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 AOYAMA VIEW

WITH MORE HEADACHES HOME, ABE TAKES GOLDEN WEEK EUROPE TOUR
Kyushu was still shaking last week, heavy rains risking further landslides and people sleeping in their cars and evacuation centers for the third week afraid to go back to their damaged homes, when another quake hit Japan's financial markets. Following BOJ decision in its end April meeting NOT to add to its massive easing program, disappointed investors drew USD 300 billion off Japanese corporate shares - around 6% of the total market - and caused JPY value shoot up 5% in just four days. Not a nice start for the Golden Wek holidays for PM Abe and BOJ governor Kuroda. They talk about "holiday hangover" when Finns return from their four week summer sojourn, but Japan's financial leaders face same coming back to office today after just one week.

Just days before, Japan had hit the world headlines in negative light again with Mitsubishi Motors fuel data cheating. Coming soon after VW's big worldwide scandal it was bad news for all automakers' reputation and another blemish for "Japan brand" after Toshiba and Asahi Kasei cases here and Takata痴 massive air bag recalll still expanding worldwide. It got wide attention even in Finland, where Mitsubishi name still commands respect from its high times in World Rally in combination with legendary Finnish drivers. It was even more shocking for many when the company admitted that it had been giving out wrong fuel consumption figures ever since 1990's. It did not, however, surprise those of us here who have been following this smallest and most wretched of Japan's car makers, who makes just a million cars worldwide. A poor cousin in the mighty Mitsubishi group of companies, it has been caught for flipping the basic business rules several times before.

We all remember how three of its directors were sent to prison in 2004 for hiding a long time problem in its trucks after a wheel flying loose killed a pedestrian. Motors promised then to officials and the buying public to improve its morals while its corporate "family" including Mitsubishi Corporation, Mitsubishi Heavy and Tokyo Mitsubishi Bank pumped in half a billion dollars new capital to keep it from bankrupting, sold the truck business and sent in new top management. Yet, Mitsubishi car sales have remained poor in Japan and the company has been compelled to fill its production lines with orders from its competitors. It was telling that in this case most of the faulted cars were 660 cc domestic minicars made for Nissan, who also was the one who noticed the errand figures.

Small sales and poor income denied company financial resources to keep up with competitors in developing fuel saving technologies, a crucial sales point in the mini-car category, so it resorted to miscalculating the figures instead. While Suzuki models can drive over 30 km by one liter of gasoline, best Mitsubishi could achieve was 23-25 km/l - or 27-29 km/l falsified. Much simpler, yet no less criminal falsification than VW, who developed and installed secret elaborate equipment in its diesel cars around the world that performed in laboratory test differently from normal driving on road.

The Traffic Ministry officials who raided Motors' offices, said they will take 3 months to go through the material before meting out their penalty, but buyers and investors punished the culprit immediately with share price falling 40% in just two days and poor sales falling another 50% in the first week. Instead of "class action" as VW is facing in USA - like in many other countries there is no provision for such in Japanese law, so each individual case would have to be handled separately - Mitsubishi is likely to be forced to pay big money to Nissan on corporate level, who will then compensate the owners. Luckily or unluckily, depending on your point of view, Motors is said to have USD 4 billion cash in its coffers, enough to pay for that bill, yet the final test for the company will come in damage to its brand and possible sales fall in coming months. Not only in Japan, but in Asian markets like China, Thailand, Philippines and Indonesia where its sales are much bigger than here. As some full size models are sold in USA as well, it is said that the officials there, too, are interested to make sure their fuel estimates have been calculated right.

All this might drive the little car maker's finances to dangerous levels again and my guess is that this time there won't be any more "lifeboat money" from the Mitsubishi corporate family to keep it afloat. After all, both Corporation and Heavy just announced they will book billion dollar losses for FY2015 and Bank is worried it could face difficult time this year amidst negative interest rates and poor demand for loans. Motors' fate is likely to be sealed in corporate shareholder meeting to be held in June in line with Japanese corporate practice. All in all, Mitsubishi Motors seems in many ways different story from VW, a highly profitable worldwide giant owned by a family, its unions and local government, who seem to be punished heavily in USA even if its faulted diesel cars there numbered less than the Nissan OEM's made by Mitsubishi, yet slips away free in Europe for 20 times bigger number.

Same day with "Mitsu" scandal we got another shock reading International Atomic Energy Agency's assessment of Japan's renewed Nuclear Regulation Authority that now meticulously maintains the strictest safety rules in the world according to government claims. The new NRA was created after the public lost its confidence into nuclear safety after the 2011 Fukushima accident that was blamed on the old safety organization's lax attitudes and powerlessness to face up to the giant regional power monopolies. The new organization was supposed to be independent, strong and strict, yet the IAEA report now says its operations, resources and powers are far from complete. In short, while its transparency and independence are a big step up from its predecessor, the NRA inspectors are not numerous enough, not enough well trained and lack powers to squeeze out the truth from the power companies, who can refuse to answer all questions and any visits without scheduled appointment. Moreover, it has no authority to impose any penalty on operators except refusing its safety approval for operation. As comparison, IAEA report says USA has 1000 inspectors with 2 years' training while Japan has only 150 with two weeks basic course and the US organization can mete out its own penalties for any neglect at the power companies.

NRA says it will now follow IAEA's recommendations and increase the number and competency of its staff. More staff will be hired and old ones will be sent for training in USA, yet it will take time before laws can be revised so that it will have bigger authority over the power companies. For one, I will remain concerned until then whether the security of each plant it is now checking and approving for restart is for real despite all claims by the government and media explanations.

As if all this was not enough, the government was embarrassed by the news that it lost the USD 40 billion submarine building deal in Australia, something that was supposed to be Abe's Big Bang opening shot for arms exports as brand-new business area for Japanese industry following termination of long held pacifistic ban. With superior product, inside political track between Abe and Abbott and recommendation from US Navy, the deal was in football terms "Japan's to lose", so the failure to clinch it was extra spectacular. Many factors contributed to Japan's loss: unexperienced salesmen for exports, cocky bureaucrats who thought it was a done deal between the two PM's, lack of understanding of Australian unions demand for domestic manufacture and, finally, change of Australian prime minister from Abbott to Turnbull, who simply wanted to do things differently from the man he deposed. In contrast, the winning French are highly experienced arms exporters and knew how to play the delicate history book with celebrations for Australian-French brotherhood-in-arms way back in 1916 WW One. In turn, when Japan brought its Soryu-class submarine for testing in Sydney Harbor, it just reminded many Aussies of the previous Japanese submarine visit in 1942 when a suicidal mini sub managed to break in and sink a commuter ferry it mistook for a battleship before it was destroyed.

The final blow came when the French announced that their boats will be equipped with the latest US electronic combat systems, compatible with US Navy standards like Soryu-class. Japan can now only wring hands for the lost opportunity. Hope Australia's decision will prove correct as it won't be possible to ask Japan come to help out if the systems don稚 match as Taiwan had to do with its high-speed train when marriage of French and German technologies proved there incompatible and Japanese companies were brought in to save the project.

With all these bad news and Parliament on holiday, it suited well for Prime Minister to take five days European tour with stops in Rome, Paris, Brussels, Berlin and London - all G-7 members whose leaders will come to the Summit meeting in Japan later this month - followed by an "unofficial" talk with Putin in Sochi. In each capital, he discussed the forthcoming G-7 meeting agenda and a set of bilateral issues. It is said he did not get much support for his proposals that European countries should follow Japan in more aggressive public spending to boost growth nor for US-Japan proposal to include China痴 island building frenzy on the Summit agenda as G-7 foreign ministers did in Hiroshima last month - seems Europeans had been put back in line from Beijing after that "slip of tongue". However, happily in Brussels, Abe, Tusk and Juncker all confirmed they will try to conclude the long discussed EU-Japan free trade and economic co-operation deal by end of this year.

In London, Abe gave his unabashed support to Cameron against Brexit emphasizing that over 1000 Japanese companies with 140,000 employees were all there because UK is their gateway to EU markets and would not take lightly that their USD 55 billion investments would lose its original meaning. Obviously, it is easier for financial industries to shift their desks from London to, say, Dublin than car makers to bolt off heavy machinery from their factory floors to built it up again in another country, yet not only Abe but Carlos Ghosn has insinuated that could happen to Nissan's big Sunderland factory if UK isolates itself. Nationalistic thickheads who talk of Brexit and dream of past Imperial glories - "Make Britain Great again"? - are taking big risks.

In Sochi - despite Obama's personal request no to go - Abe discussed the date for the long delayed Putin visit to Japan and accepted Putin's invitation to visit Eastern Economic Forum in Vladivostok in September. He also got Putin's "agreement to try" solve the island issue off Hokkaido and conclude the long lost official peace treaty. Not unexpectedly, Abe was widely lambasted in Western press for meeting with "the outcast" and "breaking ranks" and "splintering unity". We Finns on the other side of the vast country, would think that it is only natural to try maintain bilateral personal relations with the big neighbor at the top level even if same time sticking to the sanctions agreed with others. It will be interesting to see what American media says when Italian PM, certainly not a close neighbor, visits Putin next month.

Back home this week, Prime Minister faces a political scene shifting to election mood. With TPP trade deal taken off the parliamentary agenda and government staying away from any controversial new proposals, there's little colorful fight ongoing in the Diet. Instead - as showing concern for the voters' well-being and spending more money for their benefit is always considered positive - so Prime Minister has requested Diet to draw an urgent emergency budget to help rebuild Kyushu's massive infrastructure damage in addition to his earlier request to spend whole year's normal budget money as quickly as possible and prepare an extra budget after that money runs out.

Last month's win in the Hokkaido No.5 area with some doubtful help as explained in previous columns has boosted LDP's confidence, yet it remains concerned of the new "unholy" alliance between the Democrats and Communists as the latter command steady support unlike the wobbly DPJ. JCP regularly polls some 10% of the vote, so its cooperation will double the votes that the recent amalgamation of Ishin (Innovation Party) and DPJ command in polls. Despite a big number of MP's from the past elections, today's Ishin only brings 0,2% more votes to Democrats' roughly 8% and the horrible new Japanese name for the party - combining Minshu and Ishin you get "Minshin" - only makes things worse. While LDP polls over 30% average and can further count on its partner Komeito's steady 10%, combining Democrat and Communist vote behind one popular candidate in some single seat areas could deny the LDP/Komeito mutual candidate and risk LDP's target to reach 2/3 majority in Upper House together with Komeito like they have in Lower House. This is what Abe-san wants to have in order to initiate process for Constitution change, his long term target. However, many DPJ cohorts are not at all happy to work together with Communists, who are traditionally considered subverting the society, so it is not easy to reach agreements on mutual candidate between the two parties on local level. In fact, many Democrats are ready to accept constitutional changes if only they are written in an agreeable way for them and only Communists are dead set against any changes into the pacifistic Constitution. As if this is not enough, many MP's in LDP and certainly in the Buddhist Komeito are against changes as well, so there you have it: Japanese politics in all its messy complexity.

Aoyama View is all for amending the pacifistic Article 9 to give Japan right to defend itself with whatever means it takes, with its own forces or with and in support of allies, just like every other country has. I don't think any country's laws alone can protect it from outside military threats nor do I share worries that Abe will use the first opportunity to lead Japan to some far away war for US interests as the demonstrators on Constitution Day again claimed. Moreover, the current practice of "interpreting" the law so that it does allow closer co-operation with Japan's allies, sounds very artificial and is susceptible to legal challenge: already 600 people have sued the government for it.

What I worry is what other changes Abe-san and his rightist friends would like to make to the entire law if they are given a free hand with 2/3 majority in both houses. As it is, today's Constitution, written by young and bright American lawyers 70 years ago to substitute the old one from Meiji Emperor's time, is very liberal in drawing the citizens' rights, even more than America's 200 year old own, and it has provided a solid base for the Japanese society ever since. Some of the rightists pushing for change are proposing Japan should turn back to Meiji time values with strong central government powers and plentiful duties for the population instead of rights. This would be clearly against how most people see their life today, so handing the keys to Abe & Co to drive away and do whatever they want unhinged would not be my option. With no clear new text on the table to vote for or against, it is a difficult choice for the voters in July.

If all above sounds negative, let's finish with some positive points. While shakes continue in Kyushu, the wildly popular local mascot "Kumamon" was back in action to delight children and old people in evacuation centers, Shinkansen main line was back running and the main highway fixed as well last week. In contrast, GM car plants in Tennessee, Ohio and Kansas stopped for lack of electronic parts from quake damaged factories in Kyushu, another proof of how widespread global supply chains are. "Can't make cars without Japanese electronics", said a local manager. Well buddy, you might have to try make cars without them for long time when Mr. Trump makes it to the White House and cuts off trade relations.

Meanwhile in Nagoya, Japan's first self-developed stealth fighter prototype took on its wings and Asahi Beer took its first step to European markets with purchase of Grolsch and Peroni brands from SABMiller to expand its sizeable overseas business in China and Australasia.

In consumer electronics, Sony is back in black figures expecting to book USD 1,4 billion net profit from FY2015 thanks to strong global sales for Playstation 4 - total 36 million machines by now - games, movies and music. Panasonic, too, improved its result further to USD 1,8 billion profit from car batteries, navigation systems and energy - enough to promise pay for Rio Olympics closing ceremonies, where the flag will be handed to Tokyo less than 100 days from now - and for a few possible international M&A's. Meanwhile Sharp has started its diet course under Foxconn management and sold its Osaka head office building to Nitori, the highly succesful furniture and interior store chain from Hokkaido, who is challenging Ikea, its role model from Sweden. Not that Ikea Japan is doing badly either: it just celebrated 10 year anniversary of its first store with all together 8 and ninth due to open soon.

Japanese car makers' profits from last business year will be so big that they don't fit into this small column and the life insurers say they will expand purchase of foreign bonds and stocks this year further from USD 660 billion they had in books one year ago as they are pushed out of their staple Japan government bond purchases by the central bank. Hope Finnish companies manage to get their share of their money.

Last but not least, Finland will also bring its own contribution to Japan business the next two weeks with Trade and Economy Minister Olli Rehn visit, first in quite some time, and second Slush Asia event, double size to the first one last year, promoting the young start up culture here. Japan is already world's biggest "appli" market but more variety and innovation in other areas by young people's own start-up companies is needed and it's great that young Finland is helping in that. Also remarkably, the business delegation following Minister Rehn is focused on Finnish "soft power" like fashion instead the usual big companies and heavy industries. This combines well with the Tokyo premiere of "Armi Elää" (Armi Alive) movie, story of Marimekko brand so much loved by Japanese ladies, young and old.

Timo Varhama  
Tokyo, 8 May, 2016   


Previous Columns

23 April 2016
"Dramatic Giant Quake, Business Slowdown, Election Mode in Politics"

7 April 2016
"Tokyo Great City, Japan hmmm...Colorful People "

22 March 2016
"Spring energy, child care and train travel "

11 March 2016
"Five Years from Japan "3-11" - Making Best Out of Gigantic Recovery Task "

28 February 2016
"A Dig Deeper into Politics: Ignorance, Camouflage, Chicanery "

15 February 2016
"Markets in turmoil, economy in decline, challenges grow for Abe"

5 February 2016
"Minister scandal distract, economy slow down, Kuroda rides for rescue "

28 January 2016
ABE: THE REALITY BEHIND ALL THAT TALK "

20 January 2016
"Bear Outlook for Monkey Year Grows, Taiwan Votes to Keep Distance from China, but Pop Group is More Important for Many "

12 January 2016
"NEW YEAR VIEWS - AND A LOOK BACK AT 2015"

17 December 2015
"Global Environment, Food Tax, National Stadium: Historical Decisions or Political Parading? "

8 December 2015
"Challenges in Paris Conference, Challenges Back Home in Japan "

27 November 2015
"Refugees, bombs, business and global warming - can we control them all? "

3 November 2015
"Japan, USA, UK or Germany - China Impacts Us All Today "

22 October 2015
"New Ministers, New Trade Deals, All Political Play"

7 October 2015
"Power games, ball games, trade deals and refugee misery"

25 September 2015
"Big Problems, Big Talk and Big Figures - Each in Their Own Way".

9 September 2015
"Challenges in Japan, Tougher in USA and Europe ".

1 September 2015
"Looking at Neighbors, Japan Seems Stable and Safe ".

19 August 2015
"End Summer, Ceremonies and Holidays Over, Back to Work for All".

6 August 2015
"Hot Weather, Hot Air in Politics - From War Anniversary to Whisky in Space".

23 July 2015
Greece, China, EU, Japan: looking for the lost reality

23 June 2015
World No.1 City? The Difficulty of Passing New Laws, the Easiness of Spending a Lot

16 June 2015
"Only in Japan?" - Somethings, Yes, But Others Are Same All Over

4 June 2015
Security and Finances: Pensions, Companies, Banks, Olympics, FIFA

21 May 2015
Economy Back on Track, Record Profits at Big Companies

11 May 2015
Spring Events: Odaiba Rock, Shibuya Sex, Capitol Hill, White Hall and Red Square

22 April 2015
Elections, Elections - Finland, Japan, Around the World

30 March 2015
Sakura: beautiful, but just for a short, fleeting moment

16 March 2015
Better late than never - Japan moves slowly

2 March 2015
Three struck out, three more in doubt - Abe's ministers under attack again

19 February 2015
Spring, Sibelius, Chocolate, Budget and Big, Bad Putin

5 February 2015
Reform Work Starts - Energy, Farming and Food on Wish List

26 January 2015
Terror strikes, plenty work, sad memories wait

15 January 2015
Watching AKB, Eating Mochi, Spending JPY 96 Trillion - Japan Off to Better 2015 After So-So 2014



About the Columnist

The columnist is a Japan veteran among Finnish business, our Chamber ex-president and today Member of the Board of Trustees.
After running a major Finnish industry company's Japan business for over 20 years, he is now Senior Associate in a strategic consulting company.

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