Intelligence

A NEW SUN RISING

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Structural reforms are lifting Japan out of years of stagnation. But the most dynamic force may be a new generation willing to throw out the old rules. GEOFFREY YORK REPORTS FROM TOKYO

By GEOFFREY YORK

Thursday, March 31, 2005

Anyone seeking a symbol of the new Japan need look no further than a swashbuckling spike-haired 32-year-old cyberspace tycoon named Takafumi Horie.

Japan's business establishment loathes him. Television audiences adore him.

He drives a blue Ferrari, wears black T-shirts and jeans, performs on quiz shows, collects comic books, writes bestsellers on how to get rich and infuriates the business elite by violating the traditional protocol against hostile takeovers.

Mr. Horie dropped out of Tokyo University and created his own Internet company when he was 23. Within seven years, he had earned his first $100-million (U.S.). His company, Livedoor Co., reported sales of $294-million and profits of $54-million last year, primarily through Internet services and DVD rentals.

Japan's young generation made him an instant hero when he launched a brash bid to set up a franchise in the exclusive Japanese baseball league last year. Young fans saw him as a bold reformer who would rescue the baseball league from financial ruin. But the baseball moguls refused to let him enter the league.

Last month he returned with a vengeance, stunning the corporate establishment with a bid for control of Fuji TV, one of Japan's leading broadcasters. Backed by financing from the U.S.-based Lehman Brothers investment bank, he used a series of secret off-hours trades to purchase 40 per cent of Nippon Broadcasting Systems, the largest shareholder in Fuji TV. The broadcasters fought back bitterly with a "poison pill" defence, issuing new shares that diluted Livedoor's stake.

The struggle for Fuji epitomizes all the conflicts and tensions of today's Japan.

On one side are the young Japanese entrepreneurs who see Mr. Horie as an icon of change in a stodgy corporate world. They are pushing for new competition and reform in Japan's slow-moving economy, opening the doors to globalization, foreign investment, new technology and fresh blood to challenge the cozy elites who traditionally control industries through cross-holdings. On the other side, Japan's older business leaders have been outraged by Mr. Horie's rude tactics and secret manoeuvring. They denounced him for "stepping into other people's homes without taking his shoes off." They alleged that his takeover bid was "an act of terrorism." And they accused him of allowing foreign financiers to gain influence in a strategically important industry.

Behind this clash is a deeper struggle between two visions of Japan's future. One vision is the confident, new Japan: taking an active role on the world stage for the first time in 60 years, sending troops to Iraq, seeking a seat on the United Nations Security Council, winning global influence through its pop culture and technology, aiming to send astronauts to the moon, opening up its economy, challenging the U.S. for dominance in the auto industry, and even supplying the hottest new superstars for American baseball teams.

The other vision is more anxious and angst-ridden. This is a country that obsesses over the possibility of future decline. It worries about its dropping birth rate and its aging populace. It broods over projections that its population will decline by 20 million in the next 50 years. It frets over the dramatic rise of China and the nuclear threat from North Korea. And it expresses its insecurities through an increasingly nationalistic class of politicians who oppose foreign investment and demand patriotic education in the schools.

Nobody should expect either of these two visions to gain the upper hand. The only certainty is that fundamental changes are under way, and they will have profound implications for the world.

Japan remains the second-biggest economy after the United States, a crucial force in Asian security and a key trading partner of Canada. Its emerging new identity will shape not only the global economy but also the potential for military conflicts in Asia.

Much of this shifting direction can be traced to the arrival of one man: Junichiro Koizumi. Since becoming Prime Minister in 2001, Mr. Koizumi has introduced a new populism and nationalism into Japanese politics, giving the country greater confidence and a willingness to engage on the world stage. He has pledged to revise Japan's constitution, removing the pacifist restrictions that made it unique in the world. He has been willing to clash politically with North Korea and China. He has signed onto the U.S. missile defence system and has sent Japanese troops to foreign combat zones.

Domestically, his populist style has helped ensure that "reform" is the new Japanese buzzword. And he has forced the long-ruling Liberal Democratic Party to respond to the public mood. Despite decades in power, the LDP is now compelled to portray itself as the party of reform. "We are changing politics!" proclaims the latest LDP brochure. "Our job is to change Japan."

On the economy, too, Mr. Koizumi has tackled Japan's powerful bureaucracy and promised a new agenda of "reform without sacred cows" -- the kinds of reforms supported by the younger generation of business leaders. On these issues, however, the Prime Minister's record is much more mixed.

Certainly his policies have helped encourage more openness and efficiency in the economy, cutting wasteful public-works spending and reducing excess debts, especially in the banking sector where non-performing loans have been drastically reduced.

While Mr. Koizumi cannot claim all the credit, it is true that, following years of stagnation, Japan's economy is finally beginning to rebound. Its growth for 2004 was 2.7 per cent -- the best performance since 1996. Its banks are increasingly healthy, its corporations are more efficient, deflation is ending, personal consumption is rising, and money-losing "zombie" companies are finally dying off. Land prices in central Tokyo increased last year for the first time in 17 years, indicating an end to the property-value collapse that has plagued Japan since the 1980s.

"Japan is on the verge of showing vitality in its domestic economy for the first time in a decade," said Richard Jerram, chief economist at the Tokyo office of Macquarie Securities. "I think its banking system is basically solvent now, and that's extremely good news. The prospect is that the domestic economy will be much stronger now."

As the economy revives, Japan's younger entrepreneurs are increasingly willing to throw open their doors to global competition and corporate takeovers.

The cyber-tycoon, Mr. Horie, has become the symbol of the new era.

"His popularity among young people is shocking to the older generation, who see him as an Americanized capitalist," said Mari Miura, a political scientist at Sophia University in Tokyo. "In the past, there was lifetime security and you had a job until you died. Now you need to have mobility skills. People feel that they don't have to be loyal to their bosses any more. They feel that their income depends on their performance now. That's why they like Horie. He is challenging the establishment and he doesn't seem to care about social norms."

The most celebrated of Mr. Koizumi's reforms is his plan to privatize Japan's vast network of postal services, including the postal savings system -- essentially the biggest financial institution in the country. However, the postal privatization seems to be largely driven by political factors, rather than a genuine desire for economic reform, since Mr. Koizumi knows that the privatization would weaken his political foes. The postal system and its rural employees were the main stronghold of a rival faction of the ruling party, and Mr. Koizumi is determined to defeat it.

Moreover, the privatization plan has been weakened and delayed by strong opposition within his own party. He has repeatedly compromised with his opponents, watering down the reforms and pushing back the schedule to the point where some of the postal reforms will not be completed until 2017.

"I don't think he is a true believer in neo-liberalism or markets," Ms. Miura said. "His primary motive was to destroy the rival faction in the LDP. In reality, the postal system isn't likely to change very much."

There is, however, a new openness in the Japanese economy, and that is making it easier for foreign companies to invest and trade here. But analysts believe that Canada is failing to exploit these opportunities. Only 2 per cent of Japan's imports came from Canada in 2003, a substantial drop from Canada's 3.2 per cent share a decade ago.

"Canada's commercial relationship with Japan has declined significantly in recent years," said Carin Holroyd, a specialist in Canada-Japan trade relations, in a commentary published this year by the Asia-Pacific Foundation of Canada.

"Canada's performance with Japan has been mediocre at best," she said. "Other countries have been more creative, better-informed, and more engaged with the rapidly changing Japanese market. . . . Canadian firms have done relatively little to respond to commercial openings in Japan. The country has suffered economically, and significantly at that, as a consequence."

Japan: an overview
Official name: Nihon

Government type: Constitutional monarchy with a parliamentary government

Electoral system: Universal suffrage at 20 years of age

Head of state: Emperor Akihito

Head of government: Prime Minister Junichiro Koizumi

National legislature: The bicameral Diet (Kokkai) consists of the 247-seat House of Councillors (Sangi-in) and the 480-seat House of Representatives (Shugi-in)

National government: Under the constitution, the prime minister must command a parliamentary majority so after elections the leader of the majority party or leader of a majority coalition in the House of Representatives usually becomes prime minister, who them appoints the cabinet

Main political parties: Democratic Party of Japan; Japan Communist Party; Komeito; Liberal Democratic Party; Social Democratic Party

Area: Japan consists of four main islands: Hokkaido, Honshu, Shikoku and Kyushu, plus thousands for smaller islands. Their combined area is 377,873 square kilometres

Language: Japanese

Population: 126.9 million as of October, 2000, census (estimated at 127,333,002 in July, 2004)

Currency: Japanese yen (JPY)

Exchange rate: 100 yen = 94 cents (U.S.) or $1.14 (Canadian)

Largest cities and populations:

Tokyo, the capital (8.3 million)

Yokohama (3.43 million)

Osaka (2.6 million).

Nagoya (2.17 million)

Sapporo (1.8 million)

Kobe (1.5 million)

Kyoto (1.47 million)

GDP: 504.6-trillion yen

Per capita GDP: 3,954,545 yen

Real GDP growth rate: 2.7 per cent in 2004.

Unemployment rate (seasonally adjusted): 4.5 per cent in January

Inflation: Minus 0.3 per cent

Corporate bankruptcies: Fell 12.6 per cent In February from a year earlier, down for a 26th straight month

Current account surplus: Shrank 28.2 per cent in January from a year earlier to 774.9-billion yen ($7.46-billion U.S.)

Merchandise exports: Rose 1.7 per cent year-on-year in February

Merchandise imports: Rose 11.3 per cent in February year-on-year

Top trading partners: China (including Hong Kong) reached 20.1 per cent of Japan's total trade in 2004 at $213-billion (U.S.) in exports and imports; the United States was second at 19 per cent or $197-billion

Trade with Canada: Japan is Canada's second largest trading partner (after the U.S.), with almost $20-billion in exports and imports

Trade surplus: Fell 21.7 per cent in February from the same month a year earlier to 1.093-trillion yen ($10.36-billion U.S.)

Agricultural output: Japan's agricultural output totalled 8.901-trillion yen ($80.9-billion U.S.) in 2003, down 0.3 per cent

year-on-year

Industrial production: Rose 2.5 per cent in January, from a month earlier on a seasonally adjusted basis, and was up 1.5 per cent unadjusted year-on-year

Government budget: 82.2-trillion yen ($778-billion U.S.) for fiscal year 2005, which begins in April. The deficit will reach 15.95-trillion yen, down about 3-trillion yen from 2004. (The government hopes to achieve a surplus in the early 2010s)

Government debt: Set to climb to around 770-trillion yen ($7,296-billion U.S.) by the end of fiscal 2005/06 or about 150 per cent of GDP.

Foreign exchange reserves: $840.56 billion (U.S.) the world's biggest external reserves.

SOURCE: REUTERS, BLOOMBERG NEWS, ASIA PACIFIC FOUNDATION OF CANADA, THE MINISTRY OF INTERNAL AFFAIRS AND COMMUNICATIONS STATISTICS BUREAU

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