Some four decades ago, mutual fund giant Fidelity Investments, became the first foreign fund to open an office in Tokyo, encouraged by the steady growth in Japan’s economy (an average of 10% a year) and the relative stability of the country’s politics. This was in 1969, a bare two decades after the Second World War in which Japan was crushed, and was still recovering from the aftermath of being on the losing side, as well as the disastrous fallout of nuclear bombs.
Japan seemed well on the road to prosperity, but just a few years after Fidelity Japan began, the Organization of the Petroleum Exporting Countries (OPEC) quadrupled global oil prices, and Japan’s oil-dependent economy collapsed. Economic growth slowed to an average of 3.6% a year from 1974 to 1979. Recovery (later seen as a bubble) was hit by the global stock market crash of 1989, and that started a decade of what economists call Japan’s “lost decade” (1991-2002). Japan’s GDP growth rate during this period, an average of 1.2% a year, was the lowest among the major industrialised countries of the world. Retail and individual investments could hardly have been lower, but Fidelity stayed on in Japan.
Its fund managers were convinced that the country would pull itself out of the economic mire, and when it did, Fidelity wanted to be there to take advantage. Sure enough, by 1998, the government began to take serious steps to revive the sluggish economy and encourage investments. By 2005, Fidelity Japan’s assets under management had grown fivefold.
Sure, it’s a story about Fidelity’s belief in the resilience of the Japanese economy. But more than that, it’s a story of how Japan inspired a foreign company with such trust—despite a decade of anaemic growth, falling wages, low inflation, and falling stock and realty prices. History shows that Japan has repeatedly managed to work its way out of economic crises, which is perhaps the biggest reason for investors to stay on.
None of which means Japan is out of the woods yet; in fact, repeated attempts by various governments failed to revive a recessionary economy. Junichiro Koizumi, Japan’s most reformist prime minister (and mentor to the current prime minister), tried to revitalise the economy with a massive injection of funds between 2001 and 2006, but the results were short-lived, thanks to the global financial crisis of 2007-10, followed by the devastating earthquake and tsunami off the Tohoku coast. The result: the deepest recession Japan has seen.
This is what Prime Minister Shinzo Abe inherited when he was voted to power with a comfortable majority in late 2012. Abe’s self-proclaimed task was to revitalise the Japanese economy, to do which he has set up the framework for what he calls the “Three Arrows economic booster plan”.
THE THREE ARROWS plan aims to make Japan a self-sustaining, growing economy. The three arrows are monetary easing, fiscal stimulus, and structural reforms. The name itself comes from a Japanese folktale, in which a warlord gives each of his three sons an arrow, saying that as long as the arrows are together, they cannot be broken. “In my plan, the three arrows are being shot strongly, fast, and all at the same time. Soon, Japan will export more, but it will import more as well. The U.S. will be the first to benefit, followed by China, India, Indonesia, and so on,” Abe said in a speech at Washington’s Center for Strategic and International Studies in February.
India is key to Abe’s plan. It is a large market, and despite its problems, continues to be an attractive investment destination. “Japan needs to increase its exports to other markets, set up manufacturing bases in other low-cost, labour-intensive countries to cater to its domestic market, find markets where it can safely invest its surplus reserves and get a decent return, and provide a long-term alternative to China. And there could be no better place than India,” points out Sanjana Joshi, senior consultant and Japan expert at the New Delhi-based think tank, Indian Council for Research on International Economic Relations (ICRIER).
And then, in June, a few months before India’s Prime Minister Narendra Modi made his first state visit to Japan, Tomohiko Taniguchi, special advisor to Abe’s Cabinet, said: “India holds a special place in Prime Minister Shinzo Abe’s mind and the sky is the limit for a Delhi-Tokyo relationship.” Speaking at a panel discussion—India-Japan Moment: Leaders Must Capitalise—at New Delhi’s Ananta Aspen Centre, Taniguchi added that India has to be part of Japan’s new narrative by strengthening its relationship in foreign policy, economy, and national security. Economics was high on Modi’s Japan agenda.
Abe and Modi are old friends, so the bear hug with which they greeted each other in August in Kyoto was commented upon but rarely with surprise. What did create a stir was the announcement that Japan would pump in ¥3.5 trillion (Rs 196,000 crore) as new investments and government funding in India. Abe also promised to increase Japan’s presence in Indian industry. Currently, Japan is involved in some 70 infrastructure projects in India, and has invested $4.5 billion (Rs 27,378 crore) in the marquee Delhi-Mumbai industrial corridor. Bilateral trade has zoomed from $6.5 billion in 2005-06 to $16.3 billion in 2012-13.
Much has been written about what the billions of dollars in funding will mean to India. That it means almost as much to Japan is something few consider. But for Abe and his government, investing abroad means the certainty of Japanese money making decent returns, rather than lying stagnant in Japanese banks (which maintained a 0% interest rate policy for more than 15 years).
“Japan knows that it has nothing to lose but everything to gain from a tie-up [with India]—a large market for its goods, a place to park surplus funds for both government and companies, and finally be a part of the Indian growth story,” says Nagesh Kumar, head, South and South West Asia, Economic and Social Commission for Asia and the Pacific (ESCAP). A greater partnership between these old democracies, says G. Balachandran, consulting fellow at New-Delhi based research organisation Indian Defence and Strategic Analysis, has the potential to revive both their fortunes.
There’s also a strong strategic angle to the friendship. On one level, the two countries seem to be cosying up to limit the influence of China—the biggest trading partner for both countries. Each has had border disputes with the Middle Kingdom. At the same time, neither wants to offend China. Which is why, even as Abe and Modi were announcing the details of the Tokyo Declaration following Modi’s visit, Abe nominated two China-friendly ministers to his cabinet, and Modi was readying himself to host Chinese premier Xi Jingping.
After a row with Japan over the Senkaku Islands (called Diaoyu Islands in China) in the South China Sea in 2012 (both countries stake claim to these islands), China imposed a ban on Japanese goods. By December 2013, Japanese exports to mainland China had fallen by a fifth compared to the previous year.
Though things have improved since, the feeling of unease among Japanese companies remains. Add to that rising wages and an appreciating currency in China, and it is easy to see why Japanese companies are hedging their bets and looking at alternate investment opportunities. Observers like Joshi feel it’s only natural that Abe sees India’s sizeable population as a viable alternative to its more aggressive neighbour.
INDIA ALSO FITS IN neatly with Abe’s new economic policy, as a closer look at the Three Arrows plan shows. Arrow one is an injection of a little over ¥20 trillion into the economy for infrastructure development, helping small businesses to expand, and in social spending. The idea is to raise prices of goods and services, and ensure higher profits for firms, which in turn would lead to greater employment and higher wages (which have remained stagnant for many years now).
Arrow two is a monetary easing by the Bank of Japan by buying up the government’s long-term debts from banks and other financial institutions, and promising to raise the interest rate to 2% by 2015. The idea is to allow banks to lend more to companies and individuals so that they start spending, provide enough legroom to the government to invest abroad, and ensure that the yen continues to remain cheaper than the dollar. This will make Japanese goods cheaper and boost exports.
Arrow three is targeted at structural reforms in the economy, changing “bedrock” regulations that have been holding it up. Abe has opened up the labour sector by allowing foreign and domestic firms in special economic zones to hire part-time labourers, instead of the current policy of having lifelong workers; reducing the quantum of subsidies and protection to farmers; overhauling the network of agricultural cooperatives; and allowing the health-care sector to use generic drugs.
Abe wants to push even the ultraconservative Government Pension Investment Fund, the world’s largest pool of savings, into taking greater risks to earn higher returns. In other words, start investing abroad. Again, by bringing down the corporate tax rate from 35% to 29%, he is making Japan Inc. more competitive, and asking them not to hoard their earnings but to invest abroad. According to a recent study by Goldman Sachs, Japanese corporates are sitting on $750 billion of cash.
“What has really changed is the long-term equation between Japan and China,” says Joshi. Its role as a dominant partner for the past 30 years in every Sino-Japanese collaboration—because of its technological superiority and ability to provide capital—is now being increasingly challenged by China, which wants to dictate terms in any relationship.
For Abe’s plans to fructify, Japan needs markets to buy its exports, and investment destinations to better those at home. According to a global study by consultancy EY in 2013, India was the most attractive investment destination in the world, overtaking China and the U.S. During FY14, foreign institutional investors pumped in more than $13 billion into the Indian equity market, far more than what Taiwan, South Africa, Indonesia, and Brazil attracted.
YOU’D THINK THE world will be queuing up to invest in India. Except that there are probably more problems doing business here as there are reasons to invest. After all, why should a company invest in India where enforcing a contract takes 1,420 days and involves 46 different procedures, importing goods takes an average of 20 days and 11 documents, and tax payments need to be made 33 times per year? While some in government may want to dispute this data from the World Bank, there’s little doubt that it is difficult to get work done in India.
That’s why the Modi government has promised to lay down the red carpet for Japanese investors, going as far as having two Japanese sitting in the Prime Minister’s Office to resolve any issue. The government has also promised single-window clearance to infrastructure and manufacturing projects. But it may take a little more than that to attract Japanese companies.
Over the years, Japanese businessmen have been complaining about the difficulties in land acquisition, non-implementation of the goods and services tax, other issues relating to taxation, protection of intellectual property, etc. Clearly, there’s a way to go before India can be an attractive investment and manufacturing destination.
But it’s equally clear that the Japanese government has been encouraging its companies to enter India. Despite the problems, there’s already a line of Japanese companies ready to invest in India—in Gujarat in particular. Companies like Hitachi, Mitsubishi, and Toshiba are waiting for the Delhi-Mumbai industrial corridor to take off to participate in building smart cities, airports, warehouses, and cold chains that are planned along the corridor.
Apart from the good this will do to the Japanese economy, Joshi says the reason Abe is pushing to increase investment in India is that he wants Japan to “regain its glory, its national pride, and its national identity”. Also, he wants to snatch market share away from Korean competitors such as Samsung and LG. “The Japanese government has realised that it has lost out to the Koreans and Chinese in the Indian marketplace, and believes that now is the time to catch up. Japan’s earlier strategy of being ‘politically cold and economically hot’ is no longer working against an aggressive China, which now wants to be a dominant partner,” says David Weinstein, director of research, Centre for Japanese Economy and Business, Columbia University.
There’s already a substantial Japanese presence in certain sectors in India, notably automobiles, consumer electronics, infrastructure, and pharmaceuticals. Kumar of ESCAP says that despite the far-from-happy experience of Daiichi Sankyo, Japanese pharma companies will enter into joint ventures or buy outright Indian generic drug companies because of the Abe government’s decision to allow doctors to prescribe more and more generic drugs.
While India and Japan are poles apart when it comes to business models and work ethic, the unstated hope is that the dissimilarities will result in strong synergies. While Japan is struggling with an ageing population (it has the largest number of people above the age of 100 in the world), India will continue to house the youngest population till 2040. Japan as a hub for high-technology, high-cost innovative manufacturing is a perfect foil for India’s low-cost, labour-intensive industries. Again, Japan has both capital and state-of-the-art technology in abundance while India has neither. Lastly, India’s software skill fits in nicely with Japan’s hardware expertise.
All this seems to work in favour of Japan Inc. setting up an outpost in India; the country is in no hurry to open its doors to foreigners. A highly monocultural society, it is even opposing a recent move by the Abe government to allow foreign workers to care for children and elderly in its special economic zones, on the ground that it may damage the development of Japanese youngsters. Similarly, despite the obvious synergy between Japan’s hardware and Indian software skills, not too many Indian infotech companies have been able to make a dent in the Japanese market. “Language still remains an issue,” says Kumar.
Then again, Japan needs India, not Indian industry, to become the power it once was. Abe is clear that his country will move ahead. “Ladies and gentlemen, Japan is back,” he had declared at the end of his Washington speech. Now to see if it can stay relevant.
