With the euro zone now on the brink of implosion, weakness in the U.S. economy and rising concerns over China's sustainable growth, is Japan the economic tortoise to the rest of the world's hare?
Japan's economic performance has largely been written off over the past two decades. It shouldn't be-reform could build on the country's strong fundamentals.
Japan's impressive manufacturing is often overlooked because of competition. Although it is surpassed by China, Japan remains the world's second-largest steel producer, at 109 million metric tons. Japan also remains a major auto maker, with four companies among the top 10 global manufacturers, although South Korea, Germany and the U.S. have reduced Japan's old qualitative lead. The story is the same in consumer electronics, where world-class companies like Sony, Toshiba and Panasonic face competition from South Korean and Chinese businesses.
Despite a decade spent cleaning up bad banking loans, Japan has transformed its economy from a big-box producer to a central part of the global supply chain, as became evident after the March 11 earthquake and tsunami. This steady evolution has gone all but unnoticed as China has taken the lead in producing and exporting lower-end consumer goods and in assembling electronics whose parts come from Japan and the U.S.
Thanks to its macro stagnation, the Japanese economy gets little respect. But some recent data points show how the microeconomic picture in Japan may be rosier than the macro view.
Many of its companies remain not only globally economically viable but also, as recently noted in Canada's Financial Post, a decent investment. Canon, Honda and Takeda Pharmaceutical have had returns of well over 100% since the collapse of the Japanese asset bubble back in 1990.
Last week, Warren Buffett made his first visit to Japan and dropped hints that he was looking for a billion-dollar investment opportunity. Moreover, the Japan Times recently cited a New York Stock Exchange survey in which over a quarter of 371 CEOs indicated that Japan was "crucial or important for their companies' future growth."
Japan retains the building blocks of a world-class economy. While its infrastructure is aging and needs to be renewed, it has a highly skilled, literate work force and spends nearly 3.5% of its gross domestic product on research and development, far outpacing China's 1.44%. Whereas China's state-owned enterprises have been getting larger and remain coddled from market forces, Japan's companies, relative to China's, have undergone restructuring, shed workers and hustled for foreign markets.
What does threaten Japan's economic health, however, is political inertia and misguided policies. Tokyo faces a turning point in securing Japan's economic future, especially with China starting to slow down. Success or failure will ripple throughout Asia and the world.
