Why Japan is still a safe bet
“Help!” The Beatles song was rattling around my head as I heard the news today from an Economist Corporate Network (ECN) member who belongs to a major advertising group. Corporate resources are being transferred out of Japan into the booming markets of China, India, Vietnam and Indonesia, she told me. Another member was casting around in some desperation for information to help him negotiate with his head office about funding for acquisitions opportunities in Japan.
In fact, as any real investor knows, the best time to double your money is to invest when everybody is getting out. Just like patsies shun the stock market when it’s cheap, so it’s misguided to shun Japan because of its current problems. Deflation may be an ugly word – but remember this is not the crushing asset deflation we had after 1991. What we are getting now is a continuation of the deflation that has been bringing Tokyo prices in line with the rest of the world. Real estate, especially the practice of paying non-returnable deposits, still has some way to fall, I believe. Food is extraordinarily cheap and good, but there are plenty of other areas where efficiencies have not yet made themselves felt.
So you should welcome deflation – embrace it with open arms. Deflation rewards those companies which are – quite simply – more efficient than their peers. The brands of companies which can meet the challenge are flourishing. We all know the examples of UNIQLO, Nittori, H&M, Zara, IKEA, and so on. But they should alert us to the fact that companies with the right business model are hoovering up cash in Japan. Given how muddled and inefficient Japan’s service industries are (and they make up 72% of Japan’s GDP!), this is a golden time to invest in Japan. That is precisely why I am organising a series of seminars for our most senior members on the issue of “How do you sell Japan to HQ?”
In the meantime, over in China, we are being reminded that the cuddly panda is returning to its primal bearish nature: imperious and aggressive. Foreign companies have been taken aback by the change in tone.
Personally, I was horrified by the recent execution of a British passport holder for drug smuggling. Despite evidence that he was mentally disturbed, Beijing refused to examine him. The reason I was so shocked was that I was in China for 11 years from 1996 – a golden time for foreigners with “rich nation” passports. Everybody in China got the message from on high: be nice to these bearers of foreign capital and technology. And they were nice, at every level. In fact, the lower levels bordered on the servile. So the execution was all the more disturbing.
I called my German business friend, a China veteran. He is on the point of marrying a beautiful Shanghainese woman, and doing up a huge colonial mansion in the city centre. He stoutly denies any suggestion that China is getting less welcoming to foreigners. He points out that when the USAF mis-read its maps and wiped out the Chinese embassy in what was then Yugoslavia in 1999, and when a United States spy plane crashed into a Chinese jet fighter in 2001, there was a similar cooling of temperatures. Maybe he’s right.
But this same individual also candidly admitted to me that the Beijing branch of his small IT company was ruthlessly plundered by his local staff – one of whom (I met him) was a top Beijing University graduate. An interesting role in all this was played by his finance manager. He trusted her, and she generally looked after his interests, but did not think it worthwhile to tell him that a large percentage of his yearly growth was illegally going to his managers.
Have you heard about this kind of thing happening in Japan? I didn’t think so. That’s because Japan is not an emerging market, but benefits from the rule of law. You make a lot less money over the short term, but you could end up in front over the long term. Keep the faith.