s do it!”

How important is all this? Last December my right leg suffered three minor, but none-the-less painful injuries in just 2 days. I told a sensei who said there’s meaning to be found. “Just like with everything else, it’s that word that starts with A, ends with S…” (after pausing a beat so I first conjured the insult I knew he was thinking of) “and has a lot of other letters in between. Yes, it’s all about Awareness.”

Every improvement starts with awareness and a bit of dissatisfaction with the status quo. I’m sure your global readiness is making the cut so far or you wouldn’t be reading this. But every athlete knows that with a new season, the coach again goes through and chooses who’ll be playing on the team. Some make the cut and others get cut from the team. Next season is always right around the corner and the coaches are making their lists. Make sure you keep making the cut!

Illustration by Louise Rouse

A big thank you to ACCJ members for reading and to the Journal for inviting me to contribute part two of this three-part series based on the newsletter I’ve been sending to friends and clients over the years.

STROKES TO THE FINISH LINE

Last month, we took swings at the Lost Art of Listening and shared both good and bad examples of three “listening levels” offered by author Madelyn Burley-Allen. There are serious gains to be made by improving your team’s listening skills.

But many business leaders here in Japan often face the opposite issue. Their staff listens–or at least appears to listen–and sits quietly on the sidelines. Whether at an internal meeting, visiting a client or prospect, or dialing into a tele- or video-conference, the “contribution from Tokyo” often falls short of typical western expectations.

THE WRONG KIND OF BLOCKING

A lot of us who follow the NFL know that blocking is a key part of any strong offense. Good blocking wins championships. But another kind of block can prevent proactive contributions at meetings. These blocks can be personal or cultural, as anyone who has lived in Japan will attest. You may have concluded that most Japanese do not want to contribute proactively or assertively to discussions. But over the years here, I’ve discovered that what many perceive as a cultural barrier is in reality a lack of meeting management skill–and it’s lacking on both the Japanese and their western colleagues’ side of the table, phone or screen.

Ask a group of people from anywhere in the world (as I have more than 100 times): “What’s the impression of someone who attends a meeting and doesn’t say anything?” You’ll receive a variety of answers: “The person doesn’t understand the topic.” “Not interested.” “Unprepared.” “Sleepy.” Usually it takes more than 10 of these answers before even one is considered “positive” and that’s likely to be something like, “He really wants to know others’ opinions.” The overwhelming majority of impressions of someone who does not speak up at a meeting, throughout the world and including Japan, is negative. So what’s going on? Why are your people not voicing their opinions?

Digging deeper, we find that the real reasons that someone doesn’t speak up in a meeting generally boil down to two:either they fear looking foolish by saying something that isn’t brilliant, or they don’t want to appear rude by interrupting. So they wait patiently and their “turn” never comes. Or when it does, the topic has changed. We disarm both of those potentially legitimate concerns below.

A BIG ISSUE HELPED BY AN ANALOGY: “STROKE!”

This non-contribution is actually a big issue. You want your team to proactively contribute to meetings and discussions, especially if your team is “on stage” with global or regional headquarters. So let a simple analogy help. “Imagine,” you can say, “that this meeting table (or wherever we’re gathered) is a actually a boat and we’re engaged in the sport of rowing (sometimes known as ‘crew’). We’re in a race. Our objective is the finish line. That objective must be clear, whether it’s to generate a new marketing idea, reduce turnover or decide on an off-site location for the team retreat.”

“We’re all in the same boat, as the saying goes. We all want to achieve the objective. You’re here because you’re capable. We’ve all got an oar in our hands. Now, if you’re in this boat, there are three things you can do: 1) sit there and do nothing. That’s where the term ‘dead weight’ comes from; 2) put your oar in the water and stroke—that’s helping us get to the finish line; or 3) push backwards–that’s interrupting, saying too much or being negative. Whatever propels us toward the goal is good; whatever holds us back or takes us off course is bad.”

THREE STROKES TOWARD THE GOAL

People “get” this analogy and yet they still don’t know what to do. “How can I contribute? I don’t have anything brilliant to say.” First, point out that not everything they, their boss or anyone else says is always (if ever) brilliant. It’s enough to be coherent. Once your people confirm that it isn’t merely the brilliant who speak up, they’ll be more likely to give it a shot. Still, you may hear, “OK, but I don’t want to interrupt.” And they’re right. Interrupting someone is rude.

So teach your staff (and yourself, if necessary!) to interject , to add value, to push forward, etc. This is more than a semantic difference. An interruption cuts someone off; it literally stops their (and thus the boat’s) flow. An interjection, on the other hand, contributes to the goal.

Illustration by Louise Rouse

1) COMPLIMENTS

The first interjection, and one of the easiest, is to state the current speaker’s name and add a sincere compliment, “Joe, that’s a great point.” No one (not even a blowhard who loves the sound of his own voice) will take offense to a sincere compliment. And that compliment gives you the floor, from which you can use up to 30 seconds to add value with your point.

The compliment is not rude, and it’s not a trick. After you present your point, if you feel Joe was really onto something, prove you were listening by reminding him (and everyone else) what he was saying and ask him to continue or elaborate.

All of us seek validation. We like to know that our ideas merit consideration. That’s why compliments work so well. Studies at Harvard and Northwestern universities show that even insincere flattery works, in that flattery generates unconscious positive feelings from the “flatteree” toward the “flatterer.”

Good feelings means the person will feel more engaged, and pull harder on his oars to get toward that finish line. Be careful with the flattery, though, since other colleagues in the room or across the screen may see it as an attempt to ingratiate yourself rather than encouraging a positive meeting outcome. So be sincere. Another meaning of “stroke” is compliment, and complimenting someone sincerely can be one of the best strokes you use to power your meeting toward the finish line.

2) QUESTIONS

Many of your staff may not want to break in with a compliment to someone senior. That’s OK. There are plenty of other options, the most common-sense one being, “Ask a question.”

A lot of fakery goes on in meetings–people pretending to know what others are talking about when really they have no clue. Far better to ask a question early on, even something as simple as, “Can you clarify what you meant by…”

Now, if the speaker is a candidate for “On-and-on Anon,” again you can jump in by first stating his or her name. We all hear our name above the buzz of a crowded restaurant or airport (“Mr. Smith, please pick up the white courtesy telephone…”) and we even hear it above the buzz or our own voice.

Asking a good question shows you’re paying attention, you want to know more, and you are “present.”

3) VALIDATION

At a minimum, your staff needs to know that encouraging words and accepting others’ contributions can go a long way toward helping you achieve your meetings’ goals. Many of your staff are not aware of this.

When Tanaka-san steps up to paraphrase what Denise has said, thus clarifying understanding for herself and others, Denise needs to know the proper response. A quick, “Exactly right, Tanaka-san.” Or, “That’s it!” or even, “Yes!” will do. Silence, on the other hand, leaves most everyone feeling awkward. If, after validating, you want to elaborate or clarify, go ahead.

BREVITY: EVERY MEETING’S FRIEND

In a business meeting, remember your best friend “Brevity.” Author Milo O. Frank wrote How to Get Your Point Across in 30 Seconds or Less. If you are or have a chatterbox on your team, pick up a copy of Mr. Frank’s book. Imagine that when you begin to speak, a stoplight has switched from red to green. After 20 seconds or so, it’s yellow. At 30 seconds, red.

STAYING THE COURSE

Andrew Silberman is chair of the ACCJ’s Membership Relations committee, president & chief enthusiast for AMT Group (www.amt-group.com) as well as the lead vocalist & rhythm guitar for the roots rock band Moonshots (www.moonshots.net). Direct comments or questions to him by e-mail: Andrew@amt-group.com

Every time we introduce this concept, invariably someone will say, “Yes, but what if I disagree?” First, point out that they could have said, “Yes, and what if I disagree?” And my answer is simple: by saying “Yes, and…” you are acknowledging the person and their desire to reach the same goal you seek–the finish line. Then you add your idea, which may differ from theirs, and you can seek areas of agreement or compromise and keep the boat going toward the goal. Interrupting, cutting someone off or saying, “Yes, but your idea won’t work because…” will usually lead to one thing: fewer contributions from the person who was cut off. If that’s what you want, perhaps that person should not have been invited to the meeting.

Every good meeting is an exercise in rowing. Set everyone’s sight on the goal, put the oars in the water, and STROKE!

Nobu - Fotolia

Anybody who has spent more than a few days in Tokyo has noticed that there are too many banks, convenience stores, coffee shops and post offices, among other things. That situation was true even before the global financial crisis, but with the economy in the doldrums for several consecutive years now, real estate owners are trying to find creative ways of attracting tenants to properties that are no longer needed, assuming Japan’s bleak demographic outlook.

With 40 of Japan’s 47 prefectures losing population, this is a much more drastic problem in regional cities. In central Tokyo generally speaking, there are still enough people so well-located properties can find new, alternative uses.

Since Japan’s economic bubble burst 20 years ago, the department store industry has been on a steady decline. From a peak in 1991 of 9.3 trillion yen, nationwide department store sales fell 31% to 6.3 trillion yen in 2010. Even Ginza, the most prestigious retail district in Tokyo, has long suffered from a surplus of department stores. Mitsukoshi and Matsuya have been in an extended battle for bragging
rights to the top selling store in Ginza, while Matsuzakaya, Hankyu and Seibu have mostly been afterthoughts. The 2007 opening of Marui in Yurakucho was the beginning of the end for Hankyu and Seibu.

Seibu announced its closing first and, as merely a tenant, it didn’t have to worry about the future use of the famous Yurakucho Mullion building that it occupied. The building’s owners wrapped up an extensive search with the announcement that Lumine, a unit of railway operator JR East, would lease the former Seibu space. Until now, Lumine had operated what are known as “fashion buildings”, or vertical malls attached to major JR train stations, providing a growing source of profit to supplement the stagnant core rail passenger business. JR East’s decision to make an expensive, long-term commitment on a retail building not connected to one of its own stations was a clear statement that the company must diversify from its core business to have any hope of growth.

Hankyu, meanwhile, has tried to preserve its department store business with an entirely different approach. While the closing of ankyu’s previous format was an acknowledgement that it could not compete against Mitsukoshi, Matsuya and Marui for young women’s purse strings, it went in an entirely different direction with the October 2011 re-opening in Yurakucho as a specialty store for men. Although Isetan’s men’s store in Shinjuku has succeeded beyond the industry’s wildest expectations, Hankyu is likely to have a much tougher time in Yurakucho, where it doesn’t have much name recognition or market power compared to its main store in Osaka, where it first tested the men’s store concept.

Having visited both the new Hankyu and Lumine stores recently, it is clear that a great deal of effort and money has been put into both. However, the results are widely divergent, at least to the naked eye. Lumine is packed with hordes of young women, some with their mothers in tow, checking out many low to medium-priced brands not previously available in the Ginza area. The food offerings on the first floor and basements are also jammed, with long lines for popular take-out items.

Seth Sulkin is the President and CEO of Pacifica Capital K.K., a Tokyo-based real estate asset manager specializing in commercial properties.

In the last several years, a number of department stores in prime locations in Tokyo and other major cities have shut down, only to be revived by other companies in formats attracting far more customers, such as electronic stores. Just as Toyota revolutionized lean automobile production with the use of robots, real estate that can be configured easily and quickly with low labor costs is likely to significantly outperform uses such as department stores and luxury hotels that depend more on the finicky whims of consumers and events beyond the owners’ control.

Illustration by Louise Rouse

A big thank you to ACCJ members for reading – and to the Journal for inviting me to begin a 3-part series based on the newsletter I’ve been sending to friends and clients.

WHAT IS ANDREW’S AX?

I started taking wild swings with Andrew’s Ax back in 2002. As musicians know, “ax” is slang for their instrument (especially a guitar, which I happen to play). And anyone who has been fired from work or had a budget cut knows only too well what it means for someone or something to “get the ax.” You’ve probably also heard that when someone feels resentment or a grievance, we say, “They’ve got an ax to grind.”

And then there’s the actual tool used to chop wood. A framed one, known as “the Stanford Axe,” is awarded to the winner of the San Francisco Bay Area’s “Big Game,” the annual college football clash between Stanford and my alma mater, UC Berkeley.

So you can see how all these meanings are connected to my newsletter. Think of Andrew’s Ax as a tool primarily (but not exclusively) for directors here in Japan to keep themselves and their staff motivated, engaged and improving. The time you take reading it is an investment in yourself, as there’s something in each issue you can use to sharpen your own skills.

Today, let’s take some swings at what has become a bit of a lost art.

THE LOST ART OF LISTENING

In Listening: The Forgotten Skill, author Madelyn Burley-Allen divides listening into three levels. This may over-simplify things, but it’s is an easy-to-digest, effective model. Along with her basic model, I’ll share with you some real-life cases of each level that I’ve encountered here in Japan.

The highest, Level One, occurs when you are fully engaged in empathetic listening. (Some say “empathic” listening, and that’s where I will grind some ax. Because I’ve only seen one true empath, and that was Deanna Troi, the half human, half Betazoid on the television series Star Trek: the Next Generation. Still, it is true that some expert listeners may appear empathic. Not a bad appearance!)
Burley-Allen says Level One is “…listening non-judgmentally with understanding to the intent, paying attention to the speaker’s total communication, processing what is being said.” At Level One, you are fully in tune with the speaker, and if engaged in a one-on-one conversation, you find yourself in a subtle verbal and non-verbal dance, where even micro movements mirror each other.

Notice that in order to engage in Level One Listening, you need your eyes and your ears open. When I arrived in Tokyo in 1991, I remember being told, “Don’t be surprised if someone in a group closes their eyes while you or someone else talking; it doesn’t mean they are not paying attention–it may mean they are concentrating.” Well, yes, it could mean they were trying to concentrate, but this “trying” is also shutting out the body language expressed by the speaker. And I have since attended several meetings where a senior person closed his eyes in what could have been interpreted as “concentration” by some, only to then watch the person slump over in his chair and snap his startled eyes open.

On the plus side, I’ve witnessed both foreign and Japanese leaders – expert listeners – engaging in Level One listening. One way to tell is that they answer unspoken questions. Japanese are especially adept at this, and some have even received formal training in it. For example, years ago a client, a JAL purser, shared that he was taught to “listen for what the passenger might want.” The only way to answer unspoken questions is to be truly “in tune” with your counterpart, noticing micro-movements: a raised eyebrow of surprise, or a sudden shift from nodding in agreement to a hint of doubt. Since many Japanese feel that direct questions are rude, your listener may decline to ask for clarification; this means you need to be in listening mode even when speaking, and you may need to be the one to check whether or not your message is being understood. Don’t wait for their questions.

Level Two listening is when you are “hearing the words but not making an effort to understand the speaker’s intent, appearing to listen intently when in fact only slightly concentrating.” Many of us deal with people stuck at Level Two. I bet you can think of a Level Two listener right now, and if you’re honest, you can even recall the last time you engaged in Level Two listening. Today, perhaps?

I’ve seen this often during group discussions, especially with mixed culture teams. Such teams in Tokyo often span across the spectrum of language abilities. Last month, one small group we were working with consisted of two native English speakers (one with Japanese skills, one without) and two native Japanese speakers (one with English skills, one without). This situation poses all sorts of communication problems, but the biggest one is the selective lack of effort by the non-fluent speakers to do anything but wait for one of their bilingual counterparts to interpret for them. We suggest that everyone, even those not understanding the vocabulary, modify his or her behavior to match what it would be in Level One mode. If the listeners do this, the speakers will feel more encouraged, the will disclose more information, and communication will flow.

Level Two is not really listening, but it’s better than…

Level Three, which Burley-Allen calls “sporadic listening.” That’s when you are listening in spurts, just hearing rather than listening, and where you are most likely being either passive, judgmental, or both. You may think that only you know when you’re at Level Three, but your counterparts pick up on it.

A common complaint is that people rely too much on email or instant messages to communicate with someone in the same room, but often that’s because people want to at least get the feeling that someone is paying attention to them rather than being “half” listened to, at Level Two. One client’s team member complained that nearly every time she went to visit her “open door” manager, he would answer her questions without even looking up from his computer screen.

This is happening all too often, and certainly not just in Japan. Technology in general – Blackberries and iPhones in particular – has led many people to forget how to listen, at least how to listen at Level One. Just the other day, after a full morning session with a team here in Tokyo, three of us went to lunch. A Japanese HR manger (who had attended only the first part of the session), their Europe-based leader and I crossed the street for some sushi. We would have just 40 minutes together.

Less than three minutes after sitting down, the first call came to the director. He politely (is this polite?) excused himself to take the call away from the table. Five minutes later, he was back, apologized, and then halfway joined the rest of the lunch. Why “halfway”? Because he was also checking his Blackberry throughout. The HR manger said, “I never take my keitai to lunch, for exactly this reason.”

Andrew Silberman is chair of the ACCJ’s Membership Relations committee, president & chief enthusiast for AMT Group (www.amt-group.com) as well as the lead vocalist & rhythm guitar for the roots rock band Moonshots (www.moonshots.net). Direct comments or questions to him by e-mail: Andrew@amt-group.com

This is either sad or funny – maybe both – but being “on call, 24/7” is one of the reasons for burnout and a key reason for losing the art of listening. Level One listening takes time. It takes effort. And it can’t be accomplished between cell phone calls, text messages or while looking at a computer screen.

A CRUCIAL TEST

There are many ways to test your listening, and I recommend Burley-Allen’s book as a starting place. It is chock-full of assessments, exercises and insights. And perhaps your best test would be one you give yourself after your next conversation with a person with whom you’d like a better relationship. Prepare by writing down a communication goal, something like, “Level One Listening” or “Let Mr. B fully express himself.”

After the interaction, you can ask Mr. B directly, or at least ask yourself if Mr. B. would say he felt truly listened to. Did he feel better, worse or the same about himself as before the conversation? If you really listened at Level One, he should feel better.

Sharpen up your ears, pay attention to what Level (One, Two or Three) listening you’re engaged in. Listen to yourself and your team, and practice. Tune your ears first and the words you speak will be music to your followers.

Illustration by Louise Rouse

What a year 2011 has been. For people like me in the forecasting business, the past twelve months have been a powerful reminder of our need to be humble. And to be prepared to think the unthinkable: Japan’s triple disaster, the real possibility of a Eurozone break up, and America losing its triple-A rating. Yes, the events of 2011 finally made me understand what one of my mentors meant when he cautioned, “If you think you know the worst case scenario, it’s not the worst case at all.”

The good news is that this works the other way around as well – if you think you know the best case scenario, it’s not the best case at all. Let me give you an example. It plays in Greece and illustrates the power – and mystery – of money. Full disclosure here – I am indebted to a German friend who passed on this story. Its origin is from deep within the German blogosphere – a regular posting that calls itself: “Cleptocracy”. I think it’s so good it deserves more attention. Stretch your imagination, think logically, and it just keeps getting better – the magic of money.

WELCOME TO HOTEL EUROPA

Imagine a three-star hotel in the center of Athens, close to the Greek Parliament. Let’s call it “Hotel Europa.” A tourist arrives in the lobby and is greeted enthusiastically by the owner: “Hello my friend. My name is George, what is yours?”

“Wolfgang,” says the friendly young man. “I’m from Germany and am looking for a place to stay for a couple of nights.”

“Very good,” says the owner. “This hotel is close enough to Parliament to see the demonstrations, but far enough to avoid getting pestered by the tear gas. My best rooms are on the fifth floor. I’m sure you’ll like it here. Tell you what, if you leave me a pre-payment of 100-Euro, you can go upstairs and have a look at all the rooms. Best to decide for yourself what we’ve got to offer and what’s best for you. Take your time. I’ll give you the master key.”

Wolfgang says “OK” and puts a 100-Euro note on the counter. He takes the masterkey, puts his backpack over his shoulder and walks to the elevator. As the doors close, the Hotel Europa owner thinks “Wolfgang doesn’t look like the kind of guy who needs a receipt.” So he picks up the 100-Euro bill and calls for his nephew Stavros.

“Stavros, can you do me a favor? Please take this 100-Euro note over to Manolis. You know, our green-grocer from around the corner? I owe him money. Give him the note and tell him he can keep the change.”

The boy runs over to Manolis and hands him the money. Manolis is happy to see Stavros, thanks him and says, “Here Stavros, take an apple. And since you’re here, would you mind taking the 100-Euro note to Petros. Petros runs the machine repair shop around the corner. He fixed my cash register with some new parts a couple of months ago and I still owe him the money. Please give the 100-Euro to him. He can keep the change.”

Stavros runs down to Petros’ shop, tells Petros that Manolis sends his best regards for fixing the cash register, and hands him the 100-Euro note. Petros is overjoyed and gives the boy a pack of gum. Just as the boy turns to leave, Petros remembers that he still owes some money to Gianni for eating in his tavern. “Hey Stavros, do me a favor,” he says. “Please take the money over to Gianni in the tavern across the street. Send him my best. Tell him to keep the change.”

I LOVE MY NEIGHBORS

Stavros leaves Petros’ shop with a big smile. He’s been running around for about 10 minutes, still carries the 100-Euro note, yet picked up a free apple and pack of gum. The boy enters the tavern, where Gianni walks from behind the bar to greet him. Everybody in the neighborhood knows the friendly child. Stavros conveys greetings from Petros and gives the money to Gianni. Then he asks for a glass of water. Gianni smiles, pulls some freshly cooled lemonade from the fridge and gives it to the boy. The boys smiles and thinks “an apple, a pack of gum, and now a free lemonade – I love my neighbors!”

Just as Stavros is about to run off again, Gianni puts his hand on the boy’s shoulder and says: “Since you’re here, could you do me a favor? Can you take the 100-Euro and to your uncle George? Last weekend, I had an argument with my wife, so I slept at his hotel. I owe George about 100-Euro. He can keep the change. Could you do this for me?”

OK, says Stavros. At least I’ll get back to the hotel now. It’s just around the corner. As he walks into the lobby, Stavros sees his Uncle George behind the reception desk and walks over, putting the 100-Euro note back on the counter. “Here, Uncle George. It’s from Gianni. He says he still owes you some money. And keep the change.”

Jesper Koll is a Managing Director and Head of Research at JP Morgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.

George immediately hands the 100-Euro note back to Wolfgang, who leaves Hotel Europa hoping for better accommodations. Of course, he has no idea how many people are now free of debt and free of worry – all because of that 100-Euro note now tucked back in his pocket.

As an economist, it is often hard to explain how “fiat money” actually works. Just remember that sometimes only a fleeting moment of contact with money can have unimagined and powerful effects. That is the “magic of money.” Could it get any better?

A Happy Holiday Season to all readers!

Photo: Lom - Fotolia

Although the actual facts are not yet fully clear, media reports suggest the company bought several other firms at high prices and quickly wrote off most of the investments. In addition, they paid an advisory fee on a foreign acquisition that was way above market standard. While this is far from the first time that management of a publicly-traded Japanese company has been suspected of misusing shareholder capital, what has made the Olympus situation so different has been how quickly both the Tokyo Stock Exchange and the Japanese government have noticed the problem and taken reasonably bold action.

As I wrote in last month’s column, recent management buyouts at two listed companies and the hostile takeover of a third have raised expectations among international investors that Japanese stock prices will finally rise to narrow the huge gap between market capitalization and net asset value. A number of offshore funds are combing through little known small- and mid-cap companies to try and figure out the next likely management buyout targets.

As Atsushi Saito, president of the Tokyo Stock Exchange recently stated in the wake of the strange actions by Olympus, “There are laws to protect shareholders.” Up until now, foreign shareholders have never felt particularly well protected, but the situation is beginning to change. The subsequent scandal at Daio Paper, in which the former chairman personally borrowed more than 10 billion yen from various group companies, most likely came to light because of the scandal at Olympus.

For real estate investors, the Olympus situation has the potential to shake up management at public companies generally and to free up a variety of heretofore hidden assets.

Seth Sulkin is the President and CEO of Pacifica Capital K.K., a Tokyo-based real estate asset manager specializing in commercial properties.

In the Japanese real estate market, one of the biggest problems at the moment is the lack of large and stable or high-yielding assets available for sale. Even for companies that did not blatantly throw away shareholders’ money, calls for increased corporate governance and the investigation into Olympus by the Securities and Exchange Surveillance Commission should lead to big changes over time in management practices.

Such a source of asset sales is sorely needed in the real estate market, where there is a paucity of large deals between unrelated parties. Domestic and foreign professional investors are avoiding putting assets on the market as they hope for a recovery in prices. There are scattered deals in distressed properties and loans, but not the consistent flow that many experts have been predicting since the global financial crisis.

Events at Olympus, Daio Paper, Kojitu, Tachihi and Shin Tachikawa are getting foreign investors more excited about prospects in Japan than I have seen for years. And I expect emboldened independent directors and shareholders to be more aggressive in holding management of public companies responsible for their stock price – a concept that until now was considered heresy in Japan.

Photo by fidelramos flickr

So I visited Kai-Fu Lee. Years later Kai- Fu Lee became famous for many things. He set up Google.cn, Google’s presence in China. He worked for Microsoft before that. Before that he created all the speech recognition techniques that, to this day, Apple probably still uses. Heck, probably every speech recognition program out there, even on your Android phone, probably uses techniques originally developed by Kai-Fu Lee. Now, he has millions of followers on Weibo (the Twitter of China) and he has a VC fund for Chinese Internet startups.

I had first met Kai-Fu Lee when I was trying to decide what grad school to go to. When I visited him he showed me the project he was working on. It was a device that could understand any possible English command you could possibly speak if you were, say, on a battleship in the middle of a war in the Middle East.

But later, when I visited Kai-Fu, it had nothing to do with speech recognition. Like many young people he had gotten burnt out. There came a point in his grad student studies where he couldn’t bear to program another computer that understood, “Fire the missiles!” So he took a year off and like most people who get burnt out and take a year off, he created the world champion Othello program.

The basic idea was this: take 10,000 Othello positions that are either totally winning or totally losing. Put them in a database. Now, when a program is considering a move, see if the move closely matches, statistically, a winning position, or a losing position. Make the move that most closely matches a winning position. This basic idea created the world champion Othello program. And apparently it resolved Kai-Fu Lee’s burnout issues and he got his Ph.D in speech recognition (which, oddly enough, uses the same basic techniques as the Othello program).

I wanted to win a million dollars by using his same technique for Go so I went to him and asked him if he would work on it with me. He said, “No,” it’s too impossible. He had tried it, he told me. There are too many possible choices in Go and even if two positions look very similar in every possible variable, one could be completely winning and one could be completely losing. Not like speech recognition. Not like Othello.

James Altucher is an investor, a contributor to MarketWatch.com, and the author of 'I Was Blind But Now I See' (http://amzn.to/qM8kLi), you can read more of his work at: http://www.jamesaltucher.com

The odd thing is I just invested in a company that uses a very similar technique to Kai-Fu Lee’s Othello program. This company classifies brain scans to determine what type of depression a person has. They have a database of tens of thousands of brain scans detailing what anti-depressant or anti-anxiety drug worked for each brain scan. Apparently, most people with depression are horribly misdiagnosed and it takes an average of eight years in normal therapy to determine the right type of anti-depressant or anti-anxiety drug that will work. The original target customers of this company: Army soldiers returning from war in the Middle East. It all comes full circle.

Photo by Takadanobaba-Kurazawa on flickr

Against the relentless stream of bad news on the global economy, it is important not to lose sight of what’s actually going on in the real world. Yes, barely a day goes by without a new dramatic sounding headline: American debt downgraded, Greek debt default talks collapse, China inflation at record high, just to name but a few. Remarkably absent from all the scary headlines is Japan. For Japan, the news flow has tended to surprise on the upside: industrial recovery from the March 11 disaster running ahead of schedule, no major negative impact from power shortages, and the political leadership transition from PM Naoto Kan to PM Yoshihiko Noda took place as swift and smooth as changing trains in Tokyo station. Can it be that in the midst of a global economic storm Japan has found her place as a haven of stability?

Let’s look at what’s going on. Three major forces have come into play. First, the rebuilding from the March 11 disaster has given Japan’s domestic economy lots of positive momentum. Right at the time when global demand was starting to slow, Japan’s private and public sector began to spend here at home, energized by the necessity to rebuild. Complacency was never an option. Car companies switching production to Saturdays and Sundays, convenience stores running overtime on top of overtime to re-stock their warehouses, trucking companies so busy they had to hire new drivers and, of course, the entire clean-up and reconstruction effort pushing up demand for labor across all of Japan.

Take note that almost 500 million jobs have been created since March. No, it has not been just gaman, but real hard sweat and action and human endeavor that was triggered by the disaster. The animal spirits that drive economic growth are back. So just as America and Europe fell into their respective confidence crisis moments, Japan moved the other way. For the first time in many decades, a home-grown demand momentum has been built in Japan.

Where’s the proof? Just look at the drop in Japan’s unemployment rate, the rise in consumer spending and retail sales, the smart recovery in housing and construction activity (not just in Tohoku, but here in Tokyo and other big cities). And yes, all this pick-up in demand has actually led to a turn in price-power. Slowly but surely, unit prices in supermarkets and convenience stores are beginning to rise. Interestingly, here we see several large players abandoning their special discount or cash-back programs with sales actually rising after the move to normal pricing. Good to see economics still works: when demand rises, suppliers get more power over price.

The second force in play has been an unprecedented rise in corporate activity. We’re seeing record activity of mergers and acquisitions, aggressive re-organization of supply chain relations and generally a much more focused approach to running companies. Again, I think the March disaster pulled corporate managers out of complacency. All of a sudden management realized that they had to act, that business as usual was no longer an option. Japan Inc moved from strategic planning to strategic action. Case in point: Over 4 trillion yen in mergers and acquisition deals have been done since April of this year, which is about four times as much as normal. This has been a true jolt of new activity.

To be sure, much of this activity is the result of corporate leaders pushing more aggressively overseas. However, the net impact on the economy is not necessarily negative—only rarely do companies go overseas to shut-down domestic facilities. Most of the time, the push overseas merely adds to global capacity. They want to be closer to the export markets and closer to their final global customer. This in turn makes the company overall more profitable which does create a positive feedback loop for Japan-based activities and employees.

Even more exciting is that fact that since March, we have seen several cases of higher profile Japanese companies actually selling parts of their business to global players. The big case in point here is Sanyo Corporation actually selling its white-goods business (refrigerators etc.) to Chinese white-goods company Haier. This must be viewed as a long overdue win-win situation as it allows Sanyo to concentrate on its core competence of being a leading edge high-tech producer and innovator in the electricity storage business, while Haier gets a solid beachhead into the Japanese domestic market.
Again, Japan Inc has demonstrated a boost of energy. It is as though the March 11 disaster was the starting gun to a race where, all of a sudden, Japan Inc actually wants to win again.

Jesper Koll is a Managing Director and Head of Research at JP Morgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.

The third force unfolding is something I feel a little reluctant to write about, but from an objective perspective, I think I must. Like it or not, I do think the Japanese governments’ and public policy response (so far) actually deserves to be applauded. Here I am talking from a macro perspective—big-picture monetary and fiscal policy. They’ve done the right thing, and have done so fast and decisively and in a fashion that actually boosted confidence. After all, the Bank of Japan has steadily increased its asset purchases and liquidity provisions. On the fiscal side, the government has added deficit spending through two extra spending budgets and is about to enact an even bigger extra budget to help accelerate reconstruction activity further.

More importantly, the government has decided to postpone any tax increases until 2013. This means that, for 2012, Japan is poised to be the only major economy where next year there will be a net positive boost to growth from the public sector. In contrast, U.S. fiscal policy is set to subtract as much as 1.5-2 percent from growth next year, and Europe is looking at an even bigger negative hit from the public side contraction.

All told, Japan may actually be entering a period where both private and public demand are working together to create a net positive for domestic demand growth. Of course, the woes of global growth slipping into recession are poised to cut-into Japan’s export machine. A one percent reduction in global growth still pulls down Japan’s corporate profits by almost 20 percent. However, this is nothing new and corporate managers are braced for it. What is new is the newfound domestic activity push by both the private and public sector. Against all odds, Japan could well emerge a short-term winner in the global growth and economic management contest in the coming year.

photo by Shinnygogo on flickr

For many years, foreign investors in particular have tried to profit by acquiring shares in Japanese companies with large real estate holdings trading well below their net asset values. Failed takeover attempts by Steel Partners and others have created widespread skepticism around the world, though, whether hostile or unsolicited takeovers are actually possible in Japan. Effissimo, a Singapore-based activist fund, supposedly put pressure for years on the management of Tachihi and New Tachikawa, but I don’t know if its ultimate goal was to gain control of the companies or to be bought out at a profit. The fact that Effissimo’s proactive efforts resulted in a buy-out at a substantial premium to the market price has caused a number of international funds to take a fresh look at other listed companies with real estate assets trading at discounts, of which there is quite a large group.

Speaking from recent personal experience, I can say that unlike other countries, management of Japanese listed companies frequently own few or no shares in their own companies, so they are not incentivized to maximize the stock price. Especially in companies where executives and directors come from main banks or trading partners, priorities tend to be on maintaining employment and avoiding difficult major decisions, rather than maximizing profits and selling non-core assets to return cash to shareholders and focus on the main business.

Seth Sulkin is the President and CEO of Pacifica Capital K.K., a Tokyo-based real estate asset manager specializing in commercial properties.

As it turns out, the third quarter of 2011 turned out to be a very busy one for public takeover offers. According to Nikkei Veritas, there were 18 announced deals in the quarter ended September 30, compared with only five in the June 30 quarter immediately following the earthquake. Even more interestingly, the third quarter also saw the successful result of Japan’s only second hostile takeover ever, the magazine reported. A Japanese fund manager called DRC Capital Ltd. waged a hostile bid to successfully acquire Kojitu Co., Ltd., a micro cap stock whose main business is the manufacture and sale of mountain climbing equipment. According to DRC’s web site, the fund manager intends to sell Kojitu’s real estate and focus on the core business, so at first glance, one might think this was another asset-based play. In looking at Kojitu’s public disclosure statements, however, the company disposed of a large real estate division a couple of years ago and has relatively little property left on its books, so maybe DRC believes the core business is undervalued.

Whether it is a coincidence that two such precedent-setting transactions occurred in a span of only a couple of weeks or if this is the start of a new trend is not yet clear. In any event, the market for property-related stocks looks much more interesting for the time being, even as the market for hard assets shows no sign of immediate pickup.

Illustration by Phil Couzens

With interest rates in Japan and many other industrialized countries at historic lows, investors are desperate for higher yields and J-REITs, which were designed to be a medium-risk, medium-return financial product, should theoretically be a perfect solution. With 35 issues now listed on the TSE owning a variety of property types, such as office, residential, retail, logistics and hotels, investors can choose by asset class, location and portfolio quality. With a range of dividend yields from 3.5 to 7 percent, this offers a huge premium over ordinary savings accounts and Japanese government bonds. Still, as the popularity of exotic (and risky) foreign bond funds investing in Brazilian reals, South African rands and other currencies has shown, many Japanese individuals not qualified to be taking high risks are sending their money abroad when they could easily put their money into J-REITs and enjoy a reasonable yield with far lower risk.

The biggest problem with J-REITs is structural. The Japanese government chose an external management model, rather than the internal management model common in the U.S. What this means is that J-REITs are paper companies that own properties, but outsource asset management to affiliates of their “sponsors.” The sponsors, which are mostly Japanese and foreign real estate companies, are typically minority shareholders in the J-REIT, but exercise total control over decision-making through their role as asset managers. Given the generally passive nature of Japanese shareholders, this means that the sponsor, which technically doesn’t even have to own any J-REIT shares, effectively controls a separate listed company that it can exploit for its own benefit and to the detriment of J-REIT shareholders.

The second major problem created by external management is that J-REIT prices often correlate more with the financial health of their sponsors than the quality of their portfolios. A big reason for this is the ability to borrow. For any company that has ever tried to get a loan in Japan, it is very apparent that banks have a strong preference to lend to companies that don’t need the money; any company that actually needs to borrow has great difficulty obtaining funds.

Prior to the global financial crisis, both of these problems existed, but the real estate market was so buoyant that conflicts of interest were largely ignored and even J-reIts with weak sponsors had little trouble borrowing. For the last three years, however, a number of J-reIts found that they could not survive on their own, resulting in one bankruptcy and several mergers. As the volume of real estate transactions has plummeted, J-reIt transactions stand out even more, because of investor disclosure requirements. While the quality of investor relations for ordinary listed companies seems to be improving, the opposite appears to be true for J-reIts. For anybody interested in this topic, I strongly encourage you to compare the quality of property acquisition press releases from 2001 to the present. Some J-reIts are slightly better than others, but non-professional real estate investors trying to understand the rationale behind specific transactions would struggle if they relied only on information released by the J-reIts.

During the peak of the real estate mini- bubble in 2008, one of the largest J-reIts abruptly stopped disclosing the initial yield for new acquisitions, a critical piece of data for both shareholders and real estate market players to gauge the deal terms. When my company called that J-REIT’s investor relations department at the time to find out why, we were told that prices were getting so high (and yields so low) that the asset manager was causing problems (meiwaku in Japanese) for investors by continuing to disclose such information, so it decided to stop announcing the yield, or “cap rate” as it is widely known.

While some J-REIT acquisitions are of good quality assets at fair market prices, a surprising number are not. I haven’t seen a good analysis comparing transactions on an arms-length basis with those between J-reIts and their sponsors, but I think such a study would show that related-party deals tend to strongly favor the sponsors. J-REITs often acquire assets from their sponsors at what appear to be above-market prices, some of which are poorly-located or otherwise flawed properties that would be hard to imagine buying at any price. to maintain my relationships in the real estate community, I am reluctant to point out specific transactions here, but I do encourage readers to review press releases for transactions between J-reIts and their sponsors and try to make any sense of the acquisition rationale. An even more interesting exercise is to read the explanations made for round-trip transactions, or assets that have traded back and forth between J-REITs and sponsors. the stilted language and lack of logical explanation reminds me of the way that Japanese politicians used to answer questions without actually conveying any meaning, such as with the now unofficially-banned phrase zensho shimasu (“we will act with prudence”).

Seth Sulkin is the President and CEO of Pacifica Capital K.K., a Tokyo-based real estate asset manager specializing in commercial properties.

More than a third of existing J-REITs have a market cap of less than 50 billion yen, which is generally seen as too small to survive independently; another 10 are in the 50-100 billion yen range, which is better, but still too small to provide for good liquidity. Only 12 have a market cap of more than 100 billion yen, which is seen as the minimum size both for the asset manager to be profitable and for shareholders to be able to buy and sell quickly and easily. The Japanese government and TSE need to reconsider whether the J-REIT market is best off in its current state or whether internal management would be a better alternative. At the very least, they need to find a better way of mitigating the conflict of interest between sponsors and J-REITs.

Photo by Stuck in Customs, used under the creative commons attribution license.

The Minister referenced a delay in the U.S. to adopt IFRS as well as the extensive damage to supply chains caused by the earthquake and tsunami that devastated northeastern Japan as reasons for delaying local adoption. In the U.S., the original plan was to officially decide whether IFRS would be implemented or not in 2011 and, assuming implementation would proceed, for public companies to begin application of IFRS sometime between the years 2014-2016. The Securities Exchange Committee (SEC) however has changed its view such that IFRS will now be implemented following a five to seven year transition period and may therefore become effective sometime between the years 2016-2018.

Looking at the two reasons the Minister for Financial Services gave to delay adoption of IFRS in Japan it can be surmised, based on Japan’s continued reliance on U.S. policy to shape their own decision-making, that the delay is more the result of delayed adoption in the U.S. than damaged supply chains in Japan.

The statements by the Minister for Financial Services gave cause to a majority of public corporations in Japan to delay considering whether they should adopt IFRS into their own accounting system and policies. While a number of the largest corporations in Japan are indeed proceeding with preparations for IFRS, it is important for SMEs and multinational corporations to also prepare to adopt IFRS.

WHAT IS IFRS?
To help understand why companies should consider the impacts of these new reporting standards, we need to outline the basics of IFRS. Its underlying concept clearly departs from traditional accounting principles such as acquisition cost basis and periodic income statements. Instead, IFRS focuses on fair value basis and comprehensive income statements, placing a heavy emphasis on corporate valuation rather than periodic accounting of profits and losses.

The reason for this paradigm shift is mainly due to the requirements of investors in the global capital markets. Such investors are strongly interested
in information related to a company’s constantly changing stock value, or the future cash flows created by holding the stock. That is, the increasing amount of equity being invested in global markets requires a system that departs from the traditional accounting principles that emerged in 15th century Venice.

Modern finance theory, including the commonly used Discounted Cash Flow model, works well to fulfill the needs of investors. The IFRS does not really change accounting rules in the realm of traditional accounting—it is a completely brand new concept of reporting system specially designed for the investors of global capital markets. Indeed, the paradigm of IFRS is in finance rather than in accounting.

The International Accounting Standards Board (IASB)—the 15 “cardinals” that set the accounting standards for IFRS— recognize the fundamental departure from what was once an accounting focused set of rules and have dropped off the word “accounting” from the name originally
considered (the International Accounting Standards or IAS). They now use the new name International Financial Reporting Standards or IFRS.

THE SITUATION IN JAPAN
Many Japanese corporations may question whether IFRS fits traditional Japanese business culture or not, as it is primarily designed to fit the investment culture of the West. For example, IFRS 3 sets out the rules for M&A and business combinations. Applying the acquisition method, it identifies the acquirer, recognizing and measuring identifiable assets and liabilities of the acquiree. In Japan, mergers are seen more as a marriage between two companies rather than the end result of a search for strategic assets.

The attitude towards mergers in Japan is a reflection of the role agriculture has played throughout Japan’s history. Japan has historically placed an emphasis on agriculture and farming over hunting, and this can be seen as one reason Japanese tend to try to avoid conflicts. Moreover, Japanese companies still depend heavily on bank financing as well as capital markets. For these reasons, it is likely that a majority of domestic public companies are confused as to why they should have to change their corporate policies to fit accounting rules created mainly to fit the interests of global investors.

Looking at the modern Japanese economy, we must acknowledge the fact that nearly 30 percent of total investment into Japanese stock markets comes from foreign investors. Furthermore, corporations in Japan must recognize the dramatic shift in domestic demography, the impact of the gigantic national debt, and the role the hollowing out of domestic industries due to the strong yen will play. The logical point that follows on from these facts is that we cannot survive if we simply sit on our hands, waiting for the economy to pick up in Japan.

Corporations in Japan should instead embrace the global rules of IFRS as we commit to compete in the global economy.

Jun Nagamine, CPA founded accounting firm Nagamine & Mishima more than 20 years ago. Aaron Kleinman is a Senior Consulant at the firm Nagamine & Mishima. www.nagamine-mishima.com

For a country as densely built and populated as Japan, proving that you have the right to use a piece of land would logically be a part of the building permit process. Some local governments do indeed require proof that there are no border disputes, but many do not. Even in central tokyo, where rules and regulations tend to be better enforced, border disputes are quite common and can range from tree branches or ventilation pipes extending over property lines to pieces of buildings that somehow are not constructed fully consistent with the original building permit and stick out where they should not.

The role of land plays a disproportionately large role in the Japanese economy and psyche. During the bubble area more than 20 years ago, tochi shinwa, or “land myth,” the idea that land intrinsically had value and that prices would rise forever, was an essential element in excess speculation and Japan’s later downfall. In many Asian countries, “fee simple” or “freehold” ownership of land is prohibited or highly restricted, increasing Japan’s attractiveness as an investment destination. Japan has no general restrictions on fee simple land ownership and ground leases are relatively uncommon, so those desiring to own the dirt under their toes have a wide range of choices.

The corollary to this story is that over the past 10 years, the idea that even vacant land has intrinsic value is essentially gone. These days, commercial properties are priced on an income-based approach, not a purely historical value basis. The other side effects of this global desire to own dirt are that sokochi, or land ownership with an income-producing ground lease in place, are becoming more popular while buildings on top of a fixed-term ground lease have much less liquidity.

Several REITs now own sokochi, from which 100 percent of the income can be distributed to shareholders because of zero depreciation. Owning a building on top of a fixed-term ground lease means extremely high depreciation, causing problems both for REITs and investors who use a tokutei mokuteki kaisha (TMK) as an acquisition vehicle. In a fixed-term ground lease,
the lessee must demolish the building at the end of the lease and has no option for renewal, making it difficult to value the property’s cash flows on a long-term basis.

It has now been 11 years since the introduction of the fixed-term ground and building lease law in Japan and excusing the analogy to the “X-Files,” alien DNA from fixed-term leases has now sufficiently mixed with that of standard leases to the point that they are difficult to differentiate. In other countries, long-term, non-cancellable leases with built-in rent escalation clauses exist to the delight of core funds seeking stable income with little direct need for management. In Japan, the only real distinction between the two lease types is that at the end of a fixed-term lease, the tenant has no right to renew. Landlords in a competitive environment to secure tenants have watered down the other potential benefits of the fixed-term lease law to the point that tenants have much stronger bargaining power.

Seth Sulkin is the President and CEO of Pacifica Capital K.K., a Tokyo-based real estate asset manager specializing in commercial properties.

In early August, BNY Mellon adopted my idea (see December 2010 column) to start charging interest on certain bank deposits. It would be nice for Japanese banks to take notice and try something similar. If even a small portion of the mountain of cash sitting idle in Japanese savings accounts was invested in value-creating businesses, the economy would be transformed.

Unfortunately, Japan is one of the few capital markets in the world that does not have any rules requiring director training, new director orientation, or disclosure by companies of what they have done (or not) to address such needs. In the U.S., there are literally hundreds of “director education” courses provided by specialists, and if you surf the net, you’ll find them in most other countries—even in places like Pakistan and India. In particular, Canada and Australia have excellent programs. but in Japan, there are almost no specialized providers. In fact, a recent report by the Chartered Financial Analysts’ society on director education in Asia did not even include Japan because there was so little to report.

Given the importance of the topic, ACCJ members may be interested in the general “lay of the land” with regard to boards and director training in Japan. thus, I have
set forth some questions I am frequently asked, and my own views regarding solid answers.

Are there consistent patterns of behavior on Japanese boards?
There are indeed consistent patterns that arise on Japanese boards, regardless of the type of company or industry. Because the board tends to be considered an extension of senior management meetings (for which most of the members are the same) there are tendencies for: a) hierarchy to affect discussions, since naturally one is loathe to oppose the opinion of his boss, his seniors, or even the person who “invited” him to be on the board; b) tacit unspoken understandings, e.g. “I will not criticize your department if you do not criticize mine”; and c) transparency and disclosure to be de-prioritized simply because groupthink wants to avoid immediate embarrassment. All too easily, board members think in unison: “If we just keep quiet about this, it will go away,” until you persistently ask the question, “but what will you say about this decision to not disclose, if the information is suddenly leaked?”

In addition, one of the most disturbing patterns is that often the fellow sitting next to you knows relatively little about his duties under the Company Law, or the fundamentals of good corporate governance. Because of that, he may not respect the functions of the board the way he should.

This is based on my experience sitting on the boards of both listed and unlisted companies in Japan, including the post- scandal board of Livedoor. And it does not only include companies that were overwhelmingly dominated by executive “insiders.”

What are the main reasons why many Japanese boards have room to improve, and will want to?
Many Japanese companies simply have not focused on improving board practices as much as corporations in most other developed countries. this actually points to a lot of upside. Until it became clear at the end of the 1990s that Japan had definitely entered a new economic era, for all intents and purposes many Japanese boards were merely bodies run for legal purposes that ritualistically rubberstamped decisions that had already been made by management. A bit later, even though during this period bank finance became less dependable, many companies had enough cash flow to pay down debt. As a result, it took time for the exigencies of finance and market pressures to start affecting Japanese companies.

But, depending on the company, those pressures are now coming to the
fore. At the same time, over the last 15 years, the combination of legal changes and court cases has made it clear that directors bear significant personal liability if they make the wrong decisions using shoddy practices. This occurred as their legal duties have increased, not decreased. Lastly, the continuing wave of globalization and foreign acquisitions has made many Japanese companies aware that they need to inject more rigor into their decision-making processes, that those processes need to be more compatible with what foreign executives are used to, and that there are benefits if foreign investors were to view them as having superior corporate governance.

These trends are causing more and more Japanese companies to realize that the board is a body that is separate from senior management, which they must improve in different ways. My view is that Japanese boards will improve the most when executive members of the board (i.e. not just outside board members) come to meetings thinking, “When I walk into this room, I put on the robes of a board member and bear the same legal duties as the external board members.”

How is director training related the need for independent directors on Japanese boards?
There are two connections. First, there is a perception in Japanese industry that there are few good candidates to select as outside directors. the corollary self- serving complaint is that “there are few candidates that know the details of our specific industry.” These views are based on the misunderstanding that what board members do is actual management, rather than oversight.

Second, because most Japanese companies lack a “corporate governance culture” that is accustomed to having outsiders on the board, often they don’t know how to make good use of them. they don’t provide orientation for new directors. they don’t provide materials enough in advance of each board meeting so that you can actually read them all. Quite naturally, some managers don’t react well to new ideas, however useful they may be, if they create extra work. these tendencies can lead to a vicious cycle where executives view outside directors as not adding much value.

Is the disaster at Fukushima related to corporate governance and the (heretofore) lack of third-party director training programs?
Absolutely. Tepco’s most important “preparedness” memo simply assumed that a tsunami higher than 5.7 meters would never occur at Fukushima. This assumption was never revisited, despite subsequent studies suggesting it was optimistic. So tepco built a sea wall only about seven meters high, and the backup diesel generators for cooling systems, were positioned in a basement that was swamped by the 14-meter wave that ultimately crashed through.

These management errors stemmed from broader governance failures. A board’s duty is to set the tone at the top and conduct regular risk oversight to ensure that: a) risk assessments and disaster contingency plans are based on updated, well-grounded assumptions; b) there are multiple backup plans; and c) management is constantly refining its assessments, systems and plans. this, as with other board oversight functions, requires a willingness and an ability to review and question decisions one last time.

These days, it has become a habit to bash Tepco for these failures as if it were just one bad apple in the barrel. But the Fukushima crisis represents a failure of Japan’s governance system, including its rules and programs regarding director training, rather than just an instance of one mismanaged company. The proof of this is that the event came after an intense nine-year effort by Tepco to reform itself from the inside, following the 2002 uncovering of 27 other falsified safety reports, the shutdown of 17 reactors and intense regulatory and public censure.

What was missing? There was no significant influx or involvement of non- tepco-bred directors or executives, and no ongoing use of outside training programs and consultants. to really change practices in a huge company like tepco, which had a board with 27 members in total, one would have had to: a) bring in more outside voting directors than just two; b) hire a number of executives who had earned their stripes at other companies with a different corporate cultures; and c) extensively involve outside training programs and consultants.

Which organizations provide “director training” in Japan?
As background, one should recognize that most directors in Japan are the senior managers at each company, and many do not receive any training at all. Moreover, the vast majority of “director training” for internal executives in Japan occurs at programs prepared by internal departments of large corporations, or complimentary lectures by attorneys at Japanese law firms. In either case, the programs focus on dry legal compliance issues—important stuff, but it is only part of what board members need to know. the latter are really briefings in “when you should call our law firm or the legal department.”

Generally these do not really link governance with the point of the whole exercise, which is management and strategic oversight. To exercise effective strategic oversight, Japanese directors not only need to know their legal duties and risks, but about topics like finance, risk management, succession planning, reading financial statements, global strategy and M&A execution.

The Japan Statutory Auditors Association offers quality programs for statutory auditors, but these are only open to statutory auditors, and focus on the more technical knowledge that they need to perform their audits of accounting and “legality.” However, not all kansayaku take these classes by any means. (The astonishing thing about the statutory auditor system, of course, is that kansayaku are expected to monitor the legality of board decision-making, but there is no requirement that they have any legal knowledge, training, or qualifications.)

The Japan Association of Corporate Directors, a high-quality and diverse group of 260 members led by Mr. Yoshihiko Miyauchi (Chairman and CEO of ORIX), has committees and seminars for members that drill down in various subjects, and also offers speech events and seminars that are open to the public. In the past, the Japan Independent Directors Network (Shagai-Netto) offered 8-hour training sessions on various topics of particular interest to outside directors for several years, but they are not offering these sessions any more. But they do
offer regular speaker events and panel discussions on a range of excellent topics, many of which are related to corporate governance.

Nicholas Benes is Governor of the ACCJ, Chair of the Growth Strategy Task Force, and Chair of the Foreign Direct Investment Committee. As his full-time (no-salary) job, he serves as a social entrepreneur and Representative Director of BDTI, website: www.bdti.or.jp

All of these groups have all contributed a great deal to the development of corporate governance in Japan, but with the exception of the statutory Auditors’ Association, none of them specialize in “training” per se, and do they not offer programs for mid-level or junior employees. In addition, they are not really targeted at corporations as users. For this reason, I recently set up the “The Board Director Training Institute of Japan,” a grass-roots, non-profit foundation dedicated to the improvement of corporate governance in Japan, principally by offering training to all levels of management and the board.

What is the most important thing for a director to learn about corporate governance and board practices?
The most important thing is not actually specific knowledge. It is an attitude: a diehard dedication to simply “doing the right thing,” regardless of how it affects you. there is no substitute for integrity like that. Directors cannot be injected with a drug called “dedication and integrity,” but they can be shown a higher level to which the system aspires and society expects. A director can be taught practices that instill confidence and are effective toward achieving that higher level, as well as raising awareness of the downsides of not going the extra mile.

Illustration by Phil Couzens

When in doubt, the yen will rise. The track record of Japan’s currency really is impeccable—when I arrived in Tokyo in 1986, about 160 yen bought me one dollar. Twenty-five years later, I can buy the same dollar for less than 80 yen. For those of us fortunate to earn their living in yen, this surely qualifies as good news, doesn’t it?

Why is the yen so strong? Here, the easy answer is to point to the other side— it’s the dollar that is weak, what with all the concern about the U.S. economy, the Federal Reserve printing money and the ever-rising U.S. trade deficit. However, today I don’t want to do this. rather, let’s have a look at the true underlying strength that actually explains perfectly well why the yen keeps rising. In short, the yen keeps climbing because Japan Inc. remains relentlessly focused on innovation and keeps on pushing her competitive edge.

Facts speak louder than words: Every day there is about $2 billion more coming into Japan than going out. Make no mistake, Japan remains one of the two largest net creditor countries on earth. And unlike the largest creditor (China), Japan does not accumulate global IOUs under the protection of a fixed exchange rate.

Where does the money come from? Simple, Japan exports way more than it imports. Japan runs a sizable trade and current account surplus with all major economies of the world, including a net trade surplus with China. This fact, more than anything else, attests to the fact that Japan Inc. remains very much on the cutting edge of global competitiveness, innovation and economic power.

So let’s be clear, the yen keeps rising because Japan is so competitive, so successful that the dollars earned by Japan Inc.’s exporters keeps on rising faster than the dollars Japan must pay for her imports. So on a net basis, there always remains excess demand for yen (because once the import bills are paid, the excess dollars earned by exporters will be repatriated back to Tokyo headquarters, i.e. they sell dollars and buy yen).

Debates on currency are always lively and confusing. Most often, analysts point to central bank policy as the key—if the Federal Reserve prints more dollars than the bank of Japan prints yen, then surely the dollar must fall. That’s all understandable, and does have some relevance. However, in the final analysis it must be the success or failure of the private sector that is the measure of what is really going on. And as long as the private sector can sell more to the world than it buys from the world, well, that means the private sector must continue to be very competitive. It also means that the domestic currency will continue to be bid up by exactly those excess dollar earnings.

A VICIOUS CYCLE, OR A VIRTUOUS ONE?

So Japan has been a victim of her own success, and the yen keeps on rising. Superficially, many commentators think this is a bad cycle: as the yen strengthens, those dollar export earnings translate into fewer and fewer dollars. Indeed, corporate profits of companies listed on the stock exchange decline quite significantly when the yen goes up—for every one yen gain, aggregate profits drop by almost 3 percent. Make no mistake, yen strength is negative for short-term earnings (just as, by the way, dollar weakness is a strong net boost for U.s. corporate profits, more than 60 percent of U.S. corporate profits come from overseas operations/sales, so the cheaper the dollar gets, the greater the buying power of those overseas earnings).

From a more structural perspective, however, the relentless rise in the yen does force ongoing structural change in Japan’s economy. First, it forces corporate managers to keep on investing in more productive factories and more efficient manufacturing processes. The rising yen is definitely one reason why Japan is the undisputed global leader in factory automation and robotics. At the same time, the strong yen forces companies to innovate, or die. Despite individual and headline grabbing examples of failure, the fact that Japan Inc., in aggregate, keeps running sizable trade surpluses suggests innovation keeps having the upper hand.

So from a macro economic perspective, the verdict is very clear: the strong yen has been a virtuous cycle for Japan. It is one reason why the country remains hyper-competitive and a major global creditor country.

UP, UP AND AWAY

Jesper Koll is a Managing Director and Head of Research at JP Morgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.

Call it the great “hollowing out,” or call it the next wave of Japan’s globalization. Underneath the rhetoric, Japanese entrepreneurs are actually laying the foundations for the survival of Japan’s national economy going forward: a “headquarters” economy, a “rentier economy”—Japan’s future well being will be founded on the dividends and income earned from her global operations and capital assets. And then there will come a point when physical exports will no longer exceed imports, and the yen will start to weaken, meaning that the purchasing power of those overseas earnings will start to buy more and more yen. As always in economics, it’s a tricky balancing act, but it just may work—Japan’s pension and future gets covered and paid for by rising overseas earnings from the investments happening now. It just might work…

Illustration by Phil Couzens

Over thirty years ago, before the arrival of the personal computer, there were desktop computers called office workstations. Designed around the first generation of microprocessors, these computers ran business applications like word processing, spreadsheets, and accounting. they were an improvement over the dumb terminals hanging off of mainframes and minicomputers, but ran proprietary operating systems and software. My third startup, Convergent Technologies was in the business of making these workstations.

THE OEM BUSINESS

Convergent’s computers were bought and then resold by other computer manufacturers—all of them long gone: Burroughs, Prime, Monroe Data systems, ADP, Mohawk, Gould, NCR, 4-phase, and AT&T. Convergent had assembled a stellar team with founders from Digital Equipment Corporation and Intel as well as engineers from Xerox PARC. And once we went public, we hired a veteran VP of sales from Honeywell.

As the company’s revenues skyrocketed, Convergent started a new division to make a multi-processor Unix-based minicomputer. I had joined the company as the product marketing manager and now found myself as the VP of marketing for this new division. We were a startup inside a $200 million company. A marketer for five years, I thought I knew everything and proceeded to write the data sheets for our new computer. Since this new computer was very complicated—it was a pioneer in multi-processing—I concluded it needed an equally detailed data sheet. In fact, when I was done, the datasheet describing our new computer, proudly called the MegaFrame, was 16-pages long. I fact-checked the datasheet with my boss (who would be my co-founder at epiphany) and the rest of the engineering team.

We all agreed it was perfect. We’d left no stone unturned in answering every possible question anyone could ever have about our system. As we typically did, I printed up several thousand to send out to the sales force. The day the datasheets came back from the printers, I sent the boxes to the sales department in Convergent’s corporate headquarters, a separate building across the highway, and sent a copy to our CEO and the new VP of sales. (I was thinking it was such a masterpiece I might get an “attaboy” or at least a “wow, thanks for doing all the hard work for our sales organization.”)

So when I got a call from the VP of sales who said, “Steve, just read your new datasheet. Why don’t you come over to corporate? We have a surprise for you.” I smugly thought, “They probably thought it was so good, I’m going to get a thank you or an award or maybe even a bonus.”

FARENHEIT 451

I got in my car to make the five-minute drive over the freeway. Turning into the parking lot, I noticed smoke coming from the far end of the lawn. As I parked and walked closer I noticed a crowd of people around what seemed to be an impromptu campfire. “What the heck?” As an ex sales and marketing VP, our CEO had a Silicon Valley reputation for outrageous stunts so I wondered what it was this time. A spur-of- the-moment BBQ? A marshmallow roast?

Heading to a meeting with the VP of sales, I almost walked past the crowd into the building until I heard the VP of sales call me over to the fire. He was there with our CEO feeding things into the fire. In fact as I got closer, it looked like the campfire was being entirely fed by paper. “Here, toss these in,” they said as they handed me a stack of… Oh, my g-d, they’re burning my datasheets!

THE BONFIRE OF THE VANITIES

I stood there stunned as I realized that my 16-page carefully constructed, brilliantly written, technically accurate datasheets were being destroyed en masse. I guess I was speechless for so long that the VP of sales took pity on me and asked, “Steve, do you know we have a sales force?” I managed to stammer out, “Yes, of course.” He asked, “Do you know how much we pay them?” Again, I managed to answer, “A lot.” then he got serious and started to explain what was going on. (In the meantime our CEO watched my reaction with a big grin on his face.) He said, “Steve, I’ve never seen such a perfect datasheet. It answers every possible question a prospective customer could have about our product. The problem is that our computer sells for $150,000. No one is going to buy it from the datasheet. In fact, reading these, the only thing your datasheet will do is give a prospective customer a reason for saying “no” before our salespeople ever get to talk to them.

“Do you mean you want a datasheet with less information?!” I asked, not at all sure that I was hearing him correctly. “Yes, exactly. Your job in marketing is to get customers interested enough to engage our sales force, to ask for more information or better, to set up a meeting. No one is going to buy our computer from a datasheet, but they will from a salesman.”

MARKETING TO MATCH THE CHANNEL

It took me a few weeks to get over the lesson, but it stuck. When selling a physical product through direct sales, Marketing’s job is to drive end-user demand into the sales channel. Marketing creates a series of marketing activities at each stage of the sales funnel to generate awareness, then interest, then consideration and finally purchase.

Ironically, over the last decade, I’ve seen web startups have the opposite problem. For web sites with an e-commerce component, the site itself is supposed to both create demand and close the sale. Web designers have to do the work of both the marketing and sales departments.

LESSONS LEARNED

• Marketing materials need to match the channel

• Marketing’s job in direct sales channels with consultative sales need to drive demand to the salesforce

• Indirect channels require marketing material with more information than a direct channel

• Websites that sell products combine sales and marketing

• Confusing these can get you your own bonfire

Steve Blank is a veteran of Silicon Valley and serial entrepreneur, and teaches entrepreneurship at U.C. Berkeley Haas Business School, the joint Berkeley/Columbia MBA program, and at the Stanford University Graduate School of Engineering. The Japanese version of his latest book “The Four Steps to the Epiphany” can be found here, and you can read more of his business insights at: www.steveblank.com.

So, now that we’re clear about the occupational hazards surrounding economists and their forecasts, let me tell you about my biggest and most important prediction: I think the global economy stands at a key inflection point. Inflation is rising, inflation momentum is building and the negative impact of rising prices on private sector growth and wealth creation is going to be the key challenge for anybody with a savings deposit around the world.

Not surprisingly, economists have a hard time agreeing on what inflation is and where exactly it comes from. However, for you and me in the real world, it’s simple—inflation is when the purchasing power of our money declines, when the $10 I earn today will buy me fewer apples tomorrow than they do today. The reduction in the purchasing power of money can be explained by simple demand and supply. The price of apples goes up either because there are fewer apples around, or because there is more money chasing the same amount of apples. Either way, inflation is too much money chasing too few goods. For the first time in over two decades, I think we have reached exactly that stage in the global economy.

Lets looks at the supply side (i.e., the global economy’s energy to create more goods and services). Since the end of the 1980s, the global supply side—the ability and willingness of entrepreneurs to create more goods and services—underwent an unprecedented boost. This is because three fundamental forces combined.

Firstly, the end of the Cold War freed up an incredible amount of resources and factors of production. Specifically, almost three billion people were freed from the fetters of communism and entered the global workforce. Wages across most sectors in almost all global economies began to decline, unless you had a special qualification or skill that could not easily be replicated. The net effect was a significant downward push on overall costs, and thus prices.

Secondly, the world’s third industrial revolution started to get going in the early 1990s—the IT and information revolution. Businesses across all sectors of any economy were massively affected, whether a small local bookshop, a department store, a medical service provider, or a giant manufacturer, in every corner of the industrialized marketplace the Internet and information revolution forced new business models, and brought new entrepreneurs offering old services or products for lower prices and higher convenience. Again, the net effect was a relentless rise in price competition, and the purchasing power of our money actually rose.

The third force was, yes, globalization. Throughout the 1990s the world underwent massive liberalization of trade flows and investment flows. And it was not just the trade of goods across borders that got accelerated. Services which previously were mostly landlocked in national economies opened up to cross-border competition. The latest example of this is the sharp rise in “medical tourism,” patients actually moving temporarily to another country to take advantage of the lower costs and better services of medical facilities and expertise.

To be sure, we could easily refine this list further, but from a macro perspective, I think these are the three key forces that shaped much of global economic development over the past two decades. The net effect has been that across countries and across all industries and sectors, the world underwent a massive entrepreneurial boom. Everywhere more goods and more services were created so that inflation really never had a chance. There was never “too much money chasing too few goods” because of the massive rise in the supply of goods.

In my view, this has still not come to an end. There are two reasons for this. To begin with, it’s because the three deep factors mentioned above have now largely run their course. Sure, there still is more technological innovation and creativity in play, but the marginal impact of, for example, the first iPad is infinitely larger than the upgrade to the iPad 2. The first one is a game changer. The second one is, yes, smaller and faster and all of that. But in the end it’s still just an iPad. Ditto for trade liberalization and the sharp rise in the global supply of labor.

Already the often-mentioned legions of high quality Chinese high school and university graduates has peaked out. Indeed, since last year we have seen that wages and employment costs are beginning to rise sharply, particularly in the so-called “factories of the world” and BRIC economies. The bottom line: the ability and willingness of entrepreneurs to offer more goods and services for cheaper prices is, slowly but surely, coming to an end.

Jesper Koll is a Managing Director and Head of Research at JP Morgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.

At the same time, the Lehman Shock and the threat of a global depression has led to global central banks printing unprecedented amounts of money. Too much money chasing too few goods, and you begin to see the big macro forces coming together.

The first evidence of all this comes in the form of commodity prices, anything from gold, to copper, to grain and pork bellies. Global food-price inflation is running at historic, and unprecedented levels. The effect of all this is poised to feed into other goods and services prices before too long. But it always works this way when there is too much money chasing too few goods.

So what will happen from here? In my personal view, we’ll see a much more persistent, much more pronounced rise in the general price level, in inflation, across all goods and services. In other words, the purchasing power of our money is set to decline.

How can this be stopped? We can hope for more deregulation and more technological revolution. However, most likely the bulk of the adjustment will have to come from policy makers stopping the massive creation of liquidity. Already China has started an aggressive monetary tightening process to reduce liquidity. Ditto for India, Australia and many Latin American economies. How long it will take for “too much money” to be mopped-up from the system remains to be seen. For now, the risks of policy makers being behind the curve, and inflation eroding our purchasing power remains high. This is true across the globe, including Japan, in my personal view. Brace for the negative impact of inflation on your yen purchasing power here in Japan.

It has been more than three months since the earthquake and for those of us fortunate enough to be living in Tokyo, life is back to normal— at least on the surface. As the frequency of aftershocks has lessened, the psychological impact of the disaster has also faded considerably.

In fact, Tokyo has returned to normal so quickly that Japan may have lost a unique opportunity to break away from the policies that have held down growth for so long. Perhaps the best example of the return to normality is politics. As of early June, when I am completing this column, Prime Minister Naoto Kan, with some last-minute behind the scenes maneuvering, managed to hold on to his job by making a vague promise to quit when the reconstruction and nuclear power situation improves. The internal divisions of the DPJ and petty bickering with the LDP show that politicians seem more driven by personality differences than with tackling Japan’s enormous reconstruction, demographic and fiscal challenges.

Since the earthquake, Tohoku residents forced to leave their homes may not be starving or sleeping outside anymore, but they have very little to look forward to. TEPCO’s compensation program is in limbo; people ordered out of their homes by the government because of radiation danger are still forced to make mortgage payments on houses they may never use again; there appears to be little progress on raising the consumption tax which is desperately needed to help improve the government’s finances; and the planned reduction in corporate income tax which would help improve Japan’s international competitiveness has apparently been put off indefinitely.

Prior to March 11, Tokyo was already behind in the head-to-head competition against Singapore and Hong Kong for regional headquarters and the jobs they create. The earthquake caused a number of companies to shift functions and certain positions out of Tokyo, so the government will have an even greater challenge to convince companies why they should locate critical headquarters’ functions here. The government has begun efforts trying to convince Asian tourists to come back, but with little effect so far. Korean tourist arrivals in April were down so steeply (66.4 percent) that with little fanfare, China took over the number one slot for what may have been the first time. I am not aware of any post-disaster efforts by the Japanese government to try and persuade businesses around the world that they should return or increase their presence in Tokyo.

With apologies to those owning expat rental housing, this summer is clearly the time to be looking for a cheaper and better place to live.

While there is a certain amount of turnover every June when families transfer out of Japan at the end of the international school year, anecdotal evidence suggests an unusually large number of families are leaving this summer or have already left since the earthquake.

With the Kan Cabinet on life support and liable to fall at any moment, it is hard to imagine any bold action on the economy, reconstruction or anything else. Several major credit rating agencies are warning that Japan’s high government debt level is untenable and political instability may lead to another reduction in the country’s sovereign credit rating. Given that 95 percent of Japanese government bonds are held domestically and interest rates are so low, the markets are unlikely to react precipitously to a downgrade, but this is one more headache that Japan doesn’t need.

In the meantime, the “Reconstruction Design Council” appointed by Prime Minister Kan to come up with the intellectual framework for helping Tohoku has met seven times since its formation in mid-April, but it seems to be attracting little attention and generating no national debate about the nation’s priorities. Part of the reason could be the nature of its 15 members, of which seven are academics, three are writers and three are prefectural governors. There is only one businessman (from Sony) and a famous architect (Tadao Ando), and the vague mandate of this council and lack of visible support from the cabinet or anywhere else mean that it is unlikely to accomplish anything useful.

Seth Sulkin is the President and CEO of Pacifica Malls K.K., a Tokyo-based real estate asset manager specializing in commercial properties.

Part of the problem is that while the council’s mandate has no geographical restrictions, its discussions are limited to problems in Tohoku and rebuilding stricken areas is a given, rather than a major discussion topic. Although I am not in any way suggesting that Japan abandon the Tohoku coastline and move everybody in the affected areas elsewhere, the earthquake, tsunami and radiation problems have created urgent, national issues, yet the government, including the Reconstruction Design Council, seems to be treating this as a discrete, local problem.

There have been proposals for special economic zones in Tohoku, with tax incentives and reduced regulation, but based on the track record of similar programs throughout Japan, these incentives will not be compelling enough to encourage investment in Tohoku that would have gone elsewhere or to prevent businesses from leaving. To use an analogy from the cinema business, the worst kind of discount is when a customer shows up at the box office to be pleasantly surprised at the low ticket price. Helping those who can afford to rebuild and who would do so anyway is not the best use of scarce resources.

The Japanese government has been extremely effective in one area—keeping the secret that Tokyo is the world’s most livable city. For those of us expatriates who have experienced Tokyo, it is very hard to imagine life elsewhere. While Singapore and Hong Kong each has positive attributes, neither can offer the mix of clean air, safety, food, culture and overall vibrancy of Tokyo. As time passes, however, more and more foreign companies give up on Japan’s recovery prospects and turn their attention and capital elsewhere. Given Japan’s political and economic inertia, it is easy to imagine that nothing positive will come out of the March 11 disaster. I hope that the new cabinet will seize the agenda and broaden the debate to how Japan solves its shrinking population and fiscal situation, as well as reconstructing Tohoku. A growing population and mild inflation would boost real estate prices and the stock market, increase tax revenues and solve most of Japan’s thorniest economic problems.

Seth Sulkin is the President and CEO of Pacifica Malls K.K., a Tokyo-based real estate asset manager specializing in commercial properties.

Following the March 11 earthquake and tsunami, Japan has two broad choices-it can either channel its limited government resources into high-priority sectors and follow Singapore’s path of rapid GDP growth, or it can scatter restructuring funds around areas with little or no potential and become a basket case like Detroit.

As of today, I remain optimistic that Japan has the ability to choose the right path, but the lingering impact from the radiation problem, ongoing electricity shortages, political instability and conflicting demands from individuals and companies in the areas most affected by the disaster are powerful forces complicating the decision-making process. Looking at the past as a guide, Japan’s economic and urban development policies have resulted in examples of great successes and failures, so the situation could go either way at this point.

During Japan’s post-war economic miracle, individuals sacrificed their standard of living and certain individual freedoms for decades in exchange for political stability and rapid economic growth. The emergence of the Democratic Party of Japan is strong evidence that the power balance with large corporations has finally tilted back somewhat in the direction of individuals. The downside is that the cozy ties among big corporations, the long-ruling Liberal Democratic Party and bureaucrats, which were so effective in helping Japan recover from the war, disappeared when the DPJ took power, complicating the consensus-building process for reconstruction now.

In terms of failures, one can point to countless examples of unnecessary roads, bridges and dams that were built following lobbying and strategic political contributions from construction companies. There are also dozens of huge, white elephant urban development projects across the country stretching the budgets of local governments forced to pay for upkeep because there are not enough tenants.

In many ways, Singapore has followed the example of Japan’s amazing post-war reconstruction efforts. Although Singapore’s task was made easier by its much smaller land area, its multi-ethnic population did pose challenges not seen in homogenous Japan. While Singapore is certainly not a model of democracy and free speech, its national development strategy has led to remarkable growth over a sustained period.

Singapore’s GDP grew by a record 14.7 percent in 2010, 10 points more than Japan. It has been successful in attracting high-tech manufacturing, financial services, trading, shipping and is a popular destination for regional corporate headquarters. Tiny Singapore also has a robust tourism industry, with 11.6 million international visitor arrivals in 2010, compared with only 8.6 million for all of Japan.

Detroit, on the other hand, is a smaller version of what Japan may look like if reconstruction resources are not properly allocated. After having lost 25 percent of its population in the last 10 years, Detroit is a shadow of its former industrial might and its 714,000 people are spread so thinly that many neighborhoods look abandoned, but stragglers spread over a wide area place a heavy toll on city services. Without the power of eminent domain to force people and businesses to move into areas of concentrated development, Detroit faces major obstacles in preventing its fall into oblivion.

Japan does have the power of eminent domain, but has been very reluctant to use it, as shown by the long battles with landowners at Narita Airport. Already, there are many similarities between the Tohoku coast and Detroit. Japan simply does not have the resources to restore Tohoku to its pre-tsunami condition, and if it fails to use some form of eminent domain, a small population will be spread over a huge area, making it prohibitively expensive to provide basic government services. Considering that Japan is on a path to lose 25 percent of its population, albeit over 40 years, Japan needs to concentrate people into fewer, larger municipalities where young people can find jobs, enjoy a good quality of life and have enough children to support the aging population.

Prior to March 11, Japan’s export sector was booming, tourism was growing rapidly and there were some preliminary signs of a broader economic recovery. The quake and tsunami have severely impacted the export sector, but it will recover most quickly from this crisis. Inbound visitor arrivals were down 50 percent in March, and restoring Japan’s international image as a safe, clean destination will take a long time. Personal consumption, which was soft before the quake, has fallen off considerably and will also take quite a bit of time to recover.

Photo by F-L-E-X under the Creative Commons Attribution license

Jesper Koll is a Managing Director and Head of Research at JP Morgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.

June is a very special month for me. It marks my anniversary of coming to Japan. And this year it’s a big and special one–I arrived in Japan exactly 25 years ago, in mid-June 1986. The plan was to stay for three months on a summer internship stint. But I never left. In fact, I still have my return ticket issued 25 years ago. Unfortunately, the airline went bankrupt somewhere along the way. So I guess I’m stuck.

Quite a coincidence, but this year my 25 years in Japan works out to be exactly half of my life. Of my professional life, it’s much more than that–basically all of it. For better or for worse, I’m stuck and have become a Japan expert. And yes, I still absolutely love being here.

But what have I really learned over the past 25 years? As an economist and investor, it could not have been more exciting. I lived through the “bubble economy,” suffered through the crash, experienced a full-blown banking crisis and saw the destructive forces of a liquidity trap unfold. Also, I was fortunate enough to have been invited to spend many hours on various government advisory panels and blue-ribbon committees. There I got a chance to debate with Japan’s best and brightest a whole variety of policy topics, ranking from tax reform and “big bang” financial system reform, to counter measures against deflation, to the merits of robots versus imported labor. Make no mistake, there is absolutely no lack of debate on public policy amongst the elite of Japan. In fact, there is too much of it, perhaps too intense and too detail-obsessed, in my personal opinion.

So I do not want to boast, but I have been around a bit in Japan over the past 25 years, and what I learned from it all I want to summarize in my two big rules to understanding Japan.

1. Never-ever underestimate the ability and willingness of the Japanese people to suffer together.
2. Never-ever underestimate the ability and willingness of the ruling elite to make sure rule number one is applied.

Case in Point – Daylight Savings Time

The triple disaster that struck March 11 provides many excellent case studies that prove the point. Look at the daylight-savings time “problem.” The disaster has left Tokyo with the threat that its electricity power supply may fall short of demand. At the same time, many Tokyo shop-owners and small businesses have been pushed to the brink of bankruptcy by the post-disaster plunge in consumer spending.

A government order to enforce daylight savings time would be a rational and obvious countermeasure against both problems. We know from the U.S. and Europe’s long experience with daylight savings time that as much as 5 percent of total daily electricity consumption can be saved for every hour that the clocks are brought forward. This tends to be true for most of the major metropolitan areas like L.A., London, Paris, Berlin or New York.

In Tokyo, the clocks could easily be brought forward by 2 hours, but surely one hour would be a good start. Of course, “peak demand” would not be fixed, the time when it is hottest the day would merely be shifted by one hour or two, and a policy to switch-off air conditioners and have a higher summer room temperature would still have to be implemented. However, Japanese people and workers would enjoy a much cooler start to a “normal” day and, most importantly, would be able to enjoy it being lighter outside for one or two hours. Anybody who has ever been to Europe can testify to the wonders this extra hour or two gives to one’s quality of life. The ability to enjoy outdoor restaurants (Tokyo beer gardens, anyone…), leisure activities and sports all impact of the overall quality of life and serve as a tremendous boost to small and medium-sized restaurants, businesses and service providers.

But to get all this positive energy and spending power, Japan’s ruling elite would have to change the rules. But why do that when instead you can just rely on the Japanese people to “suffer together”?

For an economist, some of the arguments against ordering a switch to daylight savings time are incredible. By now we’ve all heard about the Japanese cows who, supposedly, would be upset and could not produce milk and wagyu (beef) the way they are used to. Try telling that to a prized cheese-maker in France or a champion steak rancher in Texas, and the current wave of global goodwill for Japan could quickly evaporate.

Illustration by Phil Couzens

Japan is known for having some the world’s most developed earthquake and tsunami detection systems. However, the destruction caused on March 11 amply illustrated what can happen even when we are well prepared for crises.

Imagine what happens in a crisis when you are not well prepared. We believe that this disaster has illustrated Japan’s lack of preparedness in a different sense: crisis communication.

While it must be said that DPJ politicians have been a constant fixture on television screens since the earthquake and tsunami hit, overall Japan has not done a good job of communicating the situation on the ground (especially that of Tokyo) to the rest of the world.

The lack of preparedness and the lack of a holistic strategy to disseminate accurate information to non-Japanese audiences—who watched in horror as the pictures of towns being reduced to rubble and explosions at Fukushima’s nuclear power plant were beamed across the world—quickly resulted in a chaotic blur of misinformation and half truths being spread across rolling news channels and the Internet.

The rest of the world therefore assumed the worst, which resulted in a number of governments pulling their embassies out of Tokyo (or shutting them altogether) and many foreigners being pressured by their loved ones to leave the region, if not the country. If you were to believe some of the foreign reporting, Tokyo has now become a “ghost town.”

The truth of the matter is, according to a March 29 poll of foreign companies by the American Chamber of Commerce in Tokyo, 87 percent of the 210 respondents are either running “business as usual” or at a “slightly reduced service level.”

The same poll asked the foreign firms: “What is your primary concern arising from the quake/tsunami in terms of business over the next 3 months?” Most firms answered that “availability of electrical power” was their main concern (35 percent), as this was already a reality with rolling blackouts enforced in the areas that surround Tokyo, but this was followed by “airborne radiological risk” (24 percent) and “food/water safety” (23 percent)—the true threat of which has yet to be clearly spelled out by the Government in a credible way.

When asked, “What was the biggest challenge you confronted during the crisis?”, time and time again the same messages came back. “Misinformed and sensationalized rumors,” “lack of consistent and accurate information about nuclear risk and rolling blackouts,” and “obtaining accurate, complete and timely information to make prudent business decisions” were typical of the responses. This amply illustrates that the government’s crisis communication response was inadequate, especially from the perspective of the international community.

Japan and its politicians ignore foreign media at their peril. By not taking the reins on communicating to the foreign broadcast media (many of whom of course do not speak Japanese), it was easy for the misinformation to spiral out of control, whether the source be false messages claiming to be from TEPCO spread via social networks or sensationalist foreign reporting that has even led to members of the public naming and shaming the worst offenders.

In actuality, the foreign broadcast media are one of the most critical communication channels for Japan, and this is a fact that the Government needs to recognize. When a disaster such as this occurs, the audience that needs to be addressed does not just consist of Japanese people domestically, but also foreign residents and the entire global community. Not addressing these audiences in a consistent, timely and accurate fashion will ultimately be to Japan’s detriment.

There are already a number of lessons that can be learned from the current crisis that can be addressed immediately.

Firstly: crisis preparedness. Japan is already challenged by the greatly reduced number of foreign correspondents stationed here compared to a few years ago. This makes it even more important that there be a plan in place of how to get the right message out in a crisis: Who do we call on to speak, to which audiences, and at what intervals? This plan was not in place. The response was largely ad hoc and, as such, inadequate.

Secondly: risk communication. There are plenty of English-speaking Japanese scientists, medical doctors and business people available to speak to the media, but they were not prepared in advance in case of a disaster. Risk communication should be carried out through the proactive dissemination of information by a prearranged group of media-trained experts that are able to discuss science and facts, without leaving this responsibility to often ill-informed and sensationalist TV reporters.

Thirdly: the lack of a government spokesperson for the foreign audience. During the aftermath of the Great Hanshin Earthquake that struck Kobe and the surrounding areas in 1995, the Minister for Foreign Affairs was actually part of the crisis team. This time around, there was no information made available by an English-speaker directly from the government. Although the government did start using simultaneous interpreters, as anyone who has had contact with both languages will know, the inherent vagueness of Japanese creates many challenges in translation, which risks confusing the audience further. Therefore, it is imperative that the government have an English-speaking minister or spokesman readily available and visible to provide credibility and leadership during such times.

These challenges are of course also opportunities for us to better ready ourselves in case of any future incidents, and at the same time will help to make the bonds between Japan and its many overseas friends stronger.

When Japan has the attention of the entire globe, it must not ignore the outside world.

Kumi Sato is the president and CEO of COSMO, a public affairs and creative strategic communications consultancy.

Michael Alfant is the co-founder, president and CEO of Fusion Systems, an IT consultancy.

Illustration by Phil Couzens

If you’re a visiting dignitary whose country has a Gross National Product equal to or greater than the State of California, your visit to Silicon Valley consists of a lunch/dinner with some combination of the founders of Google, Facebook, Apple and Twitter and several brand name venture capitalists. If you have time, the President of Stanford will throw in a tour, and then you can drive by Intel or some Clean Tech firm for a photo-op standing in front of an impressive looking piece of equipment.

The “official dignitary” tour of Silicon Valley is like taking the jungle cruise at Disneyland and saying you’ve been to Africa. Because you and your entourage may not know the difference between large innovative companies who once were startups (Google, Facebook, etc.) and a real startup, you never really get to see what makes the valley tick. If you didn’t come in your own 747, here’s a guide to what to see in the valley.

California Dreaming

On your flight out, read Paul Graham’s online essays and Jessica Livingston’s “Founders at Work.” Then watch the “Secret History of Silicon Valley” online and learn what the natives don’t know.

Palo Alto – The Beating Heart 1

Start your tour in Palo Alto. Stand on the corner of Emerson and Channing Street in front of the plaque where the triode vacuum tube was developed. Walk to 367 Addison Avenue, and take a look at the HP Garage. Walk to downtown Palo Alto at lunchtime, and see the excited engineers ranting to one another on their way to lunch. Cram into Coupa Café full of startup founders going through team formation and fundraising discussions (noise and cramped quarters basically force you to listen in on conversations) or University Café or the Peninsula Creamery to see engineers working on a startup, or have breakfast in Il Fornaio to see the VCs and recruiters at work.

Stanford – The Brains

Drive down University Avenue into Stanford University as it turns into Palm Drive. Park on the circle and take a walking tour of the campus and then head to the science and engineering quad. Notice the names of the buildings: Gates, Allen, Moore, Varian, Hewlett, Packard, Clark, Plattner, Yang, Huang, etc. Extra points if you know who they all are and how they started their companies. You, too, can name a building after your IPO (and $30 million). Walk by the Terman Engineering building to stand next to ground zero of technology entrepreneurship. See if you can find a class being taught by Tom Byers, Kathy Eisenhardt, Tina Seelig or one of the other entrepreneurship faculty in engineering.

Attend one of the free “Entrepreneurial Thought Leader Lectures” in the Engineering School. Check the Stanford Entrepreneurship Network calendar or the BASES calendar for free events. Stop by the Stanford Student Startup Lab and check out the events at the Computer Forum. If you have time, head to the back of campus and hike up to the Stanford Dish and thank the CIA for its funding.

Mountain View – The Beating Heart 2

Head to Mountain View and drive down Amphitheater Parkway behind Google, admiring all the buildings and realize that they were built by an extinct company, Silicon Graphics, once one of the hottest companies in the valley. Next stop down the block is the Computer History Museum. Small but important, this museum is the real deal with almost every artifact of the computing and pre-computing age (make sure you check out their events calendar). On leaving you’re close enough to Moffett Field to take a Zeppelin ride over the valley. If it’s a clear day and you have the money after a liquidity event, it’s a mind-blowing trip.

Next to Moffett Field is Lockheed Missiles and Space, the center of the dark side of the Valley. Lockheed came to the valley in 1956 and grew from 0 to 20,000 engineers in four years. They built three generations of submarine launched ballistic missiles and spy satellites for the CIA, NSA and NRO on assembly lines in Sunnyvale and Palo Alto. They don’t give tours.

While in Mountain View drive by the site of Shockley Semiconductor and realize that from this one failed company, founded the same year Lockheed set up shop, came every other chip company in Silicon Valley.

Lunch time on Castro Street in downtown Mountain View is another slice of startup Silicon Valley. Hang out at the Red Rock Café at night to watch the coders at work trying to stay caffeinated. If you’re still into museums and semiconductors, drive down to Santa Clara and visit the Intel Museum.

Sand Hill Road – Adventure Capital

While we celebrate Silicon Valley as a center of technology innovation, that’s only half of the story. Startups and innovation have exploded there because of the rise of venture capital. Think of VCs as the other equally crazy half of the startup ecosystem.

You can see VCs at work over breakfast at Bucks in Woodside, listen to them complain about deals over lunch at Village Pub or see them rattle their silverware at Madera. Or you can eat in the heart of old “VC central” in the Sundeck at 3000 Sand Hill Road.

While you’re there, walk around 3000 Sand Hill looking at all the names of the VCs on the building directories and be disappointed at how incredibly boring the outside of these buildings look (some VCs have left the Sand Hill Road womb and have opened offices in downtown Palo Alto and San Francisco to be closer to the action). For extra credit, stand outside one of the 3000 Sand Hill Road buildings wearing a sandwich-board saying “Will work for equity” and hand out copies of your executive summary and PowerPoint presentations.

Drive by the Palo Alto house where Facebook started (yes, just like the movie) and the house in Menlo Park that was Google’s first home. Drive down to Cupertino and circle Apple’s campus. No tours but they do have an Apple company store which doesn’t sell computers but is the only Apple store that sells logo emblazened T-shirts and hats.

These measures are all entirely appropriate, and will significantly help the millions of people living along the East Japan sea coast of Honshu. Although I could do without extra taxes, even an increase in consumption tax would be reasonable, provided it is temporary, and most citizens and businesses would accept such a measure.

The next major concern on the DPJ’s agenda after the quake zone is the effect of power blackouts on Tokyo’s production base of factories and workers. Tokyo accounts for about 25 percent of the nation’s GDP and if factories are going to have to shut down some days to reduce electricity consumption, that will clearly impact production levels. Further, workers are going to be dealing with what is predicted to be another very hot summer, possibly without air conditioning and thus having to either take longer summer holidays or shift work hours to earlier in the day—either measure will also cause a big hit to productivity. Since most of this economic pain will have been caused by lack of electricity, the only way to resolve it is to ensure that power production capability is restored as soon as possible. From what we can see, TEPCO is ordering temporary fossil fuel power generators en masse from local and foreign suppliers, and restoration of the capital’s power grid is obviously a high priority. In fact, we wouldn’t be surprised if power supplies are back to normal by mid-summer, despite the dire predictions by the press at the moment.

However, the government doesn’t yet seem to realize that there is a secondary effect from the disaster—one which may have much broader ramifications for the economy and will probably affect many more people in terms of long-term financial damage and unemployment.

This secondary effect is the chilling of consumer spending in the name of restraint and respect for victims of the tragedy. Japan perhaps more than any other nation, knows how to practice restraint. And in the face of nuclear scares and multiple aftershocks of some magnitude, they have plenty of incentive to hunker down and not do much of anything other than watch TV and wait for things to blow over for the next few months.

About 70 percent of the Japanese GDP is spent on domestic goods and services—most of which could be considered discretionary—and yet these are part of the fabric of Japanese business culture. Included in this sector are such things as entertainment, travel and hotel accommodation, print and electronic media, advertising, real estate, fitness and sports, apparel, jewelry, cosmetics, automobiles, and any other luxury goods and services.

Because foreign companies typically leverage through brand, intellectual property, and technology, many of these “discretionary spending” sectors are dominated by ACCJ and other foreign chamber members who are now vulnerable to the population practicing restraint. Already there is a precipitous drop in business for some of these companies, and it could mean that some will have to shut their doors and lay people off. This will have a knock-on effect on smaller firms that supply the larger ones, and business across the whole foreign sector could get very difficult.

How to overcome these challenges? Firstly, as foreign companies we need to stress to our Japanese friends that we are committed to staying and helping with the recovery. The Japanese have long memories, and will be more predisposed to firms that show they care and share.

Next, the ACCJ has always been a network of trust and information sharing, and leaders of foreign firms need to turn to the Chamber to find out what other businesses are doing and what is the “new normal.” In some cases, it will be reducing staff proactively and riding out the storm. In others, it will be spotting emerging trends and servicing those trends.

In particular, innovation rather than insulation will be key to seeing our way through the challenges ahead of us. This may mean changing our business models so that we are then able to help our Japanese hosts help themselves. Many Japanese firms are now in their own private purgatory and need help to access overseas markets, foreign know-how, and foreign investment. I’m personally finding that Japanese firms are much more willing to enter into discussions and tie-ups than ever before, and we need to collectively take advantage of this mind-expanding opportunity to establish new relationships.

Indeed, I’m hoping that in years to come we can look back on these challenging times as a point of change for the better and a way for us to become more relevant and important to our Japanese partners than we have perhaps been until now.

illustration by phil couzens

That being said, Japan faces major challenges going forward.  In the near-term, providing food, clothing and housing to the affected people in the Tohoku region will be a huge logistical challenge. In the long-term, Japan faces critical choices about what should be rebuilt in the wake of this disaster, how to revive not only the Tohoku economy specifically, but the whole country as well. Several towns along the coast in Tohoku were almost totally wiped out by tsunami. Given’s Japan’s dire fiscal situation even before the disaster, the country cannot afford wasteful or sentimental spending on the rebuilding process.

This is not urban planning on a municipal or regional scale, but national development planning along the lines of a country emerging from a regime change such as East Germany or Cambodia. Given Japan’s rapidly aging and shrinking population and the risks of additional major quakes throughout the country, a major debate is needed over where and how resources should be deployed, including revisiting the idea of moving the capital from Tokyo.

Historically, Japan had a highly decentralized government and economic system with many powerful fiefdoms far away from Tokyo such as Kagoshima, Yamaguchi and Fukushima. In the post-war period, however, Japan evolved into a hub and spoke system with two primary economic centers (Tokyo and Osaka) and many branches and local offices with little or no autonomy. In the last 20 years, many large companies shifted their headquarters functions from Osaka to Tokyo, resulting in a vast over-concentration of government, business, education and culture. There was some consideration of moving the capital out of Tokyo to reduce concentration, in part because of earthquake risk, but after the burst of the bubble, the huge cost of moving along with bureaucratic and political resistance resulted in only a handful of minor agencies actually leaving Tokyo.  

Before the earthquake, Japan’s huge national debt, deflation, falling population and low consumer confidence were a powerful combination of forces limiting the country’s growth potential. Chronic political instability exacerbated the problem, with a succession of Prime Ministers lasting only a year or so who were more focused on maintaining their political base to stay in office than dealing with the country’s long-term challenges. Now is a unique and perhaps limited opportunity for politicians, bureaucrats and the private sector to plan a long-term recovery not only from the natural disaster, but all of the other outstanding challenges that the country faces.

Not living in or owning property in Tohoku, this is perhaps easier for me to say, but fully rebuilding all of the towns devastated by the tsunami is not a realistic choice given Japan’s huge fiscal and demographic constraints. Unless Japan allows large-scale immigration or offers substantial financial incentives to encourage larger families, the country needs to consider rebuilding plans in the context of a much smaller population in the future.

In trying to gauge the long-term impact of this disaster, many analysts are looking to the example of Kobe, which suffered a major quake in 1995. Unlike this time, where most of the devastation occurred in small towns along the coast, central Kobe buildings and roads suffered major structural damage, so the rebuilding effort was massive. While it is hard to see the physical impact of the quake in Kobe today, I believe the negative impact on the local economy was profound and permanent. Kobe Port, long an important local economic driver, suffered huge damage and lost a large chunk of its volume permanently to Pusan, South Korea, Singapore and other Japanese ports. Although it ranks as one of the most popular places to live in Kansai and is a domestic tourist attraction, Kobe has gone from being a major city in its own right with strong local industry to becoming a bed town of Osaka with few independent demand sources.  

Over the next 10 years, the OECD projects that Japan’s population will fall by 5 million people and an astonishing 32 million over the next 40 years, but a disproportionate amount of that decline will occur in the six prefectures of Tohoku. According to Japanese government statistics, Tohoku’s population fell by 3.2 percent in the 2005-2010 period, the exact opposite of the Greater Tokyo area (Tokyo, Chiba, Kanagawa, Saitama), which rose 3.2 percent in the same period. The earthquake is likely to spur an even greater exodus out of Tohoku into more developed areas with better job prospects.

Seth Sulkin is the President and CEO of Pacifica Malls K.K., a Tokyo-based real estate asset manager specializing in commercial properties.

The post-war concept of the iron rice bowl, where construction companies made donations to politicians in exchange for public works contracts has resulted in too many roads, too many bridges and too many buildings that were never fully utilized even when the economy was better. For a small, mountainous country with only a limited amount of usable land, Japan is surprisingly overbuilt, and considering the aging, shrinking population, this problem will only get worse unless the government and private sector can concentrate resources in areas with high growth potential.

The Japanese government did an extraordinary job at channeling capital into critical industries after World War Two. Post-war industrial policy was extremely effective at rebuilding the country, but at the expense of consumers and small businesses. This time, Japan needs to channel capital again into high priority projects, not merely to rebuild the economy, but to transform the country into a modern society open to foreign human and financial capital. This post-disaster Japanese economy should be more reliant on personal consumption, not purely dependent on exports. The government’s announcement on March 22 that it is considering the creation of a new agency to oversee disaster reconstruction is a step in the right direction.

Borrowing private sector executives to help run the new agency, including those from foreign companies, would help to maximize public-private sector cooperation and efficient use of resources and benefits for the country.

illustration by phil couzens

As the country attempts to come to terms with the disaster, consideration is starting to be given to the cost and long term consequences. The immediate economic impact of the disaster was clear.

Japan’s stock market plunged around 20 percent in two days. The Japanese yen surged to record highs based on the market’s assessment that Japan would need to liquidate foreign assets to fund insurance claims and the recovery.

The longer term impact is less clear.
It seems likely that this will be the most expensive disaster in history. Damage is estimated at more than $250 billion. Reconstruction of the affected areas may take up to five years.

However, it needs to be remembered that, even before the disaster, Japan had been languishing economically since the collapse of the bubble in the early 1990s.

Moving forward, there seem to be two possibilities. On the one hand, what has occurred may simply accelerate the trend that has been apparent for the past two decades.

Two issues are of particular concern. A modern economy needs electricity. Japan will need to make rational decisions about how to meet industrial and household demand. What has occurred at the Fukushima nuclear reactors has been tragic and will no doubt weigh heavily in future decisions. However, Japan cannot be competitive without cheap and efficient power and it is difficult to see how a non-nuclear future could support Japan’s energy requirements.

Second is the issue of Japan’s overall industrial competitiveness. It is well known that Japan’s hi-tech and auto industries, both lynchpins of the home economy, were badly affected by the disaster. Japan produces 20 percent of the world’s semiconductors and 40 percent of the world’s flash memory chips. Manufacturers such as Sony Corp., Toyota Motor Co., and Panasonic were forced to halt production and it is uncertain when full production will resume. In addition to the direct effects, damage has been inflicted on Japan’s export infrastructure including roads and ports.

Given time, these problems can be fixed. Of greater concern is the possible impact on Japan’s overall competitive position in these industries. With even a small interruption to supply, users will be seeking alternatives. There is a real chance that competitors will attempt to exploit any foothold they gain and attempt to replace Japanese suppliers in the long term.

More optimistically, there are those who argue that there has never been a better opportunity for real reform than the one which is now presented. With the current sense of national unity, it may be possible to push through reforms that have been impossible up until now.

More needs to be done to encourage entrepreneurship and the growth of SMEs. An important part of this is reform of the tax system. The Japanese government had already planned a moderate reduction in the corporate tax rate and the temptation to delay implementation needs to be resisted. If the tax rate remains at its current level (an effective rate of 42 percent for corporations), Japan will continue to lose innovative companies to locations such as Singapore and Hong Kong.

Japan’s regions have experienced economic hollowing over a number years. Now would be the time to implement geographically targeted incentives in areas such as Tohoku. Such incentives would produce real opportunities for residents and help stem the flow of young people to major cities such as Tokyo.

According to Hiroshi Miyamasu of the Graduate School of Accounting and Finance at Chiba University of Commerce, “The most crucial thing that Japan now requires is vision and real leadership from those in charge. If Japan does not take advantage of the opportunity presented the real disaster may occur in the long term.”

Shinsuke Kikuchi is an associate at Foreya Partners where his work focuses on frontier markets. He is a qualified attorney and formerly worked with PwC in Tokyo. Shinsuke.Kikuchi@VentureCapital.Asia

illustration by phil Couzens

For an economist, labor is an essential input for production. To make national income, entrepreneurs need both labor and capital. In Japan the pool of potential labor—people aged between 15 years and 65 years—will be dropping by almost half-a-million people every year, on average for the next ten years. Pretty bad, right? But is Japan really running out of labor? Absolutely not.

First of all, the unemployment rate stands at about 5 percent, which is close to the historic high for Japan. Yes, there is a record pool of available labor currently unemployed. Most interestingly, the unemployment rate for the young population—those aged between 20 and 30—is at an all-time record, close to 10 percent. That’s right, about 1 out of 10 of Japan’s youth is unemployed. In my personal opinion, this is a disgrace for the country, and anybody who argues that Japan’s economy is doomed because of negative population dynamics (i.e. argues that Japan is running out of labor) should be ashamed of him/herself. There is plenty of labor around. The problem is that companies do not want to employ them. They argue that the quality of the young has gone down. That the young are not eager to work anymore. That they are not “hungry.” Really? Or could it be that the young are, de-facto, rebelling against out-dated management practices and corporate culture. Who wants to join the Prussian Army, when you see people succeeding and leading a happy, self-full-filling life working for more modern, enlightened companies?

Let me give you a couple of concrete examples: last year, a Japanese friend of mine asked me to give some advice to his son. Young Takeshi has been studying in the U.S. and will graduate this summer with an engineering degree from one of the best engineering schools in the world. Not surprisingly, Takeshi got job offers: one from Apple, one from the German industrial giant Siemens, and one from Canon. The father wanted me to advise Takeshi on how to choose between them.

Now, please put yourselves in my shoes. What would you tell young Takeshi? I mean, if the young engineer is good and lucky, in 15 years time he could be a contender for the top CEO job at Apple. If he joins Siemens, the European company, if he’s good and lucky, in 15 years he could probably be appointed to run a region, like Asia or Latin America. If he joins Canon, and is good and lucky, what’s it going to be, section chief? In charge of a special project?

To be sure, I mean absolutely no disrespect to the powerful success of Canon and many other Japanese corporations. But the reality is that global competition for talent is extremely severe. In my view, the same applies here in the domestic Japanese market for talent. I question whether corporate leaders in Japan have become too ossified, too complacent, too proud and insistent on past practices to actually attract, incentivize and, yes, empower the young generation. Clearspeak: Could it be that Japan’s young think they are better off unemployed, working part-time and living with their parents because working for a Japanese company is, well, no fun, not fulfilling, and offers little up-side?

Managing human capital—your workforce and the most important factor of production—is always and everywhere the biggest challenge. Striking the right balance between “carrots and sticks” is what every manager and every entrepreneur struggles with. And creating better work-life balance and helping individuals to achieve both personal and corporate goals at the same time is the holy grail. In Japan, the myth of a special relationship between capital and labor is so deeply entrenched, that somehow lifetime employment and corporate culture as such have given rise to a “capitalism with a kinder and gentler touch.” That’s fine as a myth, and by no means unique to Japan. After all, U.S. corporations will go out of their way to try and make it on the list of “500 best companies to work for.” Professionally, as an economist, that Japanese myth got shattered early as hard numbers and facts suggest that even in its heyday, barely one-in-four Japanese workers was on a life-time contract.

Jesper Koll is a Managing Director and Head of Research at JP Morgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.

To be sure, most U.S. companies do not offer scholarships to go to business schools or other graduate schools. You are on your own, and in charge of your own education and career. However, U.S. companies are definitely open for business and in the market to hire mid-level, post-graduate talent. In contrast, Japanese companies are still basically are closed for mid-level entry. So by cutting out the global scholarships, it was corporate Japan that forced the closing of the minds of their future mid-and top-level managers.

Discussing Japan’s demographic destiny is inevitably a complex issue. However, simply using the population decline as an excuse for pessimism is, well, a big excuse to justify your own mistakes. There are plenty of young Japanese around, and there is plenty of labor power and energy waiting to be harnessed. The challenge is for corporate Japan to unleash this power. In my view, Japan’s demographics spells huge opportunity, not doom and gloom.

Photo by Aidan.Morgan, used under the creative commons attribution license

Tied at the hip, VCs and entrepreneurs take large risks together. VCs invest in startups with minimal tangible assets and no certainty about the product’s viability, market size or customer adoption. Entrepreneurs face all that, and add one more risk to their list: the bad board member.

The Bad Board Member

I had coffee recently with one of my ex students. Thirty months ago he raised a Series A venture round from two name brand Silicon Valley VC firms. It was early in the day, but he looked tired. “I need some advice about my board. I get along great with one of the VCs, but the other one, Bob, is making my life miserable. Nothing I do is right in his eyes.” He looked pained as he continued. “We never had any personal chemistry, and its gotten so bad in the last six months, our board meetings are just hell. They consist of Bob beating me up regardless of whether the results are good or bad. I can’t tell if he’s trying to get me to quit, fire me and bring on a new CEO or is just a miserable human being.”

My antenna went up when I heard that Bob was his board member because the senior partner who led the investment said he was too busy to take another board seat (and right after the closing had assigned Bob to take the seat for his firm).

Uh oh, I thought. I lived through this one. Admittedly, my ex-student was quirky, bordering on eccentric, but he had a long and successful track record in Silicon Valley delivering complex products before he went back to get his MBA. He was a great engineering manager and recruited, hired and inspired a world-class team. This was his first CEO job. He said that Bob described him to others on the board as the “crazy aunt you hide in the closet when the guests come.”

We went through the status of the company, and at least from the outside it sounded good. In fact it sounded great: three major versions of the product shipped, multiple iterations and a few pivots under their belt, revenue was growing even faster than planned.

“Well you just need to talk to your other board members and ask for their counsel,” I offered. “I did! I’ve talked to the other VC and he told me it’s a problem that I just need to work out with Bob.” Hmm, this wasn’t sounding good. “Why don’t you go back to the partner who led the deal and ask for his advice?”

The look on his face told me I knew what the answer would be. “Why do you think I’m having breakfast with you? I did just that, and do you know what he said?” I sat there thinking I knew exactly what the senior VC said because I had heard it myself when I was an entrepreneur. “The senior partner at the firm said he wasn’t going to get involved in ‘chemistry’ issues.” Sounding both sad and frustrated he said, “What do I do now? I built a great company, and I think I’m being set up to be fired.”

The VC Lemon Law

Every Venture Capitalist I’ve heard talk about founder/board member problems treats them like they only happen in other funds. “Great VCs in brand name firms don’t have these problems” is the line I hear.

The venture capital industry is in denial

The problem is as bad in large brand name funds as in the smaller firms. While most board problems arise from founder performance issues, naiveté or disagreements about strategy, a number are created by bad behavior on the part of a board member. Yet while a VC can remove a founder who misbehaves, there is no corresponding recourse when a VC is the source of the problem.

Astonishingly, there’s no professional standards in the venture capital industry that acknowledges this problem even exists. Not only does the industry lack a code of conduct, but individual venture firms lack avenues for founders/CEOs to bring these problems to light. There’s no ombudsman or third-party in a firm to hear an objective review, and no remedy to deal with a partner’s bad behavior. And why would there be if the problems are only with the founders.

The rationale seems to be rooted in both tradition and math. Like doctors, VCs tend to bury their mistakes. If a partner screws up a single company in a portfolio it’s not the end of the world since they have 20-30 companies in a fund. If a single partner has a consistently terrible track record, he or she just won’t be invited into the next fund. But in the meantime this bad board member has left a trail of broken companies. When it comes time to understand individual partner performance, information asymmetry is at play—like bad doctors, knowledge about a partner’s performance is limited—and entrepreneurs rarely have a say in the matter even if they do have some knowledge.

Finally, there’s more than a whiff of noblesse oblige at play. If firms believe that VCs always act responsibly and the problems are always with the founders, they don’t need to worry about bad board member behavior. They can continue to pretend it never occurs.

The reality is that the VC business has expanded from the clubby group of 20 or so firms that sat on Sand Hill Road 40 years ago into an industry of around 400. My hope is that they realize that with that expansion comes a different set of responsibilities.

Lessons Learned

• Most Entrepreneur/VC clashes arise from founder performance issues

• Infrequently, the cause is bad behavior from a board member

• Currently founders have no recourse

• After 40 years of growth the VC industry still operates with “small club” rules and mindset

Steve Blank is a veteran of Silicon Valley and serial entrepreneur, and teaches entrepreneurship at U.C. Berkeley Haas Business School, the joint Berkeley/Columbia MBA program, and at the Stanford University Graduate School of Engineering. The Japanese version of his latest book “The Four Steps to the Epiphany” can be found here, and you can read more of his business insights at: www.steveblank.com.

illustration by Phil Couzens

In an effort to redistribute wealth and stimulate the sluggish economy, the Japanese government is considering a radical change to the inheritance tax regime. The alteration could promote the transfer of trillions of yen from the nation’s conservative, money-conscious elderly to the free-spending younger generation.

Beginning in April 2011, a reduction in the inheritance tax exemption will be effectively coupled with a change in the gift tax regime. The policy change would see a significant rise in inheritance tax, as well as a reduction of gift tax by almost half. This makes it attractive to give money away now, instead of waiting and having a future inheritance taxed at higher rates. The essence of the tax reform is encouraging elderly Japanese to gift their assets now instead of waiting to bequeath it in a will. As an economic stimulus measure, the success of this plan hinges on a hope that the younger generation will open their wallets and spend more freely than their savings-conscious parents or grandparents.

Although it is hoped that the reform will provide a much needed boost to the economy, one important concern is the individuals who will be affected by the inheritance tax solely due their holdings of over-valued assets. For them, the changes may seem like a trap. Not only do such individuals have little scope to take advantage of the gift tax break, but their heirs face the possibility of losing family property if they cannot pay the higher inheritance tax upon bequest.

Will the tax reform have the hoped for stimulatory effect on the economy? In a theoretical sense, the proposed change is appealing. Japan’s younger generation have certainly demonstrated a high propensity to spend. However, given a global economic slump that is affecting Japan more than other developed countries, a bet on increased consumer spending to improve the nation’s economy is a risky bet.

In a best case scenario, the gift tax cut and inheritance tax exemption reduction will promote economic activity internally, while the proposed corporate tax cuts will lure overseas investors, and thereby stimulate the economy. However, while both tax changes are further steps in the right direction, they do not compare favorably with the current U.S. estate tax regime or the corporate tax regimes in neighbors such as Hong Kong and Singapore. To improve the stagnant economy, Japan also needs to take bold steps in key areas such as national debt reduction. Given the scope of Japan’s economic problems, it is unlikely the inheritance tax changes will promote enough spending to have a sizeable impact on the current economy.

Dean Page is CEO of Accounting Asia. He is qualified as both an attorney and as a CPA and was formerly a partner with Ernst & Young. Dean.Page@Accounting.Asia

Kerri Schantz is a summer associate at Accounting Asia where she supports the company’s activities in Japan and Singapore.

Photo by Vladimir Zakharov, www.vladimirzakhrov.net

Following the Lehman shock in late 2008, Japanese real estate prices engaged in a sustained decline. Since fall 2010, when the Bank of Japan announced its intention to buy J-REIT shares, the market (at least for high quality properties) has recovered a good bit of those losses. Having lived through two bubbles in Japan—a major one in the late 1980s and a smaller one in the 2005-2008 period—the character of this rebound was totally different. Both of the bubbles were fueled by the cheap and easy availability of debt and investors’ expectation that property prices would continue rising forever. In both cases, there were far more buyers than there were attractive assets, so investors indiscriminately scooped up anything they could get their hands on, hoping to flip properties for a quick profit.

Since last fall, buyers have been mainly seeking reasonably new, well-located, stable income-producing properties for long-term investment purposes, rather than short-term capital gains. While the debt market has continued to recover, leverage even on prime assets has not returned to pre-Lehman levels, while more speculative properties are difficult to finance at any level on a non-recourse basis.

Recently, several major international fund managers with unused equity burning holes in their pockets or teams of people sitting on their hands with no deal flow have capitulated and begun plans to start investing again in B-grade office buildings. Using words that I have not heard investors utter in Japan for several years like “cheap,” “value-add strategy,” and “poised for recovery,” these funds are now scouring Tokyo for buried treasure in the form of small-to medium-sized office buildings with upside potential. With B-grade office rents down 30-50 percent from the pre-Lehman peak, many believe the market has already hit bottom and begun to rebound.

The problem is that tenant turnover in smaller buildings can be high and any leases signed in the 2005-2008 period are very likely to be at rents well above current levels. Even if market levels rise, buyers of office buildings in 2011 will generally be facing falling income, as tenants leave and are replaced at today’s market levels or in-place tenants seek to lower their rent as leases expire. Sellers, therefore, want to calculate the transaction price based on in-place income, while buyers want to market in-place rents to reach fair value. The 30-50 percent fall in office rents directly translates to a similar gap between the expectations of buyers and sellers.

Seth Sulkin is the President and CEO of Pacifica Malls K.K., a Tokyo-based real estate asset manager specializing in commercial properties.

I think the real aim of the funds pursuing this strategy is the Holy Grail of investing in Japanese property—finding a well-located building in central Tokyo with in-place rents at or below current market levels. If such a gem could be miraculously unearthed, then I would wholeheartedly agree with idea of investing in B-grade office buildings. I haven’t seen any such deals completed by foreign investors recently, so it will be interesting to see how much further they will capitulate on their investment criteria in order to find deals that can actually be done in today’s market environment.

Seth Sulkin is the President and CEO of Pacifica Malls K.K., a Tokyo-based real estate asset manager specializing in commercial properties.

Normally in Japan, the politicians are off in the clouds while major companies are more realistic about business conditions. As hard as it may be to believe, however, some politicians are beginning to say things that make sense, while the actions of domestic real estate investors are looking increasingly questionable.

Before Standard & Poor’s lowered Japan’s sovereign credit rating in late January, Prime Minister Kan said that the country’s financial situation was comparable to Japan Airlines, which filed for bankruptcy in 2010. He said persistent deflation and the country’s huge government debt load have caused an “enormous crisis.”

And even before Kan’s comments, former Chief Cabinet Secretary Yoshito Sengoku made a similarly extraordinary statement, saying Japan’s budget is “approaching the edge of a cliff.”

The problem, though, is that while it appears that Japan’s top politicians have finally woken up to the scope of the country’s economic and financial problems, the only major solution proposed so far has been an increase in the consumption tax, and there is no timetable for implementation. With the ruling party consumed by the prosecution of former leader Ichiro Ozawa and trying to keep its tenuous hold on power, thinking about, or more importantly, introducing policies to deal with Japan’s long-term problems does not seem to be a high priority. Recognition of the massive problems is an important first step, but while increasing the consumption rate to 10 percent or more as discussed would have the impact of broadening and stabilizing the tax base, it doesn’t deal with deflation or Japan’s most critical problem, which is the aging, shrinking population.

Recognition of the problems is clearly not enough for Standard & Poor’s. In its announcement of Japan’s ratings downgrade, S&P said that the Kan Cabinet “lacks a coherent strategy to address these negative aspects of the country’s debt dynamics,” specifically referring to the debt loan, deflation and aging population.

Meanwhile, J-REITs have gone off on a massive real estate buying spree, helped by cheap and easy access to fresh equity and debt. With interest rates still hovering near zero and little loan demand because no one wants to invest in Japan’s bleak future, individuals, non-real estate operating companies and banks are desperate for the higher yields which can only come from real estate. J-REITS have thus had an easy time sucking up the capital desperately searching for a more profitable home.

Illustration by Phil Couzens

While rents and occupancy rates are no longer falling as precipitously as they have in the past two years, I have not seen any persuasive arguments for a sustained increase in demand for office space. As the U.S. economy currently shows, a pickup in GDP does not necessarily create many new jobs in today’s economy. The Internet has created a productivity revolution that is great for corporate profits, but not for job creation, particularly in lower-skilled, administrative tasks. For years, I couldn’t understand why smart phones weren’t popular in Japan, but the introduction of the iPhone and domestic Android-based models is changing the way Japanese do business. Ultimately, white-collar and service-sector productivity will skyrocket, but employment growth will be meager even as the economy recovers, keeping office demand flat.

From the perspective of regional economic development, it is nice to see some of the J-REIT acquisitions in regional cities, but I wonder if many of these deals would have occurred if the assets hadn’t come out of the portfolios of their sponsors.

Many global real estate funds are eager to increase their Japan exposure right now, but primarily in new, well-located, stable assets in central Tokyo at risk-adjusted yields that make sense. The inherent conflict of interest between the sponsor-controlled asset managers and J-REIT shareholders is skewing the real estate market with transactions at unusually low yields, sometimes on assets that would be lucky to trade at any price on an arms-length basis.

Jesper Koll is a Managing Director and Head of Research at JP Morgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.

Japan and Germany have had a lot in common. Both countries were “catch-up” economies, rising from the destruction of WWII to become model cases of successful economic development. Both countries pride themselves on their relentless focus on manufacturing and engineering, the result of which has been continued virtuous circles of powerful export-led growth. Yet recently the gap between both countries’ development has started to widen. Germany has become the hidden success story of the industrialized world: it is the one country of the old G7 club where job creation is accelerating and the unemployment rate is falling. Both business and consumer confidence is rising. Contrast that to Japan where growth is tepid, job destruction outruns job creation, and neither businesses nor households nor politicians have much positive to say about the future.

Why is it that Germany has returned to be the model-case for successful economic management, while Japan has fallen from grace and, more and more frequently, is used as a case-study for what not to do? The answer is, in my view, rooted in a very simple, but all-powerful economic dynamic: Germany is the big winner from the creation of the euro. Let me explain.

Germany and Japan are model economies for growing productivity. Basically, they have managed to grow productivity in the tradable goods sector (industrial and manufactured products) year-in and year-out. In both countries, manufacturing sector productivity has grown by an average of about 3 percent per annum. This was true before German reunification, as well as after reunification. In Japan, it was true before the bubble economy as well as after the collapse of the bubble economy. Quite remarkable. Throughout structural change, political uncertainty, and banking crisis both countries keep improving productivity. Homegrown forces kept pushing up the global competitiveness for both countries.

Now comes the complication—global competitiveness is decided not just by homegrown productivity, but also by the exchange rate. Indeed, a rise in homegrown productivity tends to put upward pressure on the exchange rate. The more productive you are, the stronger your currency tends to get. Case in point: both the Deutsche mark and the yen were marked by steady appreciation relative to their trading partners’ currencies. Clearspeak: The gain in global competitiveness based on productivity tends to get offset by currency appreciation.

photo by UggBoy UggGirl, used under the creative commons attribution license

All this changed when Germany gave up the Deutsch mark and adopted the euro. While homegrown productivity has continued to rise by about 3 percent in Germany, the new euro currency has not appreciated. In fact, it has depreciated, due to the various fiscal and economic problems in many of the euro zone economies. In fact, outside Germany, euro zone productivity growth is de-facto zero. But make no mistake, the net effect has been nothing but positive for German industry and economy. The nation now enjoys a double-plus—productivity rises and the currency depreciates. By my calculations, the euro may be as much as 50 percent “undervalued” from a pure-German industry perspective (in other words, if the Deutsche mark were still in place, it would now be almost 50 percent higher than were the euro is today).

Contrast this to Japan: productivity growth has been good, a steady 3 percent. But at the same time, the yen has continued to appreciate. So all the hard-worked-for productivity gains have been wiped-out on the global stage because of currency appreciation. No wonder the Japanese business mood is downbeat, while Germany is upbeat.

Interestingly, Germany’s lock into the euro has allowed for a massive competitive boost as German industry is now isolated from the pressures of a free-floating, free-adjusting national currency. In a way, Germany today is like China. Because of China’s fixed exchange rate, homegrown productivity gains in China are not off-set by currency appreciation. Although the euro is obviously not a fixed exchange rate, the net effect for German industry has been the same—a huge boost to global competitiveness. In contrast, Japan Inc. “suffers” from constantly seeing its hard-won productivity gains overwhelmed by the relentless rise in the yen. What this does mean, however, is that if and when the yen begins to weaken, or the dollar strengthens, Japan’s economic and profit recovery will very much surprise on the upside. After all, the homegrown productivity gains have been real all along, they were just hidden by the yen’s strength.

Illustration by Phil Couzens

One of the great benefits of investing in the social gaming space is the opportunity to be immersed in game mechanics. Game mechanics don’t just apply to gaming companies: they apply to virtually every website on the Net.

Here are my top 10 ways to apply game mechanics to non-gaming services:

Your service: The game
Start thinking of your service as a game and it’s easy to envision all the subtle and not so subtle ways to take advantage of game mechanics in your service—whether it’s a consumer offering or an enterprise one.

Status/reputation
People want status. It’s human nature. But the thing about status is, it has to be visible both to the person who has it and to everyone else. The driver of the hot yellow Ferrari doesn’t drive it 20 miles per hour down the street so that he can see it. He drives it so that everyone else can see him driving it. The easiest way to make status visible is through badges. Badges are simple and easy. Start with silver, gold, and platinum. Then add special badges that are only available for completing a certain task, or in the case of a shopping site, a special, rare shopping cart for elite shoppers.

Gifting and reciprocation
Surprise: People love to receive gifts! In the gaming world, that means giving high status users free coins with which they can buy goods—not for themselves, but to send to other people. What makes gifts so powerful is they cause a very personal feeling of reciprocation. In the gaming world, gift recipients will reciprocate—the key is that they have to pay in order to do so. So by letting your highest status users give away something to others (for free), you get revenue in return.

Hybrid monetization
Let your users choose how they want to pay you: with their time or with their wallet. As long as you get the money, you don’t care whether it comes from your user or from a third party who wants to pay you for access to that user. This doesn’t work for big purchases, but for small purchases, such as upgrades, it can be used to great effect. Let your user choose: they can pay you for the upgrade or they can watch an advertisement. It’s up to them. (Of course, you get to set the price on what the ad is worth).

Leaderboards and points
People are competitive by nature. Associate points with actions so that people can earn points. Those points don’t necessarily have to convert into anything—simply making them visible (in the form of a leaderboard) gives them value.

Free stuff
Just like gifts, people also like to get good old free stuff. In the gaming world this comes in the form of “150 coins for logging in.” It feels good to get 150 coins for doing…well, almost nothing! Give people free stuff to get them to show up. Give away a little bit of what you offer (storage, for example) to users for completing certain tasks.

Make the virtual real
How do you make a virtual good feel real? Through look and sound. If you’re going to use coins, for example, give them the look and sound of real money. Animate them. Add accurate sound effects. That’s why Vegas casinos blast the sound of money—because even though you can’t touch it, you can hear it.

Social proof
One other thing that people want: social proof. When users see that their friends are doing something, they want to do it too. If 80 percent of people have purchased a certain upgrade, let the rest of your users know that—they’ll wonder why they haven’t.

Create scarcity
In games, this means things have a limited time—the special potion or weapon only has a life of a few minutes or a few hours. The same phenomenon can be implemented in non-gaming sites via coupons that quickly expire, or countdown timers on items so that once they reach zero, the item is no longer available.

A/B test and track the metrics
Game designers are constantly running side by side experiments on everything from the look and feel of their virtual coins to the optimum path for a user to make a purchase in an online store. You can do the same right down to the animated versus non-animated buy button. The key is to measure the results like there’s no tomorrow and track the resulting metrics.

Of course, there are many more ways to apply game mechanics to your service. Hopefully, this list will get you off to a great start.

David Feinleib is a Partner at Mohr Davidow Ventures. He invests in Internet-enabled companies. www.vcdave.com.

Illustration by Phil Couzens

The recent decision by Standard & Poor’s to downgrade Japan’s sovereign debt from AA to AA- has, once again, aimed a spotlight on the level of the country’s national debt. The downgrade is an early sign that markets are losing confidence in Japan’s fiscal policy and, as such, it is an issue of critical importance to Japan’s economic future.

Japan’s debt problem has its roots in the bursting of the real estate bubble in the early 1990s. Over the next two decades, the Japanese government engaged in a series of debt-financed stimulus measures aimed at promoting economic growth. While the measures were largely ineffective, national debt increased from about one third of GDP to twice GDP by 2009. This represents the highest level of national debt in the developed world.

The debt issue is compounded by the now famliar dilemma of a population that is both shrinking and aging. Japan’s current population is 126 million and this is projected to drop to 100 million by 2050, with the elderly accounting for 40 percent of the population. The issue seems set to trigger a pension crisis as the government struggles to fund its national health insurance and pension schemes. The problems will be compounded as the funds available to the government are further reduced by retirees who will start to cash in their government savings bonds.

In most other countries, there would be talk of impending (or even actual) economic collapse. However, Japan does enjoy certain advantages stemming from the nature of its current government debt. The debt is mainly domestic (effectively borrowed from its citizens) and Japan is also protected from default by virtue of the fact they control their own currency. European nations which are struggling with their own debt crisis are tied to the euro, but similar to the U.S., Japan could print money to alleviate some of its debt issues. In addition, Japanese citizens continue to maintain high savings rates. Instead of having to struggle with a multitude of concerns that spring from debt held by foreign countries, Japan is, to an extent, insulated.

In theory, Japan could look outward to foreign investors as a means of funding future deficits. However, finding foreign investors may be difficult as Japanese Yen 10-year Treasuries are currently yielding only about 1 percent. This is almost a third less than similar U.S. Treasury offerings. One option to attract foreign capital would of course be to raise interest rates. However, such a move would damage an already sluggish economy and could even cause a global ripple effect if the Japanese economy were to slow.

According to Jon Karlsson, a partner with Tokyo based venture capital firm Foreya Partners, “Reaching out to foreign investors could also pose problems for the U.S. since Japan is a major holder of U.S. debt, second only to China. Not only would Japan buy less U.S. debt but it could also become a competitor in selling bonds.”

The recent Standard & Poor’s downgrade is another reminder that fundamental reform is needed in Japan’s economy. Such reform needs to be far- reaching and occur in Japan’s political and economic institutions. If strong steps are not taken soon, sudden and painful adjustments will eventually be forced by markets.

Dean Page is CEO of Accounting Asia. He is qualified as both an attorney and as a CPA and was formerly a partner with Ernst & Young. Dean.Page@Accounting.Asia

Shinsuke Kikuchi is an associate at Foreya Partners where his work focuses on frontier markets. He is a qualified attorney and formerly worked with PwC in Tokyo. Shinsuke.Kikuchi@VentureCapital.Asia

Photo by Aspearing, used under the creative commons attribution license

The benefits of customer and agile development and minimum feature sets are continuous customer feedback, rapid iteration and little wasted code. But over time if developers aren’t careful, code written to find early customers can become unwieldy, difficult to maintain and incapable of scaling. Ironically, it becomes the antithesis of agile. And the magnitude of the problem increases exponentially with the success of the company. The logical solution? “Rearchitect and rewrite” the product. For a company in a rapidly changing market, that’s usually the beginning of the end.

It Seems Logical

I just had lunch with a friend who was the technical founder of his company and is now its chairman. He hired an operating exec as the CEO a few years ago. We caught up on how the company was doing (“Very well, thank you. After five years, the company is now at a $50M run rate”). But he wanted to talk about a problem that was on his mind. “As we’ve grown we’ve become less and less responsive to changing market and customer needs. While our revenue is looking good, we can be out of business in two years if we can’t keep up with our customer’s rapid shifts in platforms. Our CEO doesn’t have a technology background, but he’s frustrated he can’t get the new features and platforms he wants (Facebook, iPhone and Android, etc.) At the last board meeting our VP of engineering explained that the root of our problems was our code has accumulated a ton of ‘technical debt,’ it’s really ugly code, and it’s not the way we would have done it today. He told the board that the only way to deliver these changes is to rewrite our product.” My friend added, “It sounds logical to the CEO so he’s about to approve the project.”

Shooting Yourself in the Head

“Well, didn’t the board read him the Riot Act when they heard this?” I asked. “No,” my friend replied, sadly shaking his head, “The rest of the board said it sounded like a good idea.”

With a few more questions I learned that the code base, which had now grown large, still had vestiges of the original exploratory code written back in the early days when the company was in the discovery phase of Customer Development. Engineering designs made back then with the aim of figuring out the product were not the right designs for the company’s current task of expanding to new platforms.

I reminded my friend that I’ve never been an engineering manager so any advice I could give him was just from someone who had seen the movie before.

The Siren Song to CEOs who aren’t Technical

CEOs face the “rewrite” problem at least once in their tenure. If they’re an operating exec brought in to replace a founding technical CEO, then it looks like an easy decision—just listen to your engineering VP compare the schedule for a rewrite (short) against the schedule of adapting the old code to the new purpose (long). In reality this is a fool’s choice. The engineering team may know the difficulty and problems adapting the old code, but has no idea what difficulties and problems it will face writing a new code base.

A CEO who had lived through a debacle of a rewrite or understood the complexity of the code would know that with the original engineering team no longer there, the odds of making the old mistakes over again are high. Add to that introducing new mistakes that weren’t there the first time: Murphy’s Law says that unbridled optimism will likely turn the one-year rewrite into a multi-year project.

My observation was that the CEO and VP of engineering were confusing cause and effect. The customers aren’t asking for new code. They are asking for new features and platforms—now. Customers couldn’t care less whether it was delivered via spaghetti code, alien spacecraft or a completely new product. While the code rewrite is going on, competitors who aren’t enamored with architectural purity will be adding features, platforms, customers and market share. The difference between being able to add them now versus a year or more in the future might be the difference between growing revenue and going out of business.

Who Wants to Work on the Old Product?

Perhaps the most dangerous side-effect of embarking on a code rewrite is that the decision condemns the old code before a viable alternative exists. Who is going to want to work on the old code with all its problems when the engineering VP and CEO have declared the new code to be the future of the company? The old code is as good as dead the moment management introduces the word “rewrite.” As a consequence, the CEO has no fallback. If the engineering VP’s schedule ends up taking four years instead of one year, there is no way to make incremental progress on the new features during that time.

What We Have is a Failure of Imagination

I suggested that this looked like a failure of imagination in the VP of Engineering made worse by a CEO who’s never lived through a code rewrite and compounded by a board that also doesn’t get it and hasn’t challenged either of them for a creative solution.

My suggestion to my friend? Given how dynamic and competitive the market is, this move is a company-killer. The heuristic should be: Don’t rewrite the code base in businesses where time to market is critical and customer needs shift rapidly. Rewrites might make sense in markets where the competitive cycle time is long.

I suggested that he lay down on the tracks in front of this train at the board meeting. Force the CEO to articulate what features and platforms he needs by when, and what measures he has in place to manage schedule risk, figure out whether a completely different engineering approach was possible. (Perhaps refactor only the modules for the features that were needed now? Rewrite the new platforms on a different code-base? Start a separate skunk works team for the new platforms? etc.)

Lessons Learned

• Not all code rewrites are the same. When the market is stable and changes are infrequent, you may have time to rewrite.
• When markets/customers/competitors are shifting rapidly, you don’t get to declare a “time-out” because your code is ugly.
• This is when you need to understand
  1)What problem are you solving (hint: it’s not the code)? and 2) How do I creatively fix what’s needed?
• Making the wrong choice can crater your company.

This is worth a brawl at the board meeting.

Steve Blank is a veteran of Silicon Valley and serial entrepreneur, and teaches entrepreneurship at U.C. Berkeley Haas Business School, the joint Berkeley/Columbia MBA program, and at the Stanford University Graduate School of Engineering. The Japanese version of his latest book “The Four Steps to the Epiphany” can be found here, and you can read more of his business insights at: www.steveblank.com.

Illustration by Phil Couzens

I spent two weeks of December in Chile as a guest of Professor Cristóbal García, Director of EmprendeUC at the Catholic University of Chile, which just signed up a 3-year collaboration partnership with Stanford’s Technology Ventures Program. I did a keynote on innovation hubs at the newly created DoFuture program, spoke at Santiago’s Startup Weekend on Customer and Agile Development, and at a conference in Patagonia supported by the Ministry of Economy’s Innovation Division.

I got smarter about the world outside of Silicon Valley, met some wonderful people who made me feel part of their family and shared some thoughts about entrepreneurship.

This editorial is a personal view of what I saw in what I call “Chilecon Valley,” in no way does it represent the views of the fine institutions I teach at. Read this with all the usual caveats: visiting a place for a few weeks doesn’t make you an expert (heck I’ve lived in Silicon Valley for over 30 years and I’m still surprised), I’m not an economist, and the odds are I misunderstood or misinterpreted what I saw or just didn’t see enough.

The Chilean Experiment

Chile has decided that it wants to be an innovation hub in South America. In my short time in Chile, I spent time meeting with: Chilean entrepreneurs as part of Santiago’s Startup Weekend as well as EmprendeUC-DUOC New Ventures Contest Awards ceremony, the Innovation Division of the Ministry of Economy, the Chilean Economic Development Agency (CORFO) which sponsored Start-Up Chile and Do Future in Patagonia as well as Fundacion Chile, the main R&D agency and the National Innovation Council, universities including the business, design and engineering schools in the Catholic University of Chile who are hard at work teaching and encouraging their students to think big and to start companies and independent non profits such as the Innovation Forum, which encourage entrepreneurship and innovation in education.

The Good News

Entrepreneurship and innovation is being talked about continually in Chile. This isn’t some small-time effort. The country is dead serious in all levels of government and universities about making this happen. They’ve been thinking hard and smart about the lessons to be learned not only from Silicon Valley, but with only 16 million people, they are also looking for lessons from other small innovation clusters such as Israel, Singapore and Finland. These countries are great models of countries too small to sustain startups of scale on just domestic consumption yet have managed to create innovation with a global reach.

What Needs Work

As an outsider I was incredibly impressed with how far Chile has progressed in making the country an innovation hub. However I had questions about the challenges that still needed to be addressed.

Venture Capital

Perhaps it was just who I was meeting, but for a country so focused on innovation and startups the lack of venture capitalists was noticeable. Given the interesting things going on in the engineering labs I visited and the startups I met, one would have thought the place would have been crawling with VCs fighting over deals. Instead it felt like the government—through CORFO—was doing most of the risk capital investing. Given that great VCs are much, much more than just a bag of money, this means that startups lack experienced board members with practical experience. There seemed to be very few who knew how to coach entrepreneurs and to build companies. Finally, it wasn’t clear if everyone was on the same page; that for a Chilean startup to scale it was going to have to reach past Chile and go global. There seemed to be few tools, techniques and strategies to do so.

A sign of progress will be when some of the CORFO guys leave the government and start their own VC firms.

Corporate Connections

Entrepreneurship in Chile seems to be disconnected from the country’s largest industries and core resources. The clearest example is the country’s copper mining industry, which contributes 20 percent of the Chilean Gross Domestic Product (Chile produces 35 percent of the world’s mined copper). The largest company, the state-run Chilean National Copper Corp (CODELCO), has $23 billion in sales. Yet the copper companies import nearly 100 percent of the advanced technology they use. Interestingly, CODELCO is required to contribute 10 percent of its revenues to the armed forces, but the mining industry seems to have little or no connection with innovation and entrepreneurship efforts in universities and startups. (Perhaps it’s because the Ministry responsible for Mining is separate from the Ministry responsible for the Economy and Innovation).

I suggested that Chile’s mining industry could contribute to building innovation leadership by funding a multi-tiered initiative in the country’s leading universities: professional management training (obvious and immediate payback), applied engineering (top 10 annual challenges from the mining companies), and basic research (copper based materials science, robotics, materials handling).

Small Business vs. Scalable Startup vs. Corporate Entrepreneurship

There’s confusion in both the government and universities about the difference between small business entrepreneurship (startups designed to be family businesses), scalable startup entrepreneurship (startups designed from day one to scale big inside Chile and then expand globally), and corporate entrepreneurship.

I suggested that they think about educating (and funding) each class of entrepreneurs differently and realize different regions of Chile have different needs. In Santiago, the concept that startups are not smaller versions of large companies and that traditional business school classes and methods don’t apply, is starting to take hold and will help shape how they educate entrepreneurs. In contrast, over lunch with the governor of Ultima Esperanza (the “Last Hope” province on the southern tip of Chile) it became clear that there’s a pressing need for training and education in small business entrepreneurship, dramatically different then the scalable startup education wanted in Santiago. These three types of entrepreneurship models need to be explicitly recognized, encouraged and managed.

Additionally, low GDP growth forecasts and high corporate tax rates do not bode well for Japan’s continued status as a global financial hub. Multinational banks are focused on investments in emerging markets where estimated GDP growth (expected to exceed eight percent in China and India) are substantially higher than estimated Japanese GDP growth (optimistically forecast at two percent). At the same time, the corporate tax rates of Asia’s other two financial service hubs, Singapore (approximately 18 percent) and Hong Kong (approximately 16.5 percent), are markedly lower than the Japanese effective corporate tax rate (approximately 42 percent).

Are there new policies or changes to old policy that could reduce Japan’s disadvantage in competing for new banking sector investment? Senior Vice Minister of Finance Fumihiko Igarashi, who is steering debate at the government’s Tax Commission, noted recently that Prime Minister Naoto Kan has given instructions to his team to evaluate ways to reduce the effective corporate tax rate. Many believe this would spur private sector economic growth.

At another level, the Ministry of Finance could address inconsistent positions on the risk transfers, returns, and capital mobility held by financial service regulators and tax examiners. This inconsistency is on the minds of CFOs, regulatory reporting or compliance officers, and tax directors at banks involved in cross border businesses in Japan.

To illustrate, the capital requirements established by the Financial Services Agency (FSA) take into consideration certain types of market risk transfers, recognizing that a bank affiliate to which the market risk is transferred has the capital and legal obligation to assume such risk. This market risk transfer typically involves a Japanese affiliate of a bank entering into a trade (for example, selling an over-the-counter Japanese yen/U.S. dollar option) with a Japanese customer and entering into a mirror trade (continuing with the same example, buying a similar over-the-counter Japanese yen/U.S. dollar option) with an affiliate in another financial hub.

The FSA’s treatment of these types of market risk transfers is broadly in line with the treatment by financial service regulators in the U.S., UK, Hong Kong, and Singapore. These types of mirror trades and the centralization of market risk are at the core of Japanese and foreign banks’ cross border business models. The concentration of capital and global market risk in one affiliate and centralizing operational and risk management in the same affiliate are two major strategic goals of many multinational banks.

Where the FSA typically associates the risk and return on capital with the affiliate that has the necessary capital and the legal obligation to bear the market risk, the National Tax Agency (NTA) often associates risk and return on capital with the entity in which key business decisions are made. The result has been a number of very large, publicly disclosed tax disputes involving the NTA and the Internal Revenue Service or Her Majesty’s Revenue and Customs.

Against a background of tepid economic growth and a relatively high corporate tax rate, this conflicting treatment puts Japan at even more of a disadvantage in attracting new banking sector investment. Is there an opportunity for the NTA to establish a new position for the post financial crisis world?

There is such an opportunity and it involves listening to Japanese banks. Nomura Holdings is slowly and successfully integrating Lehman Brothers’ European and Asian franchises. The Bank of Tokyo-Mitsubishi UFJ has a strategic capital and business alliance with Morgan Stanley. Daiwa Capital Markets has acquired the global convertible bond and Asian equity derivatives businesses of Belgian financial services firm, KBC Group. Mizuho and Sumitomo Mitsui Banking Corporation are equally focused on investments in Hong Kong, Singapore, London, and New York operations.

This renewed focus on global expansion by Japanese banks makes consistency in how the FSA and NTA deal with market risk transfers a critically important issue for Japanese banks, where it may have been of marginal importance just a few years ago. Japanese banks’ need for clarity on the issue will hopefully contribute to a reconsideration of the pre-crisis NTA position on risk transfers, returns, and capital that may now be detrimental to Japan’s tax base.

In rethinking the issue, stakeholders and observers can only hope that the NTA’s views will gravitate towards the FSA’s for the sake of cross border banking in Japan and of Tokyo’s role as a global financial hub.

Samuel Gordon is the Director of International Tax Services/Financial Services Transfer Pricing at Ernst & Young ShinNihon Tax.
samuel.gordon@jp.ey.com

Illustration by Phil Couzens

Seth Sulkin is the President and CEO of Pacifica Malls K.K., a Tokyo-based real estate asset manager specializing in commercial properties.

Recent comments by Prime Minister Naoto Kan made me wonder if he is seeking to emulate the fabled “Emperor with no clothes” or to play the fiddle like Emperor Nero while Tokyo is effectively burning.

Both Kan and Foreign Minister Seiji Maehara, a future candidate for prime minister, recently stated that they would like to consider restrictions on foreign investment in Japanese real estate, apparently concerned by the increase in purchases by Chinese and Koreans.

While Japan’s economy continues to slide backwards, investments by ethnic Chinese companies from around Asia have been among the few bright spots this year. Transparency and political stability are two of the most important factors in their considerations, so if the Japanese government intends to change that policy, a key source of demand for real estate will disappear.

Not only are Japanese manufacturers and retailers taking precious capital elsewhere, but sluggish domestic loan demand and a lack of higher yielding investment opportunities at home has prompted Mitsubishi UFJ Financial Group, Japan’s largest bank, to buy a portfolio of European infrastructure loans from the Royal Bank of Scotland.

With Japanese interest rates already near zero, the Bank of Japan has been forced to take quantitative easing measures to try and spur the economy, a move that has had little effect so far. I think it is time for more radical initiatives.

To encourage consumption and investment by both individuals and companies, I would reverse the traditional business model of savings and lending. Banks should start charging interest on money in ordinary savings accounts and should pay interest to those who borrow money.

Because of deflation and low consumer confidence, Japanese have been hoarding money in bank and postal savings accounts, partially because they expect prices to be lower in the future and partially because they are concerned that their salaries or bonuses may be cut, or that they may lose their job altogether. Charging interest in savings could be a powerful incentive to put the money to better use, either for consumption or investment in stocks, real estate or small businesses. There are precedents for this type of policy, such as Swiss private banks that charge for savings or the recent U.S. Government sale of “TIPS,” or inflation-linked bonds that were sold at an initial negative yield with the prospect of paying positive interest if inflation returns.

Paying borrowers to make loans is a radical concept, and getting it right without re-creating the bubble of the 1980s would take some fine-tuning. But if a bank offered to pay you to borrow, who could possibly resist? The real question is: What you would do with the money? In the 1980s, Japanese loans were so plentiful and easy to obtain that individuals and companies invested indiscriminately in land, stocks, golf courses and companies in Japan and around the world. Individuals and companies with no track record or business plan could borrow virtually unlimited amounts without a worry about repayment.

But in the two years prior to the Lehman Shock, when Japanese real estate prices surged, banks were far more disciplined than in the bubble days of the 1980s. While real estate prices have fallen 30-50 percent from the peak in late 2008, many of the properties serving as collateral for loans stuck on the balance sheets of major Japanese banks still have enough cash flow to cover debt service, unlike 20 years ago when people merely believed in the “land myth” (tochi shinwa), and were flipping vacant parcels for huge profits. The fact that debt service is being covered has allowed Japanese banks to pretend their balance sheets are relatively pristine, unlike their counterparts in the U.S. and Europe.

In the absence of any coherent Japanese policy to cope with the low birth rate and no consideration of large-scale immigration, unusual steps to spur consumption and investment are the only hope to escape the vicious circle of deflation.

How? With an out-of-this-world business plan. First, the company bought a fleet of 15 rockets from Russia, the U.S. and China. Next, it built 72 satellites on an assembly line and used the rockets to launch them into orbit 500 miles above the earth. It was a technical tour de force. But nine months after the first call was made in 1998, Iridium was in Chapter 11 bankruptcy. It crashed back down to earth as one of the largest startup failures on record. What went wrong?

When Iridium was first conceived inside Motorola in 1987, worldwide cell phone coverage was sparse, calls were unreliable and per minute costs were expensive. Cell phone handsets were the size of a lunch box and cost thousands of dollars. Iridium’s 1990 business plan had assumptions about potential customers, their problems and the product needed to solve that problem. All were predicated on the state of the mobile phone industry in 1990. They made other assumptions about the type of sales channels, partnerships and revenue models they would need. And they rolled all of this up into a set of financial forecasts with a “size of market” forecast from brand name management consulting firms that said they’d have 42 million customers by 2002. Iridium looked like it would be printing money when it got its satellites into space.

But by the time Iridium launched, there were far fewer places on the planet where cell phone service was unavailable and traditional cell phone companies now had coverage in the most valuable parts of the world. Prices for local and international cell service declined dramatically.

Worse, Iridium’s cell phone couldn’t make calls from cars, offices or other buildings since phones had to be used outdoors with a line-of-sight connection to the satellites. But the nail in the coffin was price. Iridium’s calls cost $7 per minute–plus users needed to pay $3,000 for the handset. In the 11 years since they had been at work, Iridium’s potential market had shrunk nearly every day. But Iridium’s business model assumptions were fixed like it was still 1990. Thus they were dead on arrival as a mass market cell phone service the very day they went live.

Their mistakes? First, in 1990 the company thought it knew the customer problem to solve, and therefore thought it knew what solution to build. Second, since it supposedly knew the solution, it went into an 8-year Waterfall engineering development process. Waterfall development is a sequential way to develop a product (requirements, design, implementation, verification–ship). Waterfall makes lots of sense in a market in which the customer problem is known and all customer needs and product features can be specified up front. But it is death in a rapidly changing business. Waterfall development shut off Iridium’s ability to listen, learn, test and adapt to changing customer needs and a rapidly changing market place.

Third, its business plan had no notion of learning and discovery and completely broke down when confronted by the realities of the changing mobile phone business. A Customer Discovery and Validation process that was ongoing with product development could have provided early warning that its market was not developing in Iridium’s favor. Instead management was more comfortable executing to the plan.

All this, plus there was the corporate hubris of having raised billions of dollars, with no adult on either Iridum’s or Motorola’s board there to ask “does this still make sense?” resulted in a disaster. Instead of the 42 million customers called for in its business plan, Iridium had 30,000 subscribers at its peak. The company burned its way through more than $5.2 billion because it fell in love with technology, succumbed to Waterfall product development and never bothered to get out of the building, get their heads out of their spreadsheets and ask, “What do customers want today?”

In 2000, new investors bought Iridium’s satellites and network for $25 million, or one half of one percent of the invested capital. Today, the successor company serves some 300,000 customers in a series of niche markets including American soldiers calling home from war zones, oil rig managers, and big game hunters. Customer Development, Business Model Design and Agile Development could have changed the outcome.

Steve Blank is a veteran of Silicon Valley and serial entrepreneur, and teaches entrepreneurship at U.C. Berkeley Haas Business School, the joint Berkeley/Columbia MBA program, and at the Stanford University Graduate School of Engineering. The Japanese version of his latest book “The Four Steps to the Epiphany” can be found here, and you can read more of his business insights at: www.steveblank.com.

Illustration by Phil Couzens

Will Japan’s domestic agriculture industry kill Japan’s latest Free Trade Agreement opportunity? Japan’s business lobby wants Japan to move swiftly to join the Trans-Pacific Partnership (TPP) to support the country’s manufacturing sector which has been under pressure. However, their efforts face stiff opposition from Japan’s politically strong domestic agriculture industry.

If brought into effect, the TPP would eliminate trade tariffs between the member countries which seem likely to include Chile, New Zealand, Singapore, Brunei, Vietnam, Australia, and the U.S.

More open trade is a cornerstone of current Japanese Prime Minister, Naoto Kan’s, policy platform. However, the debate surrounding the TPP is indicative of the problems which seem to plague any attempt Japan makes to enter Free Trade Agreements. As Kan prepared to meet with TPP leaders at the APEC summit in November, he was under intense pressure from members of his own party. For a country with limited agricultural output, Japan has a disproportionately powerful Ministry of Agriculture. Attempting to counter the agriculture lobby’s opposition to the TPP is the business lobby which sees entry into the TPP as a move that would benefit the flagging manufacturing sector. Manufacturing in Japan is being devastated by a strong yen and movement by Japan’s neighbors to further open their economies and gain economic advantage.

Currently, Japan satisfies around 60 percent of its food requirements via imports. Opponents of Japan’s inclusion in a Free Trade Agreement believe that lowering the current protectionist barriers could destroy what remains of the industry. In addition, the Ministry of Agriculture argues that the TPP would reduce Japan’s GDP by lowering the domestic consumption of local produce—a difficult argument to fathom given the relatively small contribution to GDP made by Japanese agriculture. In spite of this, vested interests have created a powerful agriculture lobby which many see as diverting resources from the more competitive parts of the economy.

The current global economic downturn has seen Japanese exports stall, the Japanese yen rise to record heights, and manufacturers forced to create value-added incentives for foreign buyers to purchase Japanese goods. Concurrently, Japan’s neighbor South Korea has signed a Free Trade Agreement with the European Union. South Korea expects this agreement to provide the country with a substantial competitive advantage in the export of cars and consumer electronics to Europe. According to Chris Alderson of Japan Touchstone, a firm which assists Japanese export companies, “If Japan loses the advantage it has developed over the past 40 years, it may be impossible to regain. Japan simply cannot stand idle while its neighbors make moves to improve their trading positions. The TPP would eliminate barriers with markets such as the U.S. and Australia, and would benefit Japan in its efforts to revitalize the economy.”

It seems vital that Japan and its new prime minister not allow this opportunity to pass. It represents an opportunity for Japan to enhance its competitiveness in the vital manufacturing sector. The TPP may also represent an opportunity to push much needed reform in the agriculture sector. Failure to ratify the TPP will be a further sign that any effort to reform will suffer at the hands of the agriculture lobby, and that an economy which could reap enormous benefit from a more open economy will continue to stagnate.

Dean Page is CEO of Accounting Asia. He is qualified as both an attorney and as a CPA and was formerly a partner with Ernst & Young. Dean.Page@Accounting.Asia

Shinsuke Kikuchi is an associate at Foreya Partners where his work focuses on frontier markets. He is a qualified attorney and formerly worked with PwC in Tokyo. Shinsuke.Kikuchi@VentureCapital.Asia

First-mover Advantage – Great Bad Idea

The phrase “first-mover advantage” was first popularized in a 1988 paper by a Stanford Business School professor, David Montgomery, and his co-author, Marvin Lieberman.

This one phrase became the theoretical underpinning of the out-of-control spending of startups during the dot-com bubble. Over time, the idea that winners in new markets are the ones who have been the first (not just early) entrants into their categories became unchallenged conventional wisdom in Silicon Valley. The only problem is that it’s simply not true.

The irony is that in a retrospective paper ten years later (1998), the authors backed off from their claims. By then it was too late. Using this idea to differentiate themselves as the hot new Silicon Valley venture capitalists, some of his former business school students made this phrase their rallying cry. Soon every other venture capitalist was using the phrase to justify the reckless “get big fast” strategies of dot-com startups during the Internet Bubble.

Fast Followers – a Better Idea

In fact, a 1993 paper by Peter N. Golder and Gerard J. Tellis had a much more accurate description of what happens to startup companies entering new markets. In their analysis, Golder and Tellis found that almost half of the market pioneers (first-movers) in their sample of 500 brands in 50 product categories failed. Even worse, the survivors’ mean market share was lower than found in other studies. Further, their study shows early market leaders (fast followers) have much greater long-term success; those in their sample entered the market an average of thirteen years later than the pioneers. What’s directly relevant from their work is a hierarchy showing what being first actually means for startups entering new or resegmented markets:

The Race to Fail First

What this means is that first-mover advantage (in the sense of literally trying to be the first one on a shelf or with a press release) is not real, and the race to be the first company into a new market can be destructive. Therefore, startups whose mantra is “we have to be first to market” usually lose. What startups lose sight of is there are very few cases where a second, third, or even tenth entrant cannot become a profitable or even dominant player (the rules are different in the life-sciences arena).

Ford vs. GM, Overture vs. Google

For example, Ford was the first successfully mass produced car in the United States. In 1921, Ford sold 900,000 Model Ts for a 60 percent market share compared to General Motors’ 61,000 Chevys, a 6 percent market share. Over the next ten years, while Ford focused on cost reductions, General Motors built a diverse and differentiated product line. By 1931, GM had 31 percent of the market to Ford’s 28 percent, a lead it has never relinquished. Just to make the point that markets are never static, Toyota, a company that sold its first car designed for the U.S. market in 1964, is poised to surpass GM as the leader in the U.S. market. The issue is not being first to market, but understanding the type of market your company is going to enter.

If the car business is too removed from high tech as an example, how about the story of Overture? In 1998 Goto.com, a small startup (later Overture, now part of Yahoo!), created the pay-per-click search engine and advertising system and demonstrated it at the TED conference. It was not until October 2000 that Google offered its version of a pay-per-click advertising system (AdWords) allowing advertisers to create text ads for placement on the Google search engine. Google is now a $25 billion dollar company with most of its revenue from AdWords. Overture was acquired by Yahoo for $1.6 billion.

Implicit Customer Discovery and Validation in Fast Followers

Why do fast followers win more often? It’s pretty simple. First movers tend to launch without really fully understanding customer problems or the product features that solve those problems. They guess at their business model and then do premature, loud, and aggressive public relations hype and early company launches that quickly burn through their cash. This is a great strategy if there’s a bubble occurring in your market or you are going to bet it all on flipping your company for a sale. Otherwise the jury is in. There’s no advantage.

Astute fast followers recognize that part of Customer Discovery is learning from the first-mover by looking at the arrows in their backs. Then avoiding them.

Steve Blank is a veteran of Silicon Valley and serial entrepreneur, and teaches entrepreneurship at U.C. Berkeley Haas Business School, the joint Berkeley/Columbia MBA program, and at the Stanford University Graduate School of Engineering. The Japanese version of his latest book “The Four Steps to the Epiphany” can be found here, and you can read more of his business insights at: www.steveblank.com.

Jesper Koll is a Managing Director and Head of Research at JP Morgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.

All over the world there are thousands of analysts trying to predict what will happen to financial markets on the basis of their forecasts for the economy. In fact, it may be the other way around: what happens in financial markets dictates what will happen to the economy. Let’s have a closer look at these dynamics so that, with a little luck, the accuracy of our economic forecasts for the future may begin to improve.

The empirical evidence is overwhelmingly stacked against analysts and in favor of markets: where consensus economists have predicted eight of the past two recessions—I guess we tend to be an overly pessimistic bunch—financial markets almost always get it spot-on. No, it is not the stock market that predicts the future of the economy. It is fixed income and bond markets.

Bonds are for Gentlemen

Specifically, if you take the slope of the yield curve—the difference between short-term interest rates and long-term bond yields—this “spread” has an almost perfect track record of forecasting the economy 6-12 months in advance. The steeper the yield curve—the bigger the spread between short-term interest rates and the yield on a 10-year bond—the greater the chances of an economic recovery. When the curve starts to “flatten,” the risks of a slowdown begin to rise.

Most importantly, an “inverted yield curve” (long-term interest rates falling below short-term rates) is a dead-certain signal that recession will follow. There is not a single instance in which an inverted yield-curve was not followed by a recession. And there has not been a single economic recovery that was not preceded by a sharp steepening of the curve via bond yields rising relative to short-term rates. As they say in London: bonds are for gentlemen.

Ignore at Your Peril

Illustration by Phil Couzens

Of course, analysts and policy makers at the highest level have time and again tried to argue against the predictive power of markets. Most recently, when the U.S. yield curve began to invert in the middle of 2006, now Federal Reserve Chairman Bernanke argued that this was not a harbinger of a coming recession, but that a “global savings glut” had sparked a wave of foreign buying of U.S. treasuries. Therefore, things were different this time and it was supposedly safe to ignore the “voice of the market.”

True, there was accelerated buying of U.S. treasuries by China and, to some extent, Japan in 2006 and 2007. But who did the buying that led to the curve’s inversion turned out to be an irrelevant distraction for those of us interested in forecasting growth. Right on cue, the U.S. economy fell into recession by the end of 2007, with the usual lag between when the curve inverted and when the recession started almost perfectly intact. Make no mistake: the bond market is better at forecasting the economy than the smartest brains out there.

Why it Works

Why is it that the yield curve is such a powerful predictor of the future? Because the spread between short-rates and long rates basically dictates the profit margins of banks: the cost of funds are basically the deposit rate paid to customers while those deposits are invested in longer-term loans and mortgages to the private sector, or bonds purchased from the government. Simply put: the wider the gap between short-rates and long-rates, the bigger the profitability of the banks. And the bigger the profitability, the more eager they are to lend, which in turn makes it easier for private entrepreneurs or households to borrow. The rise in leverage creates growth as people build new homes, and companies invest in new factories and employ more people.

Conversely, when the curve flattens, the cycle goes into reverse: the profitability of banks drops, they become less eager to lend, and credit begins to slow down. An inverted curve is the extreme case where banks lose money on their basic business, so the contraction cycle goes into overdrive.

Photo by Christian Haugen, used under the Creative Commons Attribution license

Hardly a day goes by without further news of economic gloom emanating from Japan. The current focus is the strong yen which is causing difficulty for Japanese exporters. Longer term, the country has an aging population and faces ever increasing competition from neighbors such as Korea and China. Japan has been locked in a deflationary spiral for nearly two decades. Yet there seems to be no coherent plan to fix any of these problems.

Repairing the Japanese economy is not merely a matter of economics. To those of us fortunate enough to have been visiting and doing business in Japan for many years, it is clear that the change is also in the Japanese national psyche. Speak to any taxi driver, small business owner, or new graduate looking for a job and you will sense the pessimism about the future that now permeates the country.

There are also issues that relate directly to the spirit of the country’s workforce. Japan is a country full of phenomenal talent representing a wide spectrum of disciplines from engineering to the arts. However, this talent will remain mired in the logjam of an unfriendly job market and eventually lost as a source of new corporate energy unless bold, easily understood steps are taken that will signal to ordinary Japanese that change is at hand.

Japan needs to more aggressively support the profitability of existing businesses, encourage the formation of new ones, and create an environment that serves to inspire more foreign businesses to choose Japan as a location for regional headquarters and a base of operations for vital R&D.

Regional neighbors such as Singapore, Malaysia, Korea, and Hong Kong have put incentives in place for businesses that both energize the economy and encourage entrepreneurship.

Make it easier to incorporate a company: There has been some change on this front over the past couple of years, however it is still an unnecessarily complicated and time consuming process. In many countries the incorporation procedure can be completed online in less than a day. Does Japan’s current system, where incorporation typically takes several weeks, really add any value?

Clear and easily understood incentives need to be put in place focused on any new venture’s critical first years of existence. For example, during its first three years of life, a new company in Singapore pays an effective tax rate of around 9 percent on its first 300,000 Singapore dollars of income (approximately 20 million yen).

To encourage existing businesses to remain and grow in Japan, the overall corporate tax rate needs to be reduced. Currently a company doing business in Japan can expect to pay corporate tax of approximately 42 percent. Interestingly, this is the same rate a company in Singapore paid prior to 1986. The current corporate tax rate in Singapore is 17 percent.

In addition to incentives aimed at new businesses in general, Japan needs to do more to encourage certain types of business to establish their headquarters here. Many countries, Singapore and Malaysia amongst them, have clear incentives aimed at encouraging industries identified as being in the national interest. This includes the financial sector, e-commerce, and Islamic Finance. Typically the incentives involve a reduced rate of tax for five to ten years in exchange for the company meeting a certain level of revenue and employing a set number of key personnel.

If strategies such as these were introduced, it is reasonable to believe that Japan would see both a boom in local entrepreneurship and a significant new influx of foreign investment. More importantly, such bold initiatives may also help the country overcome two decades of pessimism.

Dean Page is CEO of Accounting Asia. He is qualified as both an attorney and as a CPA and was formerly a partner with Ernst & Young. Dean.Page@Accounting.Asia

Asuka Noda is an Associate at Foreya Partners, a venture capital and private equity firm with offices in Tokyo and Singapore. Asuka.Noda@VentureCapital.Asia ]]> http://accjjournal.com/looking-for-the-bright-side/feed/ 0 http://accjjournal.com/dynamic-change/ http://accjjournal.com/dynamic-change/#comments Thu, 14 Oct 2010 15:11:33 +0000 ACCJ Journal http://accjjournal.com/?p=2616 Although it is difficult to obtain exact figures, Japan’s accounting profession is going through what might politely be termed a “period of great difficulty.” According to Naoko Sumida, a partner at mid-size accounting firm JAX, three years ago it was nearly impossible to recruit an experienced, English speaking CPA. However, since late last year, JAX has been receiving several inquiries a week from qualified applicants, many with good English skills and experience at the Big 4. The situation has been confirmed by leading recruiters who feel that the current supply of CPAs far outstrips demand. In addition, the strong yen combined with reduced levels of foreign direct investment (FDI) is placing unprecedented downward pressure on fees, which has lead to the shedding of jobs and reduced compensation for those who remain. Structurally, the accounting profession in Japan is fragmented. Even the local operations of the Big 4 (PricewaterhouseCoopers, KPMG, Ernst & Young, and Deloitte) are small when compared to their counterparts in the U.S. and Europe.

Illustration by Phil Couzens

Part of the problem lies in the role that the accounting profession has defined for itself. Japanese companies have traditionally handled accounting and finance functions in-house. While the day-to-day skill of these internal advisers is unquestionable, by relying so heavily on in-house expertise, Japanese companies miss out on the broader perspective of external accounting firms. According to Paul Previtera, a tax attorney and lecturer at the Japan campus of Temple University’s law school, “In the large accounting firms it is common for key relationships with Japanese clients to be in the U.S. rather than in Japan.” This suggests that accounting firms need to be more effective at convincing Japanese clients of their experience and the value of their services.

Japan might consider looking to the steps being taken by one its largest and one of its smallest neighbors–China and Singapore. China has a well known ambition of developing local firms that will be able to compete both domestically and internationally with the Big 4. The State Council of China has declared its intent to develop 10 large, and 200 medium-sized home-grown firms. It has taken steps toward achieving this by encouraging the consolidation of smaller firms, and also by taking serious steps to raise standards.

The result is that, based on revenue, the strongest of these local Chinese firms now rivals the lower ranked of the Big 4 in the Chinese market. It seems only a matter of time until Chinese firms dominate their local market and start to offer their services globally.

Another interesting example is Singapore, which recently announced plans to become a regional accountancy hub. Earlier this year the country enacted their Council for Development of Accountancy Sector’s (CDAS) plan to double the size of its accountancy sector. The CDAS made a total of ten recommendations to stimulate the sector’s growth. These recommendations include a post-degree accounting education program, an international CFO training program, and specialization training in key areas such as business valuation, assurance, and risk analysis.

Programs such as those implemented by China and Singapore have implications far beyond simply creating jobs for the professionals involved. Japanese CPAs have a vital role in both advising Japanese companies on how to globalize and facilitate inward FDI. They give advice on foreign statutory requirements, help companies to take advantage of incentives, and provide the hard analysis in value-adding deals. In addition, by training the future CFOs of Japan, business relationships can be created that will broadly assist the Japanese economy for decades to come.

Dean Page is CEO of Accounting Asia. He is qualified as both an attorney and as a CPA and was formerly a partner with Ernst & Young. Dean.Page@Accounting.Asia

Jerrad Howard is an associate at Foreya Partners. Jerrad.Howard@VentureCapital.Asia

Jesper Koll is a Managing Director and Head of Research at JP Morgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.

Strong, stronger, strongest–this is simply the best way to describe the performance of the Japanese yen. New records of yen appreciation were set during the summer break, and, so far this year, Japan’s currency has been competing with gold for the honor of being the best asset to own. Wonderful paradox–while most economists are happy to predict the inevitable structural decline of Japan, and most asset allocators are loathe to buy Japanese bonds or stocks. Yet Japan’s currency keeps on getting stronger and stronger, outperforming the dollar, the euro, the won, and all its other competitors.

Forecasting currencies is never easy. The yen is particularly tricky, and I am reminded of an old joke: Three men arrive in heaven. So God asks the first one: “What’s your IQ?” The man replies: “148.” “Very good,” says God, “I look forward to discussing the meaning of life with you.” He turns to the second man: “What’s your IQ?” “118.” “Excellent,” says God, “We’ll have fun arguing about politics and sport. So, what about your IQ?” “87,” the third man replies. So God’s eyes light up, he walks over to him, slaps his arm around his shoulders and say’s, “So glad you came–finally someone who can explain the yen exchange rate to me…”

For economists, it’s all very puzzling indeed. A first principle is that a strong economy should be reflected in a strong currency. Does that explain yen strength? Hardly. Japan has slipped, both in absolute and relative performance against almost all global competitors. Against America in particular: An average growth rate of just above 1 percent in Japan compares to average rates of almost 3 percent in America over the past decade. Yet during that decade, the yen has risen by more than 20 percent. So much for replying on first principles.

A second approach is to look at interest rate differentials. Here, Japanese short-term rates have been close to zero for almost 20 years, while U.S. rates–until the Lehman shock–were at least 2 percent or 3 percent above that. Yet the yen kept on strengthening, despite that fact that you could enjoy “positive carry,” and could earn a higher interest rate by holding dollars rather than yen. Again, economists are baffled.

Could it be that something is wrong with the analysis? Yes, there is, and it has potentially very profound implications for Japan. Namely, we should never look at “nominal” variables, but we must look at “real” ones. It is not enough to look at 2-3 percent higher rates in America compared to close to zero rates in Japan. In fact, U.S. inflation over the past decade has been running at about 2-2.5 percent, so the real value of your investment in America only went up by about 0.5 percent. In contrast, Japan has been running with outright deflation, averaging about 1-1.5 percent. So the real value of your yen investment has grown by about 1-1.5 percent. That’s higher than the half-a-percent you earned in the U.S. So there you have it, in “real” terms, yen interest rates are very high, and that’s why the yen has continued to strengthen.

Japan does have a very high tolerance for deflation. This summer, for example, the U.S. central bank (the Federal Reserve), started to become very concerned about a possible slowdown in U.S. growth. Fed-chief Ben Bernanke revised down the growth outlook, and said that forecasting the future had become more difficult and that he is prepared to provide more stimulus if necessary. Contrast that to the Bank of Japan: They revised up their forecasts and suggested current policy should be sufficient to support and sustain growth. Clearspeak: The Fed stands ready to reduce real interest rates, while the BoJ comes across as complacent and willing to tolerate a rise in real rates. Ergo, the yen climbed to new highs during the summer.

Outside capital is essential to Japan’s future prosperity, and the key to attracting such investment is good corporate governance. Modern investors require greater transparency and stronger shareholder protection before sinking large sums of money into companies. Independent directors are an important part of the solution, as they are the watchdogs of the corporate world and the guardians of shareholder interests.

Foreign investors see an inherent conflict of interest in combining the roles of manager and director into a single position. Independent directors can prevent boards from becoming glorified rubber stamps by asking difficult questions and challenging management decisions. The resulting system of checks and balances strengthens corporate governance, which is critical to conducting business in today’s global economy.

Shareholders’ interests are best served by adding an objective perspective to the board of directors. Management may possess a greater understanding of the business, but the disinterested view of outside directors complements the experience of the executive team. Whether or not Japanese corporations and regulatory bodies value this degree of corporate governance, foreign investors certainly do.

Illustration by Phil Couzens

As evidenced by the 2002 Sarbanes-Oxley Act (SOX), the United States has recognized the need for an independent voice in the boardroom. American corporations and regulatory bodies understand that the transparency and accountability needed to attract investors can only be realized through a commitment to improved corporate governance.

Given the concerns over unbalanced and self-interested boards, the recent enactment of similar legislation in Japan is an encouraging sign. Japan’s version of the Sarbanes-Oxley, J-SOX, is a step in the right direction. Despite this development, Japan still has no real concept of independent directors; in fact, Japanese corporations have largely rejected the notion.

Although Japan has implemented J-SOX, it has yet to establish a national code of best practices for corporate governance. This additional measure would send a message to the world that Japan is truly committed to changing its corporate culture.

“Effective boards represent shareholders, not just employees, and thus serve to provide both counseling and oversight of important management decisions,” according to Jon Karlsson, President of the Japan Association of Independent Directors (JAID), a non-profit organization devoted to improving corporate governance in Japan. “In order to survive in an increasingly global marketplace, Japanese companies must embrace the trend toward stronger corporate governance.”

If Japan wishes to generate foreign investment to pull itself out of the current recession, a shift in corporate culture is necessary. Japanese corporations traditionally foster an employee-centric culture designed to employ as many people as possible for as long as possible. Foreign investors, however, prefer a shareholder-centric model focused on profit maximization. Independent directors are fundamental to implementing the cultural shift from employee-focused to shareholder-focused. This shift is critical if Japan is to expand beyond its current financial island.

Dean Page is CEO of Accounting Asia. He is qualified as both an attorney and as a CPA and was formerly a partner with Ernst & Young. Dean.Page@Accounting.Asia

Adam Bair is a student at the University of Miami School of Law

Illustration by Shane Busato

Recently, there has been rising concern amongst Japanese about Japan’s international business presence—or lack thereof. Fueling this sense of anxiety is a recent string of setbacks: The fact that Japan has lost its No.2 position as the world’s second largest economy in terms of Gross Domestic Product to China, the sharp decline of Japan’s international competitiveness according to the latest IMD (International Institute for Management Development) report, that Korean companies are enjoying more success than leading Japanese companies in the international market, and that the ports of Japan are being overtaken by Korea’s and China’s in terms of traffic.

These are just some of the hard facts backed by statistics to prove Japan’s sliding competitive power in the international arena. What are the causes of Japan’s woes? Maybe it’s due to the terribly poor quality of Japanese political leadership, or perhaps globalization and the Internet economy has taken some shine off the traditional Japanese strengths in manufacturing, sales and business practices.

Whatever the actual reason, a thorough study seems to be in order for Japan to regain its power and vitality, and reemerge as a revitalized country. Other than the statistically-proven facts cited above, in my opinion, the more serious challenge for the Japanese to conquer, in order to play a more meaningful role in the modern international arena, is an ongoing lack of communications capabilities.

This is not just a question of language capability, such as English or other foreign languages, but a more essential human factor. The Japanese often say, “Silence is Golden,” the “Eyes tell you more than the mouth,” and “Heart to heart communication is the key.” Indeed, we can find many proverbs or old sayings of this kind such as “A talkative person is usually not trustworthy,” and “A tree with beautiful flowers attracts people without saying a word,” and the like.

Historically, it seems that the Japanese have not respected words, or spoken language, as a communications tool to convey messages to others. More important tools in effective communications have traditionally been the senses of feeling and empathy communicated between the parties concerned—interpersonal dynamics that cannot be conveyed in words. Therefore, the most important success factor for anybody endeavoring to succeed in Japanese society is his/her ability to build relationships based on trust and empathy with the people who matter.

In that sense, Japanese society is more geared toward gemeinshaft (community) rather than gesellshaft (association). This empathy-oriented society presents a difficult barrier for foreigners hoping to successfully penetrate the inner workings of Japanese business. Ironically, it is this very same cultural construct that acts as a serious handicap for Japanese attempting to effectively navigate the ever-changing terrain of an increasingly globalized business environment where mutual understanding and collaboration among various kinds of people is often required to create new value.

Hence, we Japanese need to change our way of thinking in such a way as to be harmonious and cooperative with other countries in the world with the common goal of building a better future. Unfortunately, it will take quite some time before this vision is realized.

On the other hand, as one widely-read John Hopkins Institute report once pointed out, it is extremely important for the top executives at American companies in Japan to make greater efforts to get acquainted with the movers and shakers in Japanese society in order to achieve success in this market. Just having a good product, service and competitive pricing is not enough. Although the report was issued in 1991, the message is still very valid today.

As long as Japan remains attractive as a viable business market, foreign-affiliated companies will continue to be interested in doing business in Japan and make efforts to surmount these barriers. However, as a concerned Japanese citizen, I worry about a possible future in which foreign-affiliated companies lose interest in the Japanese market and leave the country, while we continue to be self-satisfied as an inward-looking society until it is too late.

Japanese decision makers are becoming increasingly aware of the need to change and have begun to engage this issue more aggressively. My hope is that more and more business leaders will decide to participate in this movement to improve Japan’s profile as an attractive place to live and do business for people from all around the world.

Homare Takenaka is the Chairman & CEO of LBS Co.,Ltd.

Illustration by Phil Couzens

Japan’s current debt-to-GDP ratio is approaching 200 percent, the highest in the industrialized world, while the U.S. faces daunting Congressional Budget Office predictions that its debt-to-GDP ratio will increase from 53 percent to 90 percent over the next 10 years. Economists Kenneth Rogoff and Carmen Reinhart recently hypothesized that the critical debt-to-GDP ratio is 90 percent, at which point economies risk being destabilized and foreign investors take their money elsewhere. As discouraging as this vision is for the U.S., Japan’s deficit has already exceeded these frightening levels.

A consequence of Japan’s spiraling debt load is a continued struggle to attract foreign investors. Japan should take note of what nations like Great Britain, and even some economists in the United States, are beginning to recognize: Revenues from consumption tax will be critical to survive this recession. In Japan, former Keidanren Chairman Mitarai had called for the immediate implementation of a long-term plan to increase the consumption tax beginning in 2011 and reaching 15 percent by the mid-2020s. The significance of the Keidanren, the world’s largest and arguably most influential business lobby, calling for additional taxes that will reduce consumption should not be overlooked.

The European value-added tax (VAT) is similar to Japan’s own consumption tax and can provide guidance as the future of Japan’s consumption tax remains hotly debated. Great Britain recently announced plans to raise its VAT from 17.5 percent to 20 percent to stimulate its economy, a move the British Retail Consortium has predicted could reduce Britain’s deficit by $16.6 billion in just one year.

Economists in the U.S. have begun calling for a European-style VAT, mirroring the consumption tax in Japan. It has been suggested that even a 7 percent American VAT could raise additional revenues to equal the predicted $1 trillion deficit in 2020.

According to Paul Previtera, a Tokyo-based tax attorney, “Increasing the Japanese consumption tax will help reduce national debt, stabilize the economy, and attract foreign investment. Though this raises the price of consumer goods and therefore reduces consumption, the macroeconomic benefit could create a more promising Japanese marketplace.” Despite reduced consumption initially, the Keidanren recognizes and advocates the viability of this solution, and the Japanese government should not turn a deaf ear.

With Naoto Kan’s ascendency to the head of the Democratic Party of Japan, the likelihood of a hike in the consumption tax has become an imminent reality. While tax increases will always face opposition, Kan seems to understand that this increase is critical to stimulate the Japanese economy. On June 17th Kan reiterated his desire to reach a nonpartisan agreement and forge ahead with the consumption tax hike despite political liabilities. Kan’s aggressiveness on this issue could be the key to attracting foreign investment and in turn stabilizing and revitalizing the Japanese economy.

Dean Page is CEO of Accounting Asia. He is qualified as both an attorney and as a CPA and was formerly a partner with Ernst & Young. Dean.Page@Accounting.Asia

Adam Blair is a student at the University of Miami School of Law

Illustration by Phil Couzens

Why do I think so? Four reasons: First of all, America remains—by far—the world’s leading innovation powerhouse. Second, America continues to attract the world’s best and brightest. Third, America has one of the most efficient tax systems, which means that the fiscal deficit woes are a cyclical, not a structural problem. And last, but not least, the U.S. dollar is unchallenged as the world’s anchor reserve currency.

Innovation Powerhouse—Part One

The facts speak for themselves: Last year, U.S. companies filed 45,790 patents according to the world intellectual property organization. That’s about one-third of the global total and a significant step-up from runner-up Japan (29,827 patents), Germany (16,736 patents), Korea (8,066 patents), or China (7,946 patents). 

While the absolute number is impressive, even more impressive is the tremendous diversity and spread. That’s where America really shines: The top 30 U.S. companies (by number of patents filed) together accounted for barely 20 percent of the total. In contrast, Japan’s top 30 companies account for almost 50 percent of the total. For Germany, 12 companies account for 40 percent, for Korea four companies claimed one-third of the total, and for China, one company alone accounted for one quarter of all of China’s patents. In contrast, the U.S. top company made up barely 3 percent. 

Clearspeak: America’s entrepreneurial capital innovation model is alive and well. There are plenty of small and medium-sized companies out there being innovative and creative, filing patents, inventing new products, business models, and designs. If ever there is a basis for future economic growth, it lies in the tremendous diversity and widespread base of innovation in America. 

Of course, this also means that it is much more difficult to read and predict where the next growth companies are going to be coming from—a “new America” is bubbling up in peoples’ garages. Unlike Japan, Germany, China or Korea, corporate America is poised to continue to re-invent itself—new players continue to enter the fray. Ten years ago, nobody had heard of Google, and in the next ten years there are bound to be at least three or four new big companies that nobody has heard of today. 

Innovation Powerhouse—Part Two

Innovation power always comes from people, and in this area America outshines every other country on earth in her ability to attract the best and brightest. The number of international students studying in America has continued to rise. It is up 30 percent over the last decade, with now about 630,000 students from all over the globe studying at an American university. There is no question that U.S. universities offer the most advanced and exciting learning prospects in the world, as well as unparalleled networking opportunities.

Following on from this powerful base in learning, U.S. corporations offer the most transparent, most equal opportunity career options for global citizens. If you are a top-class graduate from, say, MIT and you get a job offer from an American company, it is often very clear that those companies offer the best career track opportunities. America’s corporate culture is still basically a straightforward, transparent meritocracy that is, in most cases, globally best-in-class in terms of rewarding talent and hard work regardless of national background, gender, etc. The combination of excellent universities and performance-based career opportunities lays a most powerful foundation for future innovative power—and thus the power to grow the economy.

Fiscal Deficit—Cyclical, not structural

What about the U.S. fiscal deficit? Sure, the deficit has surged over the past three years, and now stands at about 85 percent of GDP. First of all, America is still very wealthy on a net basis: If all public debt had to be paid off tomorrow with U.S. household wealth, U.S. households still would have almost 60 percent of all their assets.

Yes, that’s right—U.S. households’ net financial assets are about 200 percent of GDP, while public debt is 85 percent. Net-net, America is positive.

More important than this stock-of-wealth argument is the flow of money dynamics enabled by the U.S. tax system. Much to taxpayers’ chagrin, America actually has one of the most efficient tax systems in the world. Yes, it is possible for the U.S. to grow itself out of its fiscal problem because the tax multiple is higher than 1: For every 1 percent of national income growth, tax revenues grow by about 1.2 percent.

Remember how President Clinton got lucky and found himself with a budget surplus after the U.S. economy took off in the 1990s? It came as a big surprise to most forecasters and was largely due to a very dynamic tax system at work. To be sure, the large-scale defense spending cuts did significantly compound the positive budget dynamics at the time, it was the combination of the “cold war peace dividend” plus the powerful tax system dynamics that saved the U.S. fiscal position. But the basic fact remains the same: The current U.S. fiscal deficit dynamics are largely cyclical in nature, not structural, in my view.

And a final reason for optimism on the U.S.—yes, the U.S. dollar remains unchallenged in its position as a global reserve and anchor currency. Here we have a beauty contest, where, unfortunately perhaps, the Euro has begun to discredit itself recently, with stress and strain and lack of policy coordination giving the dollar a significant credibility boost. Make no mistake—while the dollar may not always be strong, it still remains, by far, the most coordinated and consistently credible choice for a global anchor reserve currency. 

Global leader in intellectual property, global leader in attracting and retaining talent, a fiscal deficit that is cyclical, not structural, and an unchallenged global reserve currency position. What’s not
to like?

Jesper Koll is a Managing Director and Head of Research at JPMorgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.

Illustration by Phil Couzens

As discussed in this column two months ago, interest from Greater China has also continued strongly. While Chinese interest in resort hotels remains strong, two of the largest recent residential deals in central Tokyo were made by Hong Kong and Taiwanese groups, supposedly at fairly low yields.

After a long, slow dry-spell, the increase in transactions is a welcome change, and while almost any incoming foreign investment is welcome, it doesn’t hide the fact that Japan remains a ticking time-bomb. While Tokyo’s population is still inching up fractionally, the nationwide population in Japan is on the decline. According to the OECD (Organization for Economic Cooperation and Development), Japan’s population is expected to fall from 127 million now to 122 million by 2020. Even a slight fall in a country’s population has enormous impact on overall economic activity and real estate in particular, but looking ahead to 2050, the situation is even more alarming, with the population falling to 95 million.

Office rents in central Tokyo are less than half of the peak in 2008 and the vacancy rate continues to rise. No longer are empty buildings unique to regional cities; central Tokyo’s back streets are also suffering from neglect and a lack of demand. If deflation and the population decline continue at the current rate, many of these buildings may never find tenants. With 25 percent fewer people, a big chunk of Japan’s concrete jungle would be superfluous.

What has been the government’s response? Several years back, a cabinet minister was added to address the low birth rate and funding for day care centers has been increased. Thanks to the Hatoyama administration, those with children can look forward to receiving a subsidy of 13,000 yen per month for each child. These are all steps in the right direction, but none is likely to have much impact on reversing the population decline. Because of deflation and the burst of the bubble economy 20 years ago, Japan is certainly much cheaper to live in than before, but 13,000 yen per month won’t even cover the cost of juku, the ubiquitous cram schools for helping to get Japanese kids into the best high schools and universities. Japan’s bleak future is beginning to have a big impact on the investment plans of domestic companies as well. With a shrinking market and prolonged deflation, Japanese consumer products companies have stepped up their overseas investment plans. Leading companies such as Suntory, Kirin and Fast Retailing (Uniqlo) have been aggressively acquiring companies outside of Japan and expanding global sales and marketing to serve overseas demand.

With one of the lowest fertility rates in the OECD, the best solution to Japan’s future is massive incentives (otherwise known as bribes) to increase the birth rate. Imagine the impact on family planning decisions if the government were to award 5 million yen for the birth of each child and an annual subsidy of 2 million yen. Sex for fun and financial reward should be a powerful aphrodisiac.

Seth Sulkin is the President and CEO of Pacifica Malls K.K., a Tokyo-based real estate asset manager specializing in commercial properties.

Illustration by Phil Couzens

While the OECD (Organization for Economic Cooperation and Development) remains cautiously optimistic about a 2010 rebound, Japan must take its future into its own hands to ensure that its economy remains competitive and attractive for foreign investment. Japan needn’t look far to find lessons regarding economic growth; neighbors such as Singapore, Hong Kong, and Malaysia continue to attract FDI due to low business start-up costs, low tax rates, and a generally business-friendly environment. However, the consistency in this FDI influx runs deeper than these surface issues.

For example, the Singapore Economic Development Board (EDB) was established by the Singapore government to encourage and assist foreign investment into Singapore. It is generally regarded as being a highly effective organization and a model that other countries could emulate. The EDB has promoted immigration regulations that facilitate the entry of talented entrepreneurs. In addition, Singapore has sophisticated programs in place that encourage multinational corporations to establish regional headquarters there. As a byproduct, new immigrants account for more of Singapore’s population growth than the birthrate. Contrast this to Japan’s declining population and the flight of many foreign companies to more attractive jurisdictions.

A 2010 report by Doing Business crowned Singapore as the easiest place in the world to do business. Establishing a business is significantly less burdensome than doing so in Japan, which ranked 91st in start-up procedures in the same report, and 123rd most favorable with regard to tax payments for medium-sized companies. Given Malaysia’s top-5 ranking in attaining credit and protection of investors, it becomes apparent Japan cannot afford to fall further behind in the Asia-Pacific region.

“For years, Japan failed to recognize the need to catalyze its economic growth by making the regulatory environment more favorable to foreign companies,” said Chris Alderson, Chief Operations Officer of Accounting Asia. “They took an isolationist approach in technology particularly, and their failure to adjust and adapt to global growth, referred to by some as a ‘Galapagos effect,’ is being reflected in the surge of rival Asian economies at such an exponential rate.”

Japan should take steps to ensure FDI remains a priority by taking steps to rationalize immigration and business registration procedures. There are signs of recovery after Japan’s economic free-fall in early 2009, but with the growth of regional competitors showing no signs of slowing down, more dynamic measures are needed to ensure a prosperous future.

Dean Page is CEO of Accounting Asia. He is qualified as both an attorney and as a CPA and was formerly a partner with Ernst & Young. Dean.Page@Accounting.Asia

Paul Petrequin is an associate at Foreya Partners and is currently completing his legal studies at the University of Miami in Florida. Paul.Petrequin@VentureCapital.Asia

Seth Sulkin is the President and CEO of Pacifica Malls K.K., a Tokyo-based real estate asset manager specializing in commercial properties.

On April 21, Bank of Japan Deputy Governor Miyagi Nishimura said in a speech that he sees “beams of light” pointing to the end of Japan’s severe deflation problem. If true, that would be welcome news to the real estate market, but there are many reasons to be cautious. According to press reports, the Bank of Japan’s own forecast is for a drop in consumer prices of 0.5 percent in fiscal 2010 and a further fall of 0.2 percent in fiscal 2011. Even with nominal interest rates close to zero, the real interest rate is negative, which is not good for consumer spending or real estate investment, which is generally seen as an inflation hedge.

That being said, Japanese views toward real estate are not generally as cut and dried as would be more common in the U.S., Europe or Australia. History and culture still play an important role in how Japanese individuals and companies buy, hold and sell real estate, which means that numbers alone do not determine decision-making.

Take, for example, the concept of a fixed-term lease. In the U.S., it is standard that a tenant’s right to use space is limited to the term of the lease. In a traditional Japanese lease, however, a tenant can stay in perpetuity with no mechanism for the landlord to regain control of the space. About 10 years ago, the Japanese government introduced a fixed-term lease law applying to both buildings and land. The fixed-term lease law did not replace the concept of a traditional lease. Both are now in use, although traditional leases generally remain the norm outside the Tokyo area.

Where the fixed-term law had a really huge impact, however, was for ground leases. For such a small, crowded country, Japan actually seems to have a huge amount of unused or underutilized land. Knowing that control over the land would revert after a defined amount of time encouraged individuals and companies that didn’t want to sell land for tax or sentimental reasons to lease it to tenants such as supermarkets, car showrooms and shopping centers. Many of these fixed-term ground leases were for 20 years or more, so we haven’t seen what will happen at the end of the period, but legally, landlords can force tenants to demolish buildings and restore the land to the original condition.

Illustration by Phil Couzens

In large part, because of this legacy of resistance to traditional ground leases, the concept of selling land separate from ownership of the buildings on top (generally referred to as sokochi) was not considered investment-grade. Personally, I feel more confident that my tenant will continue paying rent when his investment in my property consists of a building. If he is only renting a space in a building that I own, it is much easier to walk away.

Given that transparency in the Japanese real estate market is so low compared to other key Asian markets such as Hong Kong, Singapore and Australia, real estate professionals tend to look at the behavior of J-REITs as a proxy for what is happening, given that they must disclose certain aspects of their transactions and decision-making. Because sokochi were considered to have low liquidity and banks did not like to lend against them, J-REITs have generally stayed away from buying them. Recently, however, the Japan Retail Fund (JRF), one of the largest J-REITs, made a very rational decision to recycle its portfolio of assets to try and increase its dividend payouts.

With continued deflation and no recovery in domestic demand expected in the foreseeable future that would lead to higher rental income, JRF sold a property with high depreciation cost and bought several assets with low depreciation, including a few sokochi, which naturally have no depreciation, as the tenant owns the improvements. J-REITs can only distribute profits left after depreciation, so in this case, economic rationality overcame traditional cultural resistance to buying sokochi. This is an important step in the maturity of the market.

Jesper Koll is a Managing Director and Head of Research at JP Morgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.

No, Japan is not about to become the next Greece. Trust me, I am fully aware of the risks of making bold predictions, but someone has to speak up. While it has become popular to proclaim that Japan is about to face a sovereign debt funding crisis similar to the tragedy now afflicting Greece, the facts suggest the opposite. Yes, Japan’s fiscal and economic dynamics stand in stark contrast to Greece—or Portugal, Italy, Spain, or any other country currently talked about as a candidate for a sovereign debt crisis.

First of all, let us be clear that Japan’s fiscal deficit is actually significantly worse than Greece’s. At the start of the Greece sovereign crisis, her public debt to GDP stood just below 120 percent. Japan currently records just about 200 percent, and the IMF now forecasts this will climb to 250 percent by 2015.

With deficits, bigger is definitely not better. Japan’s future generations face an unprecedented burden to pay off debt left by the current generation. Make no mistake, Japan’s ability to create future wealth will be increasingly limited as debt repayments “crowd out” income that would otherwise be available for investments. Clear speak: Taxes will go up. However, the inevitability of rising taxes, and thus lower free purchasing power of the people, does not mean that there will be a funding crisis like the one witnessed in Greece.

This is where things get interesting. Yes, Japan has a significantly worse budget deficit than Greece, but unlike Greece, Japan’s deficit is not only entirely self-funded, but it is all funded in its own sovereign currency. To be clear, Japan continues to be the second biggest creditor country on earth. Every day there is about $1 billion more coming into the country than going out. The current account surplus—Japan exports more goods and services to the world than she consumes at home—fully funds the domestic fiscal deficit.

Importantly, Japan Inc. earns U.S. dollars or euros from its exports, and uses this foreign currency to fund its all yen-denominated domestic fiscal deficit. So if the yen weakens, those dollar-, or euro-denominated earnings actually buy more yen. It’s a very stable system—the domestic private sector’s overseas earnings surplus funds the domestic public sector’s deficit.

Greece worked exactly the opposite: Grants and transfers from Germany and other EU countries funded the rising domestic deficit and excessive consumption. Greece never “earned” its deficit, its private sector never generated a surplus, while Japan’s economic power has always been large enough to not only fund its own growing deficit, but also remains the second biggest buyer of U.S. treasuries and other global budget deficits. Japan is, and always has been, a creditor nation, while Greece has basically been a debtor nation who has a seemingly endless supply of credit from Europe in general (Germany in particular).

When does the music stop? When do countries reach their limits of debt? It’s not enough to simply run out of savings. Greece has been running on negative savings for multiple years, but there was no problem because the creditor was healthy and willing to keep funding. No doubt, the strong political consensus that Greece must be supported to keep Europe and the euro viable was a big driver keeping credit lines open and flush for longer than hard-nosed credit analysis might have warranted. However, the moment of truth came when the creditors went on a strike, i.e. when the Germans and others became rational and were no longer prepared to treat Greek borrowers as an exception to the normal rules of credit for the sake of the some larger good, i.e. the goal of European integration.

Such a weakening of the keiretsu system, unforeseen 12 years ago, creates a bounty of opportunities for non-Japanese parts suppliers who may have previously viewed Japan as being a closed market. Gone are the days when your target customer needed to be your primary shareholder in order to win the business. The move to a less vertically-integrated supply chain creates openings for Western companies who can offer a competitive product or service.

Illustration by Phil Couzens

Furthermore, the recent global financial crisis has made Japanese companies more risk-adverse and prompted them to diversify their customer base. As an example, Japanese automotive parts manufacturers have begun supplying Volkswagen with parts made in China. As German and American automotive manufacturers step up their procurement from Japan, they often specify that certain parts and special processes (only offered by Western companies) be used when manufacturing such products. This has created opportunities for my company and I have noticed the trend with other Tier 3 and Tier 4 companies as well.

Japanese manufacturers are also pursuing diversification by expanding outside their main industry. Lehman-shocked automotive suppliers in Japan are finding ways to enter the less cyclical aerospace industry. Mitsubishi Aircraft’s regional jet—60 percent of which is made from North American parts—is quickly becoming a success story for American manufacturers such as Pratt & Whitney and their supply chains in the U.S.

Similarly, indigenous industries from shipbuilding to rail need software designed by American companies such as The MathWorks. CRM solution providers including Salesforce.com have won over the hearts of Japanese firms who need to manage their growing international customer base.

In the field of renewable energy, the Japanese solar energy industry has become self-sufficient with few non-Japanese components. Wind energy, however, is an industry dominated by Western companies. European-based manufacturers, in particular, provide much of the technology used to operate wind farms in Japan. Other forms of renewable energy will also require expertise from firms in North America and Europe.

Supplying Japanese manufacturers is now easier than ever before, with fewer barriers to entry and more transparency. The financial crisis has further leveled the playing field, and non-Japanese suppliers are judged more on the quality of technology and service rather than on who owns shares. As Japanese conglomerates exit areas outside of their core competency in order to mitigate the inefficiencies of vertical integration, Western suppliers can quickly increase market share by making selective acquisitions. Indeed, these are very exciting times to be involved in B2B industrial sales in Japan!

Julian Bashore is Representative Director of Bodycote Japan K.K. He also serves as Chair of the Membership Relations Committee at the ACCJ Chubu Chapter. 
www.bodycote.com/japan

Illustration by Phil Couzens

Restrictions on high-risk investments, emphasis on profit sharing, and prohibition on interest distinguish Islamic finance from the forms of finance more familiar to western investors. These unique features, combined with an uncertain regulatory regime, have proven a hindrance to Japan taking a share of this lucrative financial services market. By contrast, regional competitors such as Singapore and Malaysia continue to embrace and thrive in this growing market.

Experts agree that recent amendments to the Japanese Banking Law meant to stimulate Islamic investment do not go far enough. Currently, only subsidiaries of Japanese banks engaged solely in the finance or the securities business, may engage in Islamic financing. Apart from regulation, there are difficulties with respect to how Islamic transactions should be taxed. A common example is interest payments. Interest payments are typically subject to withholding tax, but interest is prohibited under the principles of Islamic finance. The question is therefore how payments to lenders should be characterized and whether withholding tax should be applied. The net effect of these unresolved issues is that Japan is precluded from becoming a full participant in the international market for Islamic finance. 

“Japan’s slow reaction to the Islamic market can be attributed to a number of factors, but the key component is the underlying financial structures of the transactions in question,” says Paul Previtera, co-head of the International Tax Education Program at Temple University Japan. “Simultaneous compliance with both Islamic finance principles and Japanese banking law is a difficult path to maneuver. Japan has demonstrated some willingness to accommodate Islamic finance but it now needs to take urgent steps to continue that trend.”

Changes may need to be made sooner rather than later. Malaysia and Singapore continue to revise their regulatory framework and tax structures to facilitate more Shariah (Islamic law)-compliant financial products. However, despite its slow start, Islamic finance in Japan continues to show positive trends. At least six Japanese institutions are current members of the Islamic Financial Services Board and the Japan Bank for International Cooperation has appointed four Shariah scholars as advisors on religious finance.

“One thing Japan has going for it is that most of the groundwork for conducting Islamic finance transactions has already been laid,” says Brandon Boyle, vice president of Foreya Partners, a Japanese-based venture capital firm. “All that remains is some fine-tuning of the banking and tax regulations to ensure that firms investing in Islamic-compliant structures are not put at a competitive disadvantage.”

The amendment to the banking law marked a positive step but Japan must take decisive action if it wishes to become a leading participant in the international market for Islamic finance.

Dean Page is CEO of Tokyo-based venture capital and advisory firm, Foreya Partners. He is qualified as both an attorney and as a CPA and was formerly a partner with Ernst & Young. Dean.Page@VentureCapital.Asia

Paul Petrequin is an associate at Foreya Partners and is currently completing his legal studies at the University of Miami in Florida. Paul.Petrequin@VentureCapital.Asia

Illustration by Phil Couzens

Recent developments in American immigration law highlight international immigration policy trends that may be useful if implemented in Japan.

The February 24 introduction of the StartUp Visa Act in America marks an important step in the ability of the U.S. to attract new jobs, innovative ideas, and lucrative business opportunities. This swift policy response from the U.S. shows an understanding and urgency in responding to the current global economic struggle, particularly on the issue of foreign direct investment. We strongly urge Japan to recognize the benefits of this policy and introduce similar legislation.

Legislation in Japan that would enable immigrant entrepreneurs who are creating new companies to secure visas to enter Japan would help to put Japan on a level playing field with the new American approach to business immigration. Such legislation would allow immigrant entrepreneurs in Japan to help drive innovation and job creation in an economy that is never far from leading the global market.

According to Chris Alderson, CEO of Japan Touchstone K.K., a company that provides Japan market entry services and support, “The number of individual entrepreneurs wishing to enter Japan who would benefit from legislation like this is by no means insignificant.”

If such legal barriers persist, those entrepreneurs will eventually see opportunity in America and elsewhere around the world. This is not only a potentially very high opportunity cost paid in entrepreneurs who will not come to Japan, it is an incentive to leave Japan with its high corporate taxes for opportunity in America, which could be a significant blow to the ability of Japan’s economy to compete in the global market.

Provisions that would bring these immigrant entrepreneurs here to Japan are certainly possible in today’s market, and would be a worthwhile consideration on the part of policy makers.

As is often the case with Japanese laws, clarity and certainty are issues that need to be addressed. According to immigration attorney Shuichi Ishizaka, “Provided that certain conditions are met, it may be possible for an entrepreneur to establish a business in Japan utilizing the current immigration law. However, there is much uncertainty associated with the current process and Japan could more effectively promote itself as a destination for foreign entrepreneurs.”

Japanese legislation aimed at making a path for these new business leaders could provide for a temporary visa for entrepreneurs who secure a minimum level of startup investment from Japanese investors as a part of a minimum total equity to finance their proposed business here in Japan.

The proposed American legislation allows for a temporary period of two years, and a minimum of $250,000 (about 22,277,075 yen) from an American investor. A study must be done to determine what temporary period is appropriate for a startup in Japan to prove its ability to succeed. Furthermore, there must be a determination of how much investment from the Japanese would be an appropriate minimum to ensure that such startup companies represent the desired contribution to the national economy.

At the end of that temporary visa, there must be an opportunity for those entrepreneurs participating to earn permanent residency in Japan so that they can have security in their new life here, as well as make long-term contributions to the stability and growth of the Japanese economy.

The American legislation requires that at the end of the temporary visa period the immigrant entrepreneur who wishes to become a permanent resident must have generated either five full-time jobs, $1,000,000 (about 89,108,300 yen) in additional capital investment, or achieved $1,000,000 in revenue. Similar thresholds for job creation could be determined based upon unemployment rate predictions here in Japan, to determine exactly how much of the national work force immigrant entrepreneurs should expect to support if they wish to qualify for permanent residency. Requirements of additional capital investment or revenue achievement can be developed to reflect those in the proposed American legislation by looking at the earnings and investment portfolios of healthy businesses in Japan today.

Japanese lawmakers, venture capitalists, and economic reform leaders have an opportunity to analyze the predicted impact of the StartUp Visa Act in America and work to provide the first and most competitive legislative response. Emerging from the global recession as a stronger leader in the global market may depend upon it.

Dean Page is CEO of Tokyo-based venture capital and advisory firm, Foreya Partners. He is qualified as both an attorney and as a CPA and was formerly a partner with Ernst & Young. Dean.Page@VentureCapital.Asia

Jason Young is an associate at Foreya Partners and is currently completing his legal studies at the University of Miami in Florida. Jason.Young@VentureCapital.Asia

Jesper Koll is a Managing Director and Head of Research at JP Morgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.

Forecasting the economic fortunes of nations is a bit like forecasting the weather. Sooner or later fortunes will change, pushed along by a natural cycle. No matter how miserable and freezing, eventually winter will give way to spring and summer. So let’s be bold and forecast the return of strong economic growth to Japan this year.

And no, I am not just talking about a strong export-led recovery. Domestic demand is where it’ll be at this year. Signs are good that—for the first time in over six years—a full-fledged domestic demand recovery could be underway. Yokoso domestic growth!

Call me an optimist, but please hear me out. The dynamics of home-grown demand are powered by the following force: The purchasing power of people that is rising and poised to rise even more in coming months, in my view. Why?

Yes, wages in Japan are now rising. This year’s “shunto” spring wage negotiations resulted in a 1.7 percent increase in base pay, starting April 1. This is solid evidence that the recovery in corporate activity and profits is actually feeding through into better pay for the workers of Japan Inc.

Don’t underestimate how strong the rise in workers’ real spending power actually is. Given that consumer prices are still dropping by more than one percent, the real purchasing power of the people is actually rising by over 3 percent now. That is not just the highest growth in over a decade here in Japan, but also the highest increase in workers’ effective wallet amongst all advanced industrial economies. Make no mistake—Mr. & Mrs. Watanabe are back on top.

The good news is that Japan’s wage and income dynamics are poised to get even better from here. Just as spring follows winter, workers’ bonus pay follows corporate profits. With corporate profitability up a full 40 percent from the bottom recorded one year ago, summer bonus pay is likely set to be up by about 10-15 percent. That’s what past sensitivity analysis suggests and, in my view, there is no reason to expect that this time around corporate managers will be less forthcoming in sharing corporate fortunes with their employee stakeholders.

The current political mood and social mores suggest that the leaders of Japan Inc. are more likely to want to be seen as giving back more to workers, rather than less. The current ruling party and its labor union revival dynamics suggest as much, in my view.

Another direct boost to consumers’ wallets come from government policy. Make no mistake—the Democrats’ child support policy is poised to do more for spending than currently anticipated. Remember, households will get 13,000 yen per month, per child this year. On top of that, high school tuition will be free. Add it all up and you get a 1 percent boost in disposable incomes.

Importantly, the government decided not to cut back on child tax deduction allowances this year. In other words, slightly more than one-third of all households (i.e., those with kids under age 15 or kids in high school) will get a boost to their purchasing power from government transfers, and the remaining two-thirds will see no tax hike. To be sure, next year, 2011, the child tax deductions will be tightened, but also the monthly allowance will be doubled, so next year we’ll get a bit of “step on the brake while also stepping on the accelerator” policy. However, for 2010 there is no such confusion—it’s pure and simple “pedal to the metal” policy support for consumer spending.

Seth Sulkin is the President and CEO of Pacifica Malls K.K., a Tokyo-based real estate asset manager specializing in commercial properties.

Looking at the increasing number of large-scale commercial property transactions recently, one might be excused for thinking that we are in the midst of a broad recovery in the Japanese real estate market.

A closer look at many of these transactions, however, raises several sticky questions: Do these deals fairly represent market sentiment? Is the increase in transactions sustainable? And does Japan have sufficient transparency and corporate governance in the real estate sector?

To be fair, some of the most notable recent transactions have been on an arm’s length basis. The largest office and retail transactions took place in December 2009, as Secured Capital Japan acquired the Pacific Century Place Marunouchi at a price said to be over 140 billion yen and SEB Asset Management of Germany bought a shopping center in Chiba for about 12 billion yen.

However, a large number of publicly announced transactions have been between related parties, raising issues about whether investors on both sides are getting a fair deal, and whether there is sufficient disclosure.

Since the public debt and equity markets opened up again to blue-chip Japanese real estate investment trusts (REITs) a few months ago, there have been many transactions between REITs and their “sponsors.”

During the first quarter of 2010, REITs acquired 229 billion yen of properties, the most since the third quarter of 2008 right before the Lehman Brothers shock. Many people in the industry have been puzzled by these deals. Not only have market watchers questioned the pricing, but they have challenged whether some of these acquisitions would have occurred at all if the sponsors did not control the asset managers of the REITs.

When queried about whether REIT managers sufficiently safeguard the interests of their shareholders, Japanese authorities say that it is the job of licensed appraisers to protect investors by making sure that REITs are buying properties at fair market value.

In the U.S., many mortgage lenders burned by the subprime crisis attribute a large portion of the blame to inflated valuations arranged by interested parties and hence no longer allow buyers to choose the appraisers.

Illustration by Phil Couzens

Many in the U.S. are also pointing fingers at the major credit rating agencies, which granted triple-A ratings on securities backed by sub-prime loans that later turned out to have little or no value, and whose fees were paid by the issuers of the securities.

With the Japanese economy still stuck in the doldrums, weighed by spiraling deflation and a continued rise in the vacancy rate despite falling rents, it is hard to make a case for investing in Japanese real estate based on the fundamentals alone.

Yet many major global institutions with allocations for Asia are looking for reasons to resume Japanese investment in 2010. If you ask what they like about Japan, they cite economic size, a high savings rate, political stability (believe it or not), clear laws and regulations and well-established financial institutions.

If you ask what they don’t like about the Japanese real estate market, they mention a lack of transparency in terms of transaction data, deflation, the lack of a simple pass-through vehicle to own property, the absence of a clear government policy to address Japan’s economic problems, a falling population and a general perception that major Japanese companies have special access to the best acquisition and financing opportunities.

Considering the glacial pace at which things change in Japan, one cannot expect the Japanese government to tackle all of these issues at once. Foreign investors were crucial to supporting the last boom in Japanese real estate prices, so the government should make greater efforts to address key issues such as transparency and corporate governance that could be handled relatively quickly.

Given the low prevailing cap rates (yields) on high quality Japanese property and limited availability of debt, Japan is becoming known as a country only suitable for so-called “core” investors. Typically, one associates core properties with high income stability and low risk, yet it is hard to attribute those features to the Japanese property market at the moment.

Illustration by Phil Couzens

There is a widely held view that corporate responsibility, environmentally friendly products and socially ethical business practices are expensive, time-consuming and detract from the fundamental role of businesses in society, i.e., to make money for their shareholders.

Well, allow me to borrow a phrase from Ray Anderson, founder and chairman of Interface Inc., from his book “Confessions of a Radical Industrialist”: “As you read this [article], you will see that the choices—the trade-offs—we are told we must make between financial success and environmental success, between doing well and doing good, are just plain false.”

When most business people think of success, honestly speaking, they are thinking of financial gain. This is one of modern society’s deepest failings because there are much better ways to be “successful” than accumulating piles of paper and metal called money. (Although in this day and age, wealth is more likely to be a few intangible bytes on a secure server than anything physical.)

Creating something lasting, whether it be a physical object like a sculpture, or something intangible like a business, building a home, connecting with people, making a difference—these are all things that will still hold true meaning long after you have stopped caring about how many extra digits are showing in your savings account.

The thousands of small businesses across Japan that scrape by on tiny sums of money that barely support the owners is testimony to this different definition of success. Before you scoff and dismiss them as simpletons who simply don’t have the Ivy League business school training to run a “real” business, think about this: For many of these people, while they wouldn’t hate being rich, their primary goal in life is to run a business that produces a product they can be proud of or provides a service that is useful to their community. If they can achieve that goal with a 100 percent “success” rate, are they not “successful”?

Of course, this kind of thinking does not sit well with many people. For starters, they believe that, essentially, money can solve all problems. But people who define “success” as financial wealth over and above what others around them possess also often subscribe to a fatally flawed view of evolution. They believe that evolution proscribes that the biggest, fastest and strongest inevitably “win,” and the smallest, weakest and slowest “lose.”

They think of the “winners” as lions, eagles and sharks. Extrapolating from this viewpoint, these “win-olutionists” come to believe that “successful” companies must continually grow bigger, better, faster and leaner by cutting costs, slashing staff, viciously competing and cutting down their competitors at every opportunity, and those that do not will be wiped out. However, they have forgotten a critical lesson of evolution.

By the evolutionary standards of longevity, diversity, volume and numbers, by far the most “successful” organisms on Earth are the humble bacteria. However, these are not the only evolutionary über-success stories to be found on Earth. Many other nominally “insignificant” organisms are highly successful by evolutionary standards. In fact, if you removed all other material from the planet, you would still be able to see the outlines of geographical features defined by biomass from each of them.

All of these organisms have certain things in common. They don’t require many resources or much space and they evolve quickly because of their short reproduction times. This helps them to become very diverse, so they can occupy many niches. And, like the bacteria in your body, most successful species have fostered symbiotic relationships with other species in the community where they perform key functions in nutrient cycles.

What’s the point, you ask?

“Symbiosis is all well and good for bacteria, but we are running a business in a cut-throat world.” And that is exactly the point. Corporate responsibility is epitomized by sustainability. The ultimate in corporate irresponsibility is to manage a company unsustainably, i.e., drive it into the ground. A successful business is one that continues to be successful, not just in the short-term but over the long-term. And, it is an undisputable fact that 3.5 billion years of evolution cannot be wrong when it comes to long-term sustainability.

So, however you define “success,” take a look at nature’s finest examples and learn from their practice of creating symbiotic relationships, evolving to meet changing conditions and adapting to perform core functions in their communities. Apply those lessons to your own organization and not only will you be more successful, you may just get rich while you’re at it.

Luke Poliszcuk is the CEO of eQualC Sustainability Communications.

photograph by kohji shiiki

Individual tax returns for 2009 were due by 15 March this year. But this didn’t affect the multitude of foreigners (not to mention Japanese) who have left Japan over the past couple of years to set up shop in other parts of the region. Singapore and Hong Kong are the most popular destinations and the individuals involved tend to be those working in the high value financial services and professional sectors.

According to Paul Previtera, a Tokyo- based tax attorney, “The reasons these people leave Japan are numerous but one factor does seem constant—Japan’s high rates of individual tax and the complexity of the Japanese tax system when compared with other countries in the region.”

Individual tax rates in Hong Kong and Singapore range from 0-15 percent and 3.5-20 percent respectively. By contrast, Japan’s top national tax rate for individuals is 40 percent and there is a local tax of 10 percent. Combining the national and local taxes, a Japanese individual’s tax rate can reach up to 50 percent. In addition, an individual working in Japan is likely to be subject to a multitude of other taxes including social insurance taxes, labor insurance taxes, land tax, and consumption tax.

A further issue is the less than straightforward manner in which taxes are calculated. Take local tax for example. Liability is based on whether you were a resident of Japan on January 1st. If you leave Japan on December 31st, you may avoid having to pay a year of local tax (standard advice from the Big 4 accounting firms to their multinational clients). Remain in Japan for a couple of New Year drinks in Roppongi and you will wake up with a tax headache.

Another issue is that local tax is based on your previous year’s income. Make a million dollars in 2010 only to lose your job at the end of the year? You’ll be required to pay local tax in 2011 based on the $1 million you made in 2010 in spite of your newly unemployed status.

Japan also changed its rules regarding which foreigners were subject to tax on worldwide income. Up to 2006 this meant foreigners who had been in Japan for the past five years. However, the law was changed to cover anyone who had been in Japan for five out of the past 10 years.

According to tax accountant Naoko Sumida, “The effect of this has been to add further uncertainty and also to discourage individuals from taking up a second posting in Japan.” Add to this the fact that Hong Kong and Singapore generally don’t tax individuals on income earned outside these jurisdictions and an assignment to Japan becomes even less attractive.

The problems associated with the loss of talented workers are likely to get worse as more jobs become mobile. “The steps Japan is considering to reform its corporate tax system need to be matched on the individual side—if skilled professionals are reluctant to work in Japan, the desired foreign direct investment will simply not occur,” says Previtera.

If Japan is serious in its quest to become a regional financial hub, individual tax is an issue that needs to be addressed soon.

Dean Page is CEO of Tokyo-based venture capital and advisory firm, Foreya Partners. He is qualified as both an attorney and as a CPA and was formerly a partner with Ernst & Young.
Dean.Page@VentureCapital.Asia

Izumi Shibasaki is an associate at Foreya Partners and is currently completing her legal studies at Touro College in New York.
Izumi.Shibasaki@VentureCapital.Asia

Jesper Koll is a Managing Director and Head of Research at JP Morgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.

Macro Pessimism, Micro Optimism—for years now, this has been the straw to clutch on for those of us who have had to convince global headquarters why Japan still presents a good investment and business opportunity.

The good news is that, possibly, this may be about to change. Call me an optimist, but chances are that the new government is about to embark on a more pro-active and constructive policy that actually creates macro-tailwinds for corporate excellence here in Japan.

Why my optimism? Because for the first time in almost a decade, Japan’s political leadership is actually focusing on setting a goal.

Although hard to believe, the fact is that ever since the demise of the Koizumi-era, Japanese policy making has not had a clearly defined policy goal.

If at all, the LDP’s post-Koizumi leaders appeared to be primarily focused on going backwards—unwinding many of the reform programs put into place by Takenaka Heizo and Koizumi’s leadership team.

In doing so, they lost the plot and lost track of focusing on what the principal goal of all policy making should be: to grow national income.

Without a strong focus on growth, all other policy will inevitably be nothing but “stealing from Watanabe-san to pay for Suzuki-san.”

If the overall pie does not get bigger, somebody will have to lose for someone else to win. It is the death of economics, and the start of a ruthless political economy where everything becomes stuck in a zero-sum game. And trust me, economics may be a lot of things, but it is not a zero-sum game.

Under the leadership of Finance Minister Naoto Kan, the Democrats are now realizing that Japan needs to get back into the game. To do so, they have started to put an overall growth target into place.

While neither new nor finalized, this marks a huge departure from the generalist policies presented so far by the ruling party. Although not final at this point of writing, it looks as though the growth target will be set at 3 percent nominal GDP: real growth of 2 percent and a positive GDP deflator of 1 percent.

That’s right—a positive growth target and a positive deflator. This is in sharp contrast to the current state of the economy where nominal growth is contracting and prices are falling.
And yes, the Democrats are becoming ambitious on growth. That, in turn, is one reason to be more optimistic on macro Japan.

Importantly, the principal reason for setting a growth target is the long-overdue need to set concrete parameters for getting the fiscal deficit back in order. With debt-to-GDP at basically 200 percent, the risk of a debt-deflation spiral has become significant.

To address this, Japan needs policy coordination. All parts of the government—central, local, Bank of Japan, and each and every bureaucracy—need to be brought in line. Without a big-picture macro growth target, it is simply impossible to get buy-in and coordination.

Indeed, anybody who has been visiting the Bank of Japan in recent months must have been struck by the fact that all the BoJ is talking about is Japan’s fiscal problems.

Meanwhile, anybody who has visited the Ministry of Finance walked away with a long lecture on what the Bank of Japan should do.

In other words, the two major institutional players in Japanese policy-making appeared to many observers to be counterproductive to each others’ responsibilities.

Institutional turf wars are exactly what happen when no overriding national policy goal is evident. Kan and his national strategy council are now working to fix this.

CAIRO MARSH is the Senior Partner, Customer Marketing Innovation for RAPP Tokyo. RAPP is a leading direct, digital and CRM advertising agency, headquartered in the U.S. with 50-plus offices around the globe.

You can’t catch lightning in a bottle. But you can try.

If you do, I am pretty sure that one of two things will happen. The first, and most likely, outcome is that you will stand outside in the rain looking awfully foolish while holding an open bottle. You will get utterly soaked from the rainstorm and you might catch pneumonia, but you won’t catch any lightning.

The second thing that could happen, if you are once-in-a-million-lifetimes lucky enough to be at right place at exactly the right time: A few milliseconds after you open the lid a bolt of lightning will race toward you, enter the bottle—along with 500 mega joules of energy and a super heated atmosphere of 20,000 degrees—hence shattering the bottle, causing a brief moment of convulsion and some light charring…before everything goes dark.

Either way you slice it—still no lightning in the bottle.

In my business, today’s lightning in a bottle is the uber-successful social media campaign. If you are in marketing you certainly know the dream: minimum cost/maximum reach. Add a sprinkle of Twitter with a dash of Mixi, swirl it up on YouTube and then watch the money flow in.

But I think most marketers are simply standing in the rain.

The explosion of the social web, the change in the way we see consumers engaging with online platforms like Mixi, Gree, Ameba, Facebook, etc., has taught a lot of us the wrong lesson.

Social media is an indicator, not the issue, nor really the opportunity.

What we are seeing is a shift towards more valuable experiences and content. Digital and social technologies are allowing consumers to sort through content more efficiently and engage, or ignore, information based on the value to them.

Illustration by Phil Couzens

Media is the enabler—but it’s a value-based shift.

You can see this shift in the way people are organizing both online and offline information. For example, in the popularity of iPhone apps like Four Square that allow consumers to pull up user comments about the restaurant that they are in.

Consumers are engaging proactively based on what is valuable to them. But value is a two–way street.

A lot of us have rushed to simply apply old content strategies to new media, setting up Twitter accounts and blogs that are rarely updated and offer little new information.

These efforts, unsurprisingly, do little to drive business. All that happens is that we spend more marketing dollars while creating more content clutter to be ignored.

If the communication has a real cost (cash or sweat equity), but is not a place where a credible or real difference is made to our customers to influence their buying decisions, then it is not the right place to apply resources.

So, before we go running out into the storm with our bottles and blogs, we should filter our communication approaches through a value-based equation (VBE).

Each business has its own VBE, driven by the business model, sales cycle and consumer expectations. But the core variables that drive it should be the same. Doing this right isn’t about capturing lightning in a bottle. It’s about linking Calculation to Creativity. It’s about producing electricity from a generator—where value is in the fuel.

Seth Sulkin is the President and CEO of Pacifica Malls K.K., a Tokyo-based real estate asset manager specializing in commercial properties.

Just like in every other business sector, China’s growing presence is having an increasingly large impact on the Japanese real estate market. Initially, the impact was mostly negative, as global institutions tired of waiting for the long-promised recovery in Japan turned their attention to the booming property market in China.

More recently, however, rising Chinese wealth and a variety of government and business risks have led to a more complex situation resulting in growing inward investment in Japanese property from Chinese individuals and companies.

Since the Lehman shock, China has been one of the few bright spots in the global property market. In 2009, with the U.S., Europe and Japan still in deep distress, China property prices boomed to the extent that the Chinese government has been looking for ways of cooling down excess speculative investment by restricting bank lending.

Given the legal and business complexities of buying Chinese property, major global funds have generally been cautious about making large investments.

An increasing number of leading international and Asian property funds have made their first investments in China by now, and China’s allocation in global and regional funds is only expected to continue rising, mainly at the expense of Japan’s share.

In the U.S., distressed investment opportunities abound, reducing the need for many funds to look abroad. In the UK, the debt market has recovered much faster than the U.S. or Japan, helping prices to recover somewhat, but more importantly, facilitating greater liquidity through higher transaction volume.

Illustration by Phil Couzens

In Japan, by contrast, debt remains scarce and leverage is low—at most 50 percent of the transaction price. Outside the central five wards of Tokyo (Minato, Chiyoda, Chuo, Shibuya and Shinjuku), debt is virtually impossible to obtain. Prices on medium- to high-quality properties remain stubbornly high, however, yields remain too low to be attractive to any but the most conservative, so-called “core” investors.

Institutional investors tend to focus on the office market, which is generally the most transparent and easiest asset class to manage. At the moment, though, the office market has the worst fundamentals of any real estate asset class in Japan, so many international funds have been turning their attention increasingly to China.

Japanese real estate companies and real estate investment trusts (REITs) have not yet been active in China, although that could change soon. Over the last few months, the Japanese capital markets have improved to the extent that blue-chip property companies and their affiliated REITs have been able to tap the public markets for equity and debt offerings, giving them fresh dry powder to make acquisitions both domestically and potentially in China.

While the Japanese property sector has been largely absent from China so far, Japanese retailers and manufacturers have been going to China in droves. Japanese consumer and industrial brands are extremely popular in China and with few growth prospects for the domestic market, many Japanese companies have come to the conclusion that their only hope to survive is the Chinese market.

Back in Japan, the presence of Chinese individuals and companies is rapidly growing. Walk down Chuo-dori in Ginza and it feels like there are more Chinese tourists than Japanese spending money at the department stores. During the recent Chinese New Year, ski slopes in Karuizawa and Niseko were full of Chinese visitors. I frequently hear that Chinese individuals have been buying resort condos around Japan.

In the commercial property sector, Chinese investors are said to be the winners of recent auctions for hotels in Hakone and Niseko. These trends are good for the Japanese property market, the Japanese economy and Japan-China relations. Unless the Japanese government does something else to stimulate banks to lend more, however, the Chinese may soon be the only investors left willing to buy Japanese property.

The initial steps taken by the Japanese government have been welcomed across Japan’s business community but, in our view, more needs to be done if the authorities are serious about attracting such investment.

For those in the financial industry, acutely aware of Japan’s economic ails—a decrease in exports, an ever-shrinking GDP, and the bottoming out of the Japan Stock Exchange—the issue was always going to be how the government chose to respond. Japan’s response in implementing its 2009 tax reforms and negotiating bilateral tax agreements with a number of Middle Eastern jurisdictions was clearly a step in the right direction, but do they go far enough?

What is agreed by pundits across the financial sector is that a slow U.S. economic recovery and a strengthening yen means Japan is unable to rely on U.S. investment to the extent it has in the past, reinforcing the increasing trend of soliciting FDI from the Middle East.

“Recently we have been fielding more questions about structuring transactions in Japan in an Islamic-compliant manner,” said Tokyo-based international tax attorney and Islamic finance specialist, Paul Previtera.

“And while in principle Japan appears ready to accommodate such investment, its regulatory framework and, in particular, the tax treatment of these transactions needs to be clarified to provide greater certainty to investors,” he said.

The Gulf Cooperation Council (GCC) member countries (Kuwait, Qatar, Oman, Bahrain, Saudi Arabia, and the United Arab Emirates) have become a hotbed for investment activity due to the countries’ lucrative natural resources, steadily-growing economies, and stable financing system.

The GCC nations provide more than 20 percent of the world’s oil, supplying almost 80 percent of Japan’s domestic oil supply. The GCC’s oil-based economy largely insulated it from the extreme shockwaves of the global financial crisis, even amongst falling oil prices and high-profile corporate defaults in the region, like Dubai World.

In fact, the GCC member nations represented the few nations in the world that actually produced a positive growth rate which is expected to increase in 2010, at a rate two to three times that of the United States and Japan.

Another unique feature that makes the GCC an attractive source of investment is its Islamic-based finance principles, which include a ban on high-risk investments, strict asset-backed loan requirements, and no interest charges on loans.

Additionally, a principle underlying all Islamic transactions is that the lender and the borrower are in a business partnership and therefore share in losses, as well as profits.

These rules and attitudes result in a stable banking industry and provide economic liquidity, the lack of which drove the United States economy into a tailspin in 2008.

“With the world’s new distaste for excessive risk and paranoia over financial uncertainty, the GCC markets represent the perfect venue to re-energize the Japanese economy,” said Previtera.

Interestingly, China is also vying for GCC-investor attention, highlighted by its 60 percent increase in trade with the six-member block in 2008 and its current negotiations for a Free Trade Agreement.

“Last year alone there was a 50 percent reduction in trade between Japan and the GCC,” said the CEO of Japan Touchstone, Chris Alderson, whose company increasingly receives inquiries about Middle East investment.

“This figure is only expected to further decline because of a fall in global prices and a steady growth in trade between the GCC and China,” said Alderson.

Japan must take a more proactive stance on its trading relationship with the GCC. While Japan has used tax reforms in recent years to encourage Japanese companies to repatriate income earned overseas to Japan, more can be done to provide tax breaks to foreign investors looking to enter the Japanese market.

We applaud Japan’s enthusiasm for executing bilateral tax agreements with members of the GCC and see these as a key platform from which Japan’s economy can drive forward.

However, in order to convert this intent into results from an FDI perspective, more can be done from the viewpoint of Japan’s domestic legal and tax regulations. Only then will Japan be able to position itself as a more competitive trading partner and a lucrative ground for investment.

Dean Page is CEO of Tokyo based venture capital firm Foreya Partners. He is qualified both as an attorney and as a CPA and was formerly a partner with Ernst & Young.
Dean.Page@VentureCapital.Asia

Jennifer Malaer is an associate at Foreya Partners and is currently completing her legal studies at Miami University in Florida.
Jennifer.Malaer@VentureCapital.Asia

Jesper Koll is a Managing Director and Head of Research at JP Morgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.

Yes, there is a “magic bullet” for Japan’s economy. Yes, I really think it does exist, that one policy action that will put an end to economic stagnation. Of course, it is my personal view, but here we go: Japan should pass a law that automatically raises the consumption tax by an additional one percentage point every year on April 1.

And, yes, this law must not specify how many consecutive years this step-up is supposed to happen. Toriaizu—for the time being—the consumption tax will be going up with the start of the new fiscal year, end of story.

Why do I think this will work? First of all, it is great economics. Second, it is good politics. Let me explain. The economics is simple—it aims directly at both deflation and fears of a bankrupt pension, social welfare and heathcare system. Survey after survey confirms that by far the single biggest worry is uncertainty (or should I say certainty?) that the states’ promises to cover a graceful retirement cannot be honored. This is what drives up private savings, which in turn depresses demand, which leads to further deflation.

Politicians have been quick to find excuses for not hiking the consumption tax ever since it became clear that Japan’s demographics dictate a shift away from direct taxation to indirect taxation. But the consumption tax is the right thing to do. As Japan’s workforce declines, the tax base drops off. Fewer and fewer people earn income that can be taxed. To offset the revenue loss the easiest thing to do is start taxing at the point of consumption. Also, the consumption tax is much fairer as it is basically impossible to avoid. As the famous politician Michio Watanabe said at the time of the introduction of the sales tax in 1989, “The consumption tax is good because even the yakuza and politicians will have to pay it.”

Unfortunately, every year that the decision to raise the consumption tax is postponed, the need for a more aggressive hike increases. With debt-to-GDP at almost 200 percent, Japan’s risks of a debt-spiral are considerable. Most economists calculate that the tax would need to be raised from the current five percent to almost 20 percent to make fiscal consolidation credible. Scary prospects, but to be fair, it is simply impossible to predict and calculate what exact level of consumption tax would be optimal for Japan. All we do know is that it is not five percent but higher. Hence my proposal to—toriaizu—hike the tax by one percentage point every year. We can then see how effective the new system is, how quick and efficient the impact on total tax revenues will be. Clearspeak: Let’s not pretend we know how much is needed now, but let’s be pragmatic and realistic.

Overbuild

Illustration by Phil Couzens

Building an enterprise infrastructure is challenging and costly. Yet many businesses today are actually intentionally overbuilding—and therefore overspending—as this has historically been the only proven means of ensuring that business-critical operations will remain in service, no matter what the world throws at them.

Companies depend on being able to provide consistent, reliable access to business-critical applications, and particularly applications such as external websites or customer portals which represent their brand, and their business to the outside world.

Yet too many organizations today have suffered from crashed websites or unavailable applications resulting from usage spikes. This is why overbuilding has become the norm—it ensures that the network will withstand the unexpected and in doing so also ensures that day-to-day activities can continue uninterrupted. From a business perspective, this means huge amounts of idle capacity for great sweeps of time, ‘just in case.’

Not surprisingly, therefore, that cloud computing is of such interest to organizations in Japan and around the globe. In a cloud computing environment, functionality is transferred out of the network and made available to enterprises on demand. In essence, service providers can leverage economies of scale to provide a highly reliable platform with greater cost and management efficiency.

Companies gain flexible access to large amounts of scalable computing power, giving them the freedom to adjust capacity up and down to support the natural cycles of their business. Resources can be added, turned off, or reassigned whenever necessary. Cloud computing is therefore a business enabler rather than a technical construct—a function that IT leaders are finding increasingly necessary as the IT role evolves.

Drivers

Cloud computing also creates an opportunity for IT departments to change their focus from deploying and supporting applications to managing the services that those applications provide. This allows the department to focus on high-value activities that align with and support the enterprise business goals.

The CIO can then function as a technology strategist, working with business units to understand their business needs and advise how best to use technology to accomplish their objectives.

Nevertheless, this is a big change in business strategy and, perhaps understandably, some business and IT leaders remain hesitant about stepping off the parapet and into the cloud. The usual concerns cited are security, availability and control. And it’s true that an effective cloud computing strategy must incorporate these factors, if it is to drive business success.

Trust

In cloud computing, servers, network capabilities and storage are provided to the enterprise as a service. In turn, data is delivered from the enterprise to the cloud, with attendant concerns about letting sensitive information move outside the company firewall.

These concerns must be adequately addressed. Industry standards and regulations such as HIPAA, the Payment Card Industry Data Security Standard (PCI-DSS), the Gramm-Leach-Biley Act (GLBA) and the Statement on Auditing Standards 70 (SAS-70) have very defined and measurable security requirements.

For cloud computing to be viable, providers must adhere to the same standards and controls that an organization would impose in-house. By their very nature, cloud computing service models involve transferring some control to a trusted service provider. But not all organizations will want all systems to migrate to the cloud, and therefore varying levels of control can be provided within the cloud computing model. As cloud computing becomes more available, the type and level of customization offered by a service provider will become a competitive differentiator.

Conclusion

Cloud computing is more than the driving force behind the next wave of technology innovation. It is a sound business strategy that helps organizations practice better financial management and creates a more sustainable, cost-efficient model for supporting IT services.

While valid concerns exist, they can be managed with proper preparation. Careful evaluation of vendors can help identify a service provider whose solution is enterprise-ready in key areas such as security, availability, and control. We at Verizon Business are excited about the potential of cloud-based computing to transform our customers’ business, and look forward to helping them navigate their way to future business success.

Itsuo Iso is the Executive Officer and President of Verizon Business in Japan.

Seth Sulkin is the President and CEO of Pacifica Malls K.K., a Tokyo-based real estate asset manager specializing in commercial properties.

Walk around central Tokyo these days and you will see a surprising number of new, empty buildings. While Tokyo doesn’t quite yet look like Bangkok at the height of the Asian financial crisis or Dubai today, even prime districts like Ginza, Omotesando, Roppongi and Azabu Juban are suffering from an excess of building supply and shortage of tenant demand.

It is tempting to assume that some failure of Japanese government policy is to blame, but in reality it is mostly a combination of the Lehman shock, greed and unrealistic development assumptions.

If you go elsewhere in Japan, the situation is vastly worse and yes, it is fair to hold the Japanese government largely responsible. Go to a shotengai (main street) in the traditional commercial core of any regional city and you may find more shuttered shops than those still open for business.

Both directly, and indirectly, through local chambers of commerce, small shopkeepers were among the strongest traditional supporters of the ruling Liberal Democratic Party (LDP) for decades.

Three years ago, the LDP rewarded this support with the passage of three urban planning laws collectively called machi zukuri sanpo that had the effect of halting most new commercial development in suburban and rural areas in order to protect the shotengai.

Ask any old-time shopkeeper or local government official if sales have improved in the last three years and few would give the LDP much credit.

It is hard to argue that Japan needs more shopping centers at the moment, but intervening in the free market to limit competition is unlikely to increase foot traffic for the shotengai.

Shortly before last year’s election that put the Democratic Party of Japan (DPJ) into power, a few ACCJ members and I had the opportunity to exchange views on regional development policy with some up and coming DPJ Lower and Upper House members.

Illustration by Phil Couzens

I sensed a strong interest in regional development issues and hoped that they would move away from the LDP’s failed policies and try something that would actually help struggling urban areas without restricting competition but, so far, this doesn’t seem to be a high priority of the Hatoyama cabinet.

The Hatoyama government also needs to make clear its policy on other forms of intervention in the private sector, such as the bailout of Japan Airlines and other financing schemes of the 100 percent government-owned Development Bank of Japan (DBJ).

As a taxpayer, I haven’t seen any clear explanation as to why my money is being used to save JAL or a cost/benefit analysis for letting it disappear. As a real estate market participant, the kanmin fund—or public/private fund, that was supposed to serve as an alternative to traditional bank financing for struggling J-REITs and boost the overall property market—is not making progress.

Instead, it actually competes directly with private sector banks, albeit poorly, by offering loans at high interest rates requiring full collateral. A couple of years ago when it was targeted for privatization, the DPJ aggressively inserted itself into the private sector, raising all kinds of real estate and other private equity funds and forming joint ventures with private companies.

Now that privatization has apparently been put on the back burner or shelved, the DBJ seems to have gone back to its traditional role of bailing out struggling companies with no other means of borrowing.

And what has happened to Financial Services Minister Shizuka Kamei recently? As a company that theoretically should have qualified for his bizarre scheme to put a moratorium on bank loan repayments, I was eager to give it a try. All of the teeth have been pulled out of his plan, however, and perhaps from him personally as well, as Minister Kamei hasn’t generated headlines for a while now.

Seth Sulkin is the President and CEO of Pacifica Malls K.K., a Tokyo-based real estate asset manager specializing in commercial properties.

The creation of the J-REIT market 10 years ago spurred huge change in the Japanese real estate market, resulting in increased institutional ownership, the introduction of Western-style valuation and management practices and higher transparency. While the market rose for much of the last 10 years, systematic flaws in the J-REIT market didn’t seem to matter. Now that the Japanese real estate market is floundering, it is time for the Japanese government to take a fresh look at what it did wrong and how to correct it. Without a transformation of the J-REIT market and fresh non-recourse lending, it will be very difficult for the real estate market to recover in any meaningful way.

Unlike most countries, where REIT management is contained in the same entity that actually owns the real estate, Japan created a system where REITs are paper companies that own property and asset management is performed by separate entities on a contractual basis. The first few J-REITs were created by Japan’s corporate elite, such as Mitsubishi Estate, Mitsui Fudosan and Mitsubishi Corp., which set up subsidiaries to manage the REITs and sold properties off their balance sheets to seed the portfolios.

As a result, many investors, particularly individuals, focused more on the name of the sponsors than the actual portfolios and operating performance. Until about two years ago, J-REITs borrowed money quite differently than real estate private equity funds. Lenders to the J-REITs, which were primarily large Japanese banks, provided huge amounts of unsecured loans at extremely low rates. This contrasts with private equity funds, which borrowed then and now on a “non-recourse” basis, meaning that the properties were pledged as collateral, but the lender did not have a general claim on other corporate assets. When the real estate debt market virtually disappeared in 2008, J-REITs whose sponsors were not affiliated with the Mitsubishi, Mitsui, Nomura or other major Japanese corporate groups were practically shut out of the debt market or forced to borrow at much higher rates and with full collateral.

Illustration by Phil Couzens

It is no coincidence that many of the J-REITs struggling for survival right now have foreign sponsors. Major Japanese banks never really developed sufficient underwriting capabilities to properly value the collateral of non-recourse loans. Instead, they prefer relationship-lending with well-established domestic companies which will honor loan commitments on underperforming assets, even when it doesn’t make economic sense. This contrasts with Western investors, who sometimes walk away from assets when the value is less than the outstanding loan amount. One foreign-controlled J-REIT has already gone bankrupt (New City Residence); several face looming debt maturities with no attractive solutions, and others are in the process of being absorbed into J-REITs controlled by major Japanese companies. In a November 2009 report by Nomura Securities on the proposed “merger” (in reality, takeover) between the Japan Retail Fund (managed by an affiliate of Mitsubishi Corp.) and the LaSalle Japan REIT (managed by an affiliate of LaSalle Investment Management of the U.S.), the report came to the conclusion that LaSalle really had no choice but to get out of the J-REIT business because “LaSalle Japan REIT’s banks were uniformly hostile in their lending stance.”

Changing the structure of J-REITs to internalize management would reduce the influence of the original sponsors, leading to more professional practices, reduction in conflicts of interest and improved transparency. The Japanese government should increase pressure on banks to lend to real estate, particularly in the non-recourse category. A revival of the J-REIT market and greater availability of loans are the two most important steps that can be taken to jumpstart the real estate market, which is probably more critical to the economy than exports.

Jesper Koll is a Managing Director and Head of Research at JP Morgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.

In global finance and economics, it is almost always the rates of change rather than the absolute level that matters. Humans reward growth, not stagnation. Yes, size matters, but growth is so much more exciting. It’s the dream of being big in the future that counts. And on the global stage, whether you like it or not, being bigger and faster than the other economies is still what’s needed to attract capital and rewards.

This relentless race also applies to the complex world of policy making in general, and monetary policy in particular. What has been hurting Japan is not that they are doing nothing, but that they have been doing it less aggressively than the rest of the world. Just listen to the Federal Reserve continuing to make strong commitments that they will continue to be there and will continue to act pro-actively because the U.S. economy still faces strong headwinds. In contrast, the Bank of Japan (BoJ) is ensnared in a “stop-and-go” pattern—in November of last year they upgraded their growth outlook and openly talked about the need to “exit” from quantitative easing and money printing. But then in December they turned around and started talking about deflation risks and decided to actually increase monetary accommodation. Clearspeak: Japan suffers from policy inconsistency and a lack of persistent and aggressive pursuit of a defined policy goal. Stop-and-go does not win world records in the long-distance race we’re all in.

Monetary policy is not as mysterious as people sometimes make it out to be. The central bank of any country controls the price of money—interest rates—by printing money and buying either public sector or private sector securities. There are no limits to “mechanical monetarism,” i.e. the printing of money. Technically, the central bank could buy all the government bonds that are issued. And if they want to, they could buy any private sector assets as well. Case in point: Remember when then BoJ Governor Toshihiko Fukui started an equity-buying program within a month of being appointed by then Prime Minister Junichiro Koizumi. The unprecedented move by the central bank to buy equities from private companies sent an incredibly strong message. Yes, the BoJ has gotten serious about wanting to fight deflation. Make no mistake, where there is a will, there is a way. And remember that any central bank is a far more powerful operator than any private enterprise: They own the printing presses and they do have an information advantage. Of course, there is institutional best practice, basic principle and culture, but if central banks want to act, they can.

But should they?

Perhaps the best-ever answer to this was given by former BoJ Governor Masaru Hayami in one of the parliament sessions. Called in to testify just after another re-start of a quant-ease initiative in the late ’90s, he said–and I quote from memory, “We are doing all we can, but trust me, it is not going to work.” Clearspeak: The BoJ does not believe in mechanical monetarism, i.e. growing base money and the money supply will “not” lay the foundation for future growth.

Are they wrong?

To answer this one, you can either hide behind some dogma (the great Milton Friedman says inflation is always a monetary phenomena, so what is the BoJ waiting for?), or you can jump onto an infinity loop of possible empirical observations that justify, perhaps, that Japan is a special case. Neither is helpful, in my view, so let me give you some quick thoughts on my personal thinking on this one (and I’m happy to discuss this further over a glass of wine next time we meet).

The BoJ law stipulates two principal goals that must guide BoJ operations: One is price stability, the other is financial system stability. I think it is reasonably clear that the BoJ has failed to achieve the first one. Japan is stuck in de-facto disinflation rot, with all major markets of the economy–land, labor, capital–showing consistent price declines. Make no mistake, it is this adjustment of the major factor markets that is the macro-driver forcing price deflation in the various goods and service industries.

What this really means is the following: Without wealth effects from rising factor prices –land, labor, and capital–you cannot get out of deflation in the goods and services industries.

Seth Sulkin is the President and CEO of Pacifica Malls K.K., a Tokyo-based real estate asset manager specializing in commercial properties.

In March of this year, I was reading books about daily life during the Great Depression to try to compare the behavior of consumers and businesses in the 1930s with what seemed like the end of the world in early 2009. Funnily enough, although Japanese consumers stopped buying Louis Vuitton bags and businesses cut back significantly on inventory and entertainment spending, Tokyo continued to look and feel like a reasonably prosperous place. There was no noticeable increase in homeless on the streets or a substantial increase in foreclosures on residential mortgages.

That being said, while the Japanese real estate market has recovered somewhat from the lows in March, 2010 is likely to be a tumultuous, difficult year for the industry. Although the GDP turned positive in the last couple of quarters, many economists believe the improvement was temporary, spurred by Japanese government stimulus spending and inventory rebuilding, neither of which is likely to be sustained. Deflation is rampant and still accelerating, which is not only bad news for the economy generally, but real estate specifically. The average price of a bento has dropped from around 650 yen two years ago to 350 yen today, while a pair of reasonable quality blue jeans can now cost below 1,000 yen. Many expatriates have successfully negotiated rent reductions on their homes of 20 to 30 percent or more this year. Class A office rents have dropped about 40 percent from the peak.

Despite more doom and gloom to come, there is growing anecdotal evidence that at least part of the real estate industry is poised to recover. The market for small investment properties (100 million yen to 1 billion yen) is up 30 to 40 percent from the bottom early this year. When net yields on these properties hit 10 percent early in the year, a flood of demand was unleashed from wealthy individuals and ordinary businesses seeking to invest spare cash in high yielding assets. Institutional grade properties (5 to 20 billion yen) haven’t seen a similar change, mainly because non-recourse debt remains extremely difficult to obtain and leverage is so low that few investors can reach their minimum return hurdles.

The big story for the commercial real estate market in 2010 is likely to be the massive wave (1 trillion yen) of commercial mortgage backed securities (CMBS) maturing and the degree to which banks can delay or avoid the sale of non-performing loans (NPL). Although nobody is quite yet predicting sizable NPL sales at huge discounts, a number of domestic and international funds are being raised in the expectation that banks and bondholders will capitulate in the near future and start selling their assets at market prices.

Illustration by Phil Couzens

Ordinarily, the dumping of real estate (either hard assets or loans) at discounts would have a highly negative impact on the market overall. Perversely, in what may feel like a parallel universe, institutional investors who have been sitting on their hands for the last year or two are beginning to break out of their cocoons by actively looking at acquisitions again. The number of lenders is also gradually rising because of the return of some previously active players as well as the arrival of some new non-bank lenders. The increased availability of debt should lead to higher leverage, higher returns and spur more acquisitions at higher prices, speeding along the recovery of the real estate market. The big question for 2010 is whether these parallel universes can co-exist.