Japan: Ripe for Re-Assessment* Michael Clifton Senior Trade - PowerPoint PPT Presentation

Japan: Ripe for Re-Assessment* Michael Clifton Senior Trade Commissioner Osaka, Japan * Title from Lowy Institute Paper by Dr Malcolm Cook and Huw McKay

The Economic Purgatory is Over • Five consecutive years of unbroken growth • Elimination of the ‘three excesses’ - headcounts, debt and production capacity • Company profits up 10% on average – 5 consecutive years of growth • Non-Performing Loans down 66% since 2001 • Golden Cycle – increases in capital expenditure, rising land prices and end of deflation • M&A activity soaring – 2,775 cases in 2006 • Unemployment below 4% - job vacancies exceed applicants

But the more things change… • Corporate insularity and fickle consumers • Reliance on long-held relationships • Distrust of financial investors • Limited expertise in financial re-engineering • Companies don’t like to sell – the system favours incumbents • Lack of shareholder pressure to improve investor returns • High cost of regulation • Low levels of FDI – 2.8% in Japan Vs 22% in USA and 37% in UK

Issues and Challenges • Demographic pressures • Regulatory changes - Ageing population - Increased M&A and foreign investment - Shrinking workforce - Shareholder activism - Mid-career hires - Benefits of deregulation - Women in the workforce - Triangular mergers • Productivity gap in services sector • Lagging consumer confidence - 60% of GDP depends on consumer spending - Temps and part timers now 30% of the workforce - Slow wage growth (just 2% since 1997)

Demographic Pressures � 2005: 126 million 2050: 100 million 2100: 64 million � Loss of 14 million productive workers by 2030

Demographic Pressures…So What? • Growth potential capped in 1.5-2% range • New revenue sources needed • Companies need growth offshore, plus labour saving technologies onshore - Toshiba/Westinghouse - Nippon Sheet Glass/Pilkington - Auto-Bake • Need to tackle low productivity in services sector (70% of employment and GDP) • Need to attract and retain women in the workforce • Downwards jolt in wages bill as older workers replaced by younger, cheaper staff • Wither the family business…?

Top Level Commitment • Aim to increase FDI from 2.8% to 5% of GDP by 2010 • Investment critical to compensate shrinking market size, and • Improve competition

Regulatory Changes • Competition policy reforms have delivered real change: - Average electricity prices down 39.1% since 1994 - Electricity market grew over 18% during this period - Freight transport prices down 27.5% during period 1994-2004 - Cell phone prices down 60% during period 1993-2005 • Ban lifted on cross border, triangular mergers • Changes to Anti-Monopoly Law • M&A activity has quadrupled in 10yrs to 2006 (621 → 2775)

Change Leads to Opportunity • Investment in the market • Labour-saving technologies (hardware & software) • Healthcare: services, training, IT • Childcare services • Financial services • Global supply chains for trading houses and other global players

The Pacesetters • Aconex • Cheetham Salt • KeepPad • George Weston Foods • Hansen Technologies • Detmold Packaging Group • SystemsGo Corporation • Japan Australia Corporation • Impact Investing • Anca • Auto-Bake • Niseko - Nihon Harmony Resorts - Deep Powder Tours - Niseko Adventure Centre

The Pacesetters • Macquarie Shinsei Advisory Company - targeting infrastructure assets include telecommunications, media and transportation - in response to favourable economic trends and the ongoing public-to-private sector shift • Babcock and Brown Japan Property Trust – 36 office, retail and residential properties valued in excess of $1bn – returns in excess of 29% in year ending Dec06 • Challenger Kenedix Japan Trust

Key Messages • Japan’s ‘lost decade’ is now an historical footnote • Japan is in the early stages of a “Third Opening” • Japan’s demographics present real opportunities for astute entrepreneurs • Is Australia lagging the competition? Act now or risk missing the boat. • Support is at hand - JETRO, Austrade and many others

Achieving Success in Japan • Know your strengths • Be prepared to spend time, resources and effort • Relationships matter • Maintain highest standards of quality and safety • Maintain cultural identity – Australians are not Japanese. • Follow up early and often • Some of the best niche markets can be found in regional Japan