Reforms needed to lift Japan's economy

In the first week in April, the delicate blossoms on Tokyo's cherry trees were blown away by high winds and rain. This meteorological shock and awe was fitting on the second anniversary of the Bank of Japan's monetary easing programme, as so far, Abenomics has done much more for asset prices than it has for the real economy.

Analysts have downgraded their forecasts for Japanese economic growth to a dismal 1.5 per cent for the first quarter, while the stock market remains close to its highs of early March.

Some would argue that this is about to change. They say the willingness of big companies such as Toyota to raise wages will trigger a new virtuous cycle in which domestic demand will improve, a good kind of inflation driven by rising incomes will replace the bad kind of deflation, and companies will begin to invest in more than just their shares.

Hopefully that will prove the case. But meanwhile the sort of structural reforms that could put growth on a firmer foundation and justify the level of the stock market, (which has more than doubled since November 2012 when Prime Minister Shinzo Abe announced his plan), seems as elusive as ever. The main reason to buy Japanese shares is government and government related firms' buying.

Almost all the rise in corporate earnings is due to the translation effects of a weaker yen, for example. It is nice for shareholders to see prices rise as companies buy back their shares, but far better if companies saw a compelling reason to invest to expand their core business. Unfortunately, though, the population of Japan continues to dwindle. Factory output shrank 3.4 per cent in February.

Sadly, there has been little progress on major reforms and in some ways Japan remains less part of the world than it was in say the Taisho years almost 100 years ago. This is a country, after all, where older people say they would prefer to be looked after by a robot than by a foreigner, according to one survey. And while many countries have issues with Uber, there is something disturbing about the fact that many people in Japan refer to the internet ordered transportation service as black cars. That epithet brings to mind the Black Ships of Commander Perry which forced Japan to open itself to the demands of foreigners wishing to make inroads in the country. Moreover, despite the attempt to get foreign firms in, many including GE Capital and Citigroup, are pulling back.

The Japanese government and its affiliates has all sorts of schemes to help Japanese companies to go global, from helping them to orchestrate and finance mergers and acquisitions to taking them to Silicon Valley.

But the sort of innovation that is transforming, say, China, continues to be largely missing in Japan, (with the notable exception of Rakuten). Japanese technology in hardware was the perfect technology for an analog world. The ability of an IBM for example to move from hardware to a more value added services and software model is something traditional Japanese companies such as Fujitsu have struggled with (though others, such as Toshiba or Fuji Film have been more successful). Banks are also behind in adapting to the internet. (Sumitomo Mitsui for example has ATMs which can handle English but not English language internet banking for its foreign clients.)

In the face of an educational system which continues to prize memorisation and loyalty to the group over initiative and individualism and a business culture built around seniority, there are few start-ups, and fewer of the kind of misfits that make a difference. The country that pioneered brilliant video games has not given rise to a generation of players who will build on the legacy.

"Japan is 20 years behind," says Tomo Sato, the co-founder of Atonarp, a Tokyo start-up. "Everyone tried to shrink to save money. We haven't made enough of a transition to a digital world."

Among the few promising signs is the influx of tourists attracted by the attractions of a Japan which is far more attractive to foreigners with the yen at 120 than at 80. Many are Chinese who have decided that rather than disparage the government's efforts to drive down the yen, they should take advantage of them. They are lining up to buy quality goods at a fraction of the price they pay at home. They rather than the Japanese themselves are the big beneficiaries of Abenomics - at least so far.

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