It is 23 years since I was last in Japan. I still love it. The cultural collision of ancient tradition, mass urbanisation and advanced technology is a gobsmacking experience. And, then there’s the friendly population hungry to learn while blessed with fabulous food, beautiful rural scenery, extraordinary attention to detail, safe streets and a commitment to social harmony. It is perhaps unique among the advanced economies of the world. However, Japan has its challenges. We all do these days but maybe Japan offers a fresh perspective on how to cope with change. I lived in Tokyo for three years in the ‘90s and this visit has been an eye-opener on how Japan is responding to change. So, I have decided to write a series of short articles in the coming weeks while travelling here on topics relevant to European business and investment. I’m currently on a Shinkansen (Bullet) train out of Tokyo on my way to the beautiful Gifu region and wanted to touch on a few early themes. Let’s set the scene.
A quick glance at the daily newspapers – Yomiuri Shimbun, The Nikkei and The Japan Times – confirms that global trade disruption is the topic du jour in common with almost every other country on the planet. The Japanese economy is a trade-based one, given its relative lack of natural resources. It also had its own MAGA-type isolationist experiment from 1602 to 1863 when trade and foreign visitors were effectively shut out from Japan by its ruling Shoguns. So, it’s interesting to note the Japanese media focus on the “isolationist” aspect of the extremist Trump regime in Washington. Let’s just say the Japanese are a bit sceptical on Washington’s ability to put together a coherent trade framework. In fact, the unofficial feedback from the Japanese trade delegation sent to the White House was damning.
There was a strong Tokyo view that the American negotiators “have no idea what they want”. Furthermore, this is a Japanese negotiating team which agreed trade deals with Trump in 2017 (TPP) and 2019 (agriculture/industrial products). As long-time Japan observers know, Japanese business and its leaders value relationship building and trust before committing slowly to any commercial deal. The mind boggles as to how Trump’s negotiating team think they will get any deal done with the Japanese while ignoring the terms agreed with Trump himself during his first presidency. Trust in the US is evaporating.
There has been a global ‘sell America’ trade in recent weeks as the US dollar, US Treasury bonds and US stocks have been whacked by foreign sellers who have lost faith in US institutional stability. Japan is believed to have been the original foreign seller of US Treasuries (it holds $1 trillion (!) of these bonds) which spooked Trump into delaying tariffs on ‘negotiating countries” like Japan earlier in the month. Instead, Trump’s team focused its tariff tantrums on China while giving most countries a 90 day breather. As I write, the White House attempt to shift focus and possibly gather trade “allies” against China is blowing up rather embarrassingly. Indeed, Japan have just said they will not join any co-ordinated trade axis against China as it is too important as a trading counter-party. Sensible stuff. Meanwhile, the CEOs of Walmart, Target and other US retailers have apparently told Trump that store shelves “will be empty in 2 weeks”. Indeed, import activity at US ports has collapsed and the country’s 8 million truck drivers (and MAGA hats) are on stand-by for mass lay-offs. Whoops… not so sensible stuff.
It turns out China can’t be removed from the US economy on the whim of Agent Orange. In fact, the latest word from the ‘stable genius’ is that tariffs on China will be reduced. No doubt, there will be some spurious ‘win’ claimed by Trump and his blowhard MAGA champions but the silence from China and President Xi has been deafening to all sane watchers of geopolitics. China has been prepping for this trade war for years, and has forced Trump to blink for all to see. However, the damage is already done to US credibility and increases the relevance of Japan as a trading partner for economic blocs in Asia and Europe. So, where can Europe work with Japan in a new world order? I already see a few shared pain points.
In many ways Japan is a window into Europe’s future. Europe is already in “low growth” phase with its ageing population and high level of risk-averse savings. However, the demographic cliff facing Japan has already sparked a dramatic change in policy. For context, Japan’s working population is expected to lose more than 10 million workers (72m to 62m) in the next 15 years. Yep, ten million. So, it was immediately striking on this visit to Tokyo to see the number of non-Japanese working in the hospitality and retail sectors. So striking that I went to check the statistics. According to a Japan Times report in 2018, more than 1 in every 8 adults living in Tokyo’s 23 wards (cities) are not Japanese citizens. That is remarkable considering when I first worked in Japan there were just over 1 million foreigners living amongst a Japanese population of 126 million across a country roughly the size of Italy. Perhaps the desire to live in Japan is less surprising when you consider in the same time period (from the ‘90s to now) the annual number of tourists has rocketed from 2.7 million to 40 million. However, the true surprise is the policy shift in Japan to allow immigration in significant numbers. Bluntly, despite far right political party activity in Europe, immigration is a necessary part of its future. But…. not the only solution. Japan again is leading.
Mario Draghi in his 2024 European Competitiveness report highlighted innovation and productivity as a necessary policy focus. In Japan, the use of robots and technology to assist in service-heavy healthcare and retail is well established. I personally witnessed robots in action in Narita airport and a variety of Tokyo retail settings but the presence of humanoid robots in Japanese nursing homes is also well established. In fact, Japan dominates world robotics, accounting for 40% of the global market. Of course, innovation does not happen without risk capital/investment. While the financial headlines have obsessed over AI and the gyrating performances of “Mag 7” tech stocks, Japan has quietly turbo-charged its investment environment.
Thanks to policy changes facilitating shareholder activism and takeover activity, the Japanese private equity market has exploded. We often write that the “future is private” so it is remarkable to see conservative Japanese capital markets experience 40% growth in 2024 private equity/venture capital activity. Unsurprisingly, the global private equity giants like KKR, Blackstone and Bain are all over this structural shift. Hedge funds have been racing to set up offices in Tokyo to follow the action too. Back in Europe, Draghi has highlighted the lack of innovation and investment/financial policy coherence across 27 different jurisdictions. Joined up thinking on investment could be as transformational for Europe as it appears to have been in Japan. And if you’re looking for policy endorsement, then who better than Warren Buffett.
We will return to the Japan private investment environment in greater detail in subsequent articles but the public markets have already received the “Buffett kiss”. Over the last few years Berkshire Hathaway has built 10% equity stakes in each of 5 Japanese trading houses. These trading houses, also known as sogo shosha, are large, diversified conglomerates involved in a wide range of businesses, from trading and investment to logistics and manufacturing. Buffett has invested in the big five sogo shosha – Mitsubishi, Mitsui, Sumitomo, Itochu, and Marubeni. We have written previously on this Buffett move but way before the Trump tariff tornado hit global markets. And, now I’m beginning to wonder. Did Buffett see an isolationist America coming and deliberately seek out the centuries-old trading relationships established across Asia by these Japanese trading giants? It wouldn’t be the first time Buffett saw a structural shift early. However, it’s not too late for Europe. A deliberate attempt to increase co-operation and relationships with Japan might be a very clever way to diversify risk away from an inward-focused US and explore Asian opportunity. Certainly, the Japanese can offer interesting perspectives and responses to deal with the four horses of Europe’s stagnation apocalypse: trade, immigration, demographics and innovation. Lots to learn, lots to write (or right).
