Japan 2013 Forecast
Five surprises and one wish
It‘s that special time of year again when economists and pundits around the world offer their forecasts for the new year. Will economic fortunes rise or fall? Will currencies go up or down, stock markets crash or surge?
Trust me, having been part of the prognostication racket for almost three decades the most important lesson I’ve learned is to be inherently skeptical of most forecasts. It’s always worthwhile to keep in mind the old adage: why did God create economists? Answer: to make weather forecasters look good.
Still, it is only human to want to predict and discuss the future. Technical forecasting of economic trends is not that difficult anymore, as statistical tools and computing power have vastly improved in recent decades. Your average Excel spreadsheet offers a whole set of applications preset to extrapolate and calculate future possibilities. Predicting the future for almost any data set is just a few mouse clicks away.
Real life and real economies are not that simple. Quirks and jumps in the data, outliers and breaks in the series, define much of what happens in the real world. Even the world’s best economic forecasters barely get it right half of the time. The sad truth is when you need an economic prediction, you might as well flip a coin.
Now, I hope you’ll agree with me that flipping a coin is much more boring that listening to a great thesis or prediction. Debating an outlandish thesis or hypothesis with a friend, customer or team stands a higher chance of yielding a productive outcome than presenting a multifaceted, regression-based prediction.
In this spirit, my “forecasts” for 2013 are as follows. They contain surprises that, despite their low probability, do have a chance of bubbling up and making a difference in Japan’s future.
1. A Japanese bank buys a Chinese bank
This year we saw corporate Japan on an aggressive buying spree of global companies. Importantly, this wave of M&As was spread across a wide spectrum of industries and sectors – from car parts companies to advertising agencies, from drinks and pharma conglomerates to internet start-ups and steel companies. Even Softbank, a Japanese firm in the largely domestic telecommunications sector, purchased Sprint, a major domestic player in the US. Make no mistake: Japan Inc. is back, raising its global game by buying competitors and partners.
So how long will it be until a Japanese bank buys into a major US player? Their capital base is strong enough and domestic growth opportunities are limited. This year we saw Japanese banks begin to expand their overseas loan books for the first time in almost a generation. The next step, I believe, will be an all-out purchase or major capital tie-up with a Chinese bank.
The economics behind this possibility are interesting. China’s banks need capital to account for a rise in non-performing loans and credit costs. Japanese banks need markets to expand business, grow risk assets and raise returns. I know it sounds improbable now, but a Japanese bank buying a Chinese bank could very well be a match made in heaven. As a bonus, Japan-China relations could improve as elite bankers from both countries begin to focus on making money together.
2. Japan makes a hit electronic product that sets a global trend
Japan’s consumer electronics industry is dying. On the global stage, the last Made-in-Japan category killer was the Sony Walkman. Since then, news has gone from bad to worse. US and Korean electronic gadget makers now dominate the emotional buy-in for consumers across the globe. What a surprise it would be if the next global trendsetting electronic product came from a Japanese company.
The R&D, product design and patent pipelines of corporate Japan remain very strong. It would only take gusto, real-world marketing magic and a “new openness” among Japanese companies, rather than continuing to insist on proprietary software and exclusive in-brand compatibility. These two factors are widely acknowledged as the key forces behind Japan’s fall from global relevance in the realm of gadgets.
If Japan embraces and promotes open architecture and global creativity it could easily make a comeback among global consumers. Possible candidates include personal robots and lifestyle companions, particularly for the aging and elderly. Japan Inc. has what it takes to get us from I-pad to I-Robot.
3. Stable government, credible leaders
Next year could bring a major surprise on the political front. Japan could have a stable government by late summer. In 2013, two national elections will be held: the upper house in July/August, and the lower house sometime before September. With a little luck, this combination could bring Japan’s political gridlock to an end.
Japan has suffered for more than a decade because the various ruling coalitions only had a majority in the lower house. The lack of upper house leadership made effective government a de facto impossibility.
Now it is not obvious that any one party or coalition will be strong enough to carry both houses. Most pundits even expect further fragmentation of the parliamentary balance of power. The renaissance of charismatic small-party leaders suggests so.
However, pragmatism could assert itself come election time. We should not rule out either a strong LDP-led coalition, or a Democrat-led unified front. Either way, stable government with majority control of both houses would be a pleasant surprise for Japan in 2013.
4. A gaijin governs the Bank of Japan
In early April, the government will appoint the next Governor of the Bank of Japan (BoJ), as the five-year fixed term of Governor Shirakawa comes to an end. This is a highly political selection process. The Governor is the ultimate steward of the nation’s currency and wealth. He is also usually the first public official blamed when things go wrong – the stock market drops, the economy slows, the currency appreciates.
In Japan, the Governor’s job is particularly difficult, as every part of the government has a strong opinion about what the BoJ should do. The BoJ’s independence is coming under growing pressure. The pressure to monetize government debt and print money is mounting at home.
Overseas, the aggressive pro-inflation policies of both the Federal Reserve Bank of America and the European Central Bank risk isolating the more conservative BoJ. To solve this problem and reassert policy leadership without losing face, appointing a foreigner as BoJ Governor could be a solution.
Make no mistake that unorthodox monetary policy will come to Japan in one way or another. Whether the next governor is really a gaijin (non-Japanese national) or simply an ex-Ministry of Finance official, an outsider to the BoJ may get the top finance job in Japan in the coming year.
5. Tokyo real estate prices climb
Many say it cannot happen. How could Tokyo real estate prices rise? Simple supply and demand suggest it cannot be. Population decline means falling demand, while fewer tenants increase supply in the forms of empty mansions and homes. It’s a simple bet, or so the overwhelming consensus agrees. But could we see upward pressure on prices?
Buyers will bid up condo and home prices because they have become cheap. Remember that here it is relative to income and what you can afford. They want to live in a better place, a smarter neighborhood, closer to work or to the grandparents. In my mind, all these forces are converging and I expect an upturn in Tokyo property and home prices in the next twelve to eighteen months.
Call that my forecast. But it would still surprise most observers. And if you want a strong indicator for a really big surprise, here it is. If I’m right and Tokyo real estate prices begin to climb for the first time in more than a generation, it will be a surefire sign that Japan’s domestic demand economy is starting to achieve sustainable recovery. Rising home prices equal rising wealth, which equals growing confidence, equals a jump in spending: a virtuous cycle of economic growth.
Aside from my surprise predictions, I also have one wish for Japan as New Year approaches: celebrate success.
I wish Japan could start to celebrate and embrace success more openly. I often get the sense the Japanese regard success primarily with jealousy and suspicion. It is almost assumed that those who succeed must have done something wrong, must have somehow broken the rules of group behavior to create success.
And yes, to be exceptionally successful, you must break the mold of convention. But is that not a refreshing, liberating and exemplary source of pride, both for the creator and the group that gave them the strength to create?
In 2013, don’t be suspicious. Celebrate your own success, as well as the successes of your friends, your group, your company and your country, Japan.