Tankan Survey Buoys Spirits
The latest Tankan Survey had mostly good news for the Japanese economy. The main news was that the strength of the big manufacturers was spilling over to service businesses as well as smaller companies, which were increasing their capital spending. Japanese corporate profits rose at a 15.5% rate in the July-September period, the fastest quarterly increase in two years. Private consumption continues to be a problem, however; it declined 0.9% quarter over quarter.

Is a Shrinking Population a Good Thing for Japan?
An intriguingly contrarian take on Japan's declining population is attracting much attention. In a recent article in Bloomberg, columnist William Pesek discusses a report from Sharmila Whelan of CLSA Asia-Pacific Markets. Pesek writes:

Whelan's optimism is based in part on history. Growth, she argued, tends to be driven by "specialization, innovation and trade.'' Investment, like labor,tends to go where returns are highest. As Japan moves more toward a knowledge-based economy driven by increased research and development, its citizens will prosper...Similar demographic trends didn't hold back Venice's economy in the 11th century, Whelan said. Nor did they imperil the Dutch Republic in the 14th century. Likewise, Whelan said, ``in the coming decade, Japan's shrinking population is the least of her problems as far as growth goes.''...Whelan also makes the argument that "Access to labor, technology and capital are the least of Japan's problems...creating an environment where there is unhindered entry and exit of new businesses and new ideas are born resulting in continuous innovation and cost savings is the greater challenge. Japan has a long way to go, but the process has started."

According to Pesek, Whelan cites "renewed foreign interest in Japan, a rise in mergers and acquisitions, and a growing number of start-up companies" as evidence that the forces of creative destruction are at work, and a more productive and dynamic corporate sector is in the offing.

Perhaps demographics isn't destiny, but I question just how much Japan is changing. The rise in mergers and acquisitions is notable. But the outcome of some M&A battles -- like the fight for Hokuetsu Paper where Oji Paper's hostile bid was set aside by company management -- is hardly encouraging for the forces of creative destruction. A few stories in the business press about Japan's new entrepreneurial class makes encouraging reading. But most of Japan's under-35 cohort still seems mired in the the worlds of salaryman/OL or arbaito/freelancer, neither of which are places from which ground-breaking economic change is likely to originate.

Further, even if Japan's population was only aging rather than shrinking, that would still augur poorly for the nation. Generally speaking, an older population is more conservative, needs to focus greatly on health needs, and consumes rather than innovates. Whelan may hope that the younger population that displaces it in government ministries will set the nation on a new course. But if the political environment is such that it favors the old over the young, those efforts are likely to be fruitless. With a greater number of older voters who are more reliable voters, a new generation of politicians may well be hamstrung if they try to effect change in traditional Japanese institutions too rapidly.

Still, it's encouraging to get a more optimistic view of Japan's prospects, and Whelan's contrarian view (if indeed it is as advertised -- we haven't seen her original report) is certainly to be welcomed, as it adds fresh energy to the discussion of Japan's future.

Capital Investment Up 12% for September Quarter

According to the Ministry of Finance, capital investment of Japan's nonfinancial firms was 14.8 trillion yen in the July-September quarter, a 12.0% increase from the same period last year. Capital investment has now been up on a year-to-year basis for 14 consecutive quarters. However, the increase was below the 16.6% level recorded for the second calendar quarter, and below analyst estimates of a 15.3% advance.

Japan and U.S. Unemployment Low, But Anxiety Persists
Recently announced unemployment rates for both Japan and the U.S. are at the lowest levels they've been for some years. At the same time, workers in both countries are showing considerable economic anxiety. In Japan, personal consumption has failed to advance in line with the better economy. In the U.S., Americans continue to spend, but we always do that. What we haven't usually done is worry inordinately about foreign workers stealing our jobs, especially in times when people who want to work can apparently get do so.

Some of the fear in the U.S. is both political -- internal, geopolitical, and somewhere in-between. The majority of Americans have lost faith that the Bush Administration knows what it's doing. Immediately after 9/11 Americans felt, as Jeff Greenfield put it, "thank God, the grown-ups are in charge." Iraq and Katrina changed that.

It seems odd to say it now, and certainly it's not a broadly held view among Democrats, but in fact part of the President's current problems are precisely because expectations for his Administration post 9/11 were so high. And indeed, if you asked most Americans on September 12, 2001, whether they would be satisfied with the President if their country five years hence enjoyed a good economy, had relative piece of mind about the threat of Islamic terrorism in their daily lives, but at the same time was mired in a small-scale war in Iraq with about 3,000 servicemen and women dead, I think most Americans would have been satisfied with those trade-offs. Unfortunately for the Bush Administration, those five years have revealed substantial incompetence in obtaining those mixed results -- not least in the inability to manage perceptions of that incompetence -- and so the President has lost most of his prestige.

This lack of confidence in the Presidency -- and, by extension, government -- is coupled with a much broader concern about the American way of life. I don't think most working Americans are very upset with illegal Hispanics in their midst. They are worried about what these people represent: the end of solid, long-lasting working class jobs relatively invulnerable to technological change and international competition. With the destruction of those jobs has gone a way of life, of union halls and company bowling leagues. Lofty notions of feminist independence may be useful for Vogue columnists, but they are empty promises for working-class women struggling to maintain family life and make ends meet, either on their own or with husbands whose jobs are vulnerable. As De Tocqueville recognized, Americans are so naturally drawn to associations that networking still thrives, and an astonishing variety of "communities" live on, much of it Internet based. But virtual communities can't replace the sense of place provided by physical community.

Japan faces somewhat different problems, but the sense of loss is similar. Between 1945 and 1990, the Japanese people broke their backs creating a powerful economy that somewhat compensated for the loss of World War II. The bargain was that the Japanese would work their asses offices, and companies would provide lifetime employment; all the while, family, company, and nation would prosper. Through the Nineties, Corporate Japan tried to maintain that bargain, but in a globalized economy (a cliche is no less true for being a cliche) that compact could not be sustained into the 21st century. Policies like merit pay that American workers feel relatively comfortable with, even welcome, are considered by many Japanese as disharmonious and jarring. There's much talk of a new entrepreneurial spirit, but the Sony or Canon hotshot who quits his job to start a new venture or even a Duncan Donuts franchise is still relatively rare. The safe, comfortable employment system of the postwar period, with all its drawbacks, is missed, and Japanese are uncertain about what is coming next.

Moreover, it's questionable if the traditional Japanese system could have been maintained much longer. It's one thing for salarymen to give their lives for company and nation when they are trying to expunge the memory of catastrophic defeat. The next generation feels no such obligation, and the Internet and their Hawaii vacations show them how the other 14% of the world's population that is middle-class lives, ie, with several weeks of vacation time and no 65-hour workweeks. Young women in particular find the social strictures of their mothers' generation -- with its obligations to workaholics husbands and infamously (if somewhat fictional) shrewish mothers-in-law -- unpalatable and even unbearable, and large numbers have opted out of marriage and childrearing.

Thus, despite record low employment, both Japanese and U.S. workers feel considerable economic anxiety, and uncertainty about the future of the society in which they live. A change in the Presidency (or even Mr. Bush's policial fortunes) in the US, and more solid economic data in Japan, may bring temporary relief and a lifting of spirits. But the long-term problems of workers trying to cope with rapid technological innovation, globalization, and societal change will remain.