The Sun Also Sets
I used to be a Japan hand. I spent my junior year in college in 1985 as an exchange student at Kansai Gaidai in Osaka. Upon graduating college in 1986, I worked for JETRO (Japan External Trade Organization), the Japanese government’s trade group. I then spent two years working in the Kagoshima State government’s international division. After this, I spent a year as a Research Fellow studying consumer trends at Kyoto University’s Economic Research Institute.
Japan was in its prime in the 1980s, and I was there. I ended my five-year focus on Japan when I read 1989’s The Sun Also Sets: The Limits To Japan’s Economic Power by Bill Emmott, editor of The Economist. The book lays out several points, among them was that Japan’s advantages were not sustainable and were easily copied. In fact, Japan was following a very basic mercantilist approach to becoming a major exporter. They made high-quality products, manipulated the currency to fuel exports and erode competition, and maintained a positive trade balance by blocking imports through trade barriers. Emmott predicted an end to each of these advantages, and he was right.
Once the cheap yen advantage was removed, Japan began a downward spiral from which it has not recovered, and I don’t think they ever will. Japan has the UK disease; a once great island empire fighting to stay relevant on the economic stage.
Japan won’t recover from its downward spiral.
Japan: A Bystander on the Digital Highway
In the world of bytes and bits, Japan has become a bit-player.
Japan’s fading economic might can be summed up in its share of global semiconductor sales, which has collapsed from 40%+ to barely double digits.
At the same time – and very much related – Japan’s share of Global GDP (per the OECD) has fallen from 10% in 1990, to 7% in 2004 and 5% today.
As the Semiconductor market has marched up an impressive 9.2% CAGR, Japan has actually shrunk.
The latest smartphones come from Korea (Samsung) and America (Apple) and are manufactured in Korea, Taiwan and China. The software comes from America. The latest camera, the GoPro, is American. The electric car that everyone wants is American (Tesla). The consumer electronics that everyone buys come from Korea. Telecommunications and computer products come from American or elsewhere, but definitely not Japan.
A simple snapshot of Japan’s fading importance is evident in US imports as seen below:
US Imports Through August ($B):
2013 2014 Gain/Loss
China $281 $294 +$13
Germany $74 $81 $+7
Korea $42 $45 +3
Japan $93 $89 -$4B
Other Countries See Exports to the US Growing while Japan’s are Shrinking
Participation in the Digital Economy Matters
Japanese companies have lost the lead in their traditional markets because they don’t make products for the 21st Century digital economy.
In 2013, out of $2.3T in imported goods, the top US imports were:
- Oil $390B
- Machinery $311B
- Electronic and Medical Equipment (ex Smartphones) $300B
- Vehicles $253B
- Smartphones $100B
- Pharmaceuticals $63B
Of the $2T non-oil imports, Japan’s share was $142B (7%).
China’s electronic equipment exports to the US ($120B) almost equaled Japan’s total exports to the US.
Production is Contracting
Semiconductors reflect the shift in Japan’s economic relevance. When Japan led the consumer electronics world, semiconductor sales led industrial production:
Today semiconductors lag overall industrial production.
Make Stuff People Want, Make It Cheaper
The central problem, as noted above, is that Japan doesn’t really make stuff people want. That’s a long-term problem without an easy solution.
In the short-term, the only means to boost exports will be for major monetary stimulus to crush the yen, and not a little bit. It needs to contract at least 15%. That would boost exports.Going back to semiconductors, a lot of production would shift to Japan if the yen drops.
Back in November 2012, I predicted that Japan would have to go nuclear on the yen; drive it to 100. The BOJ did exactly this, forcing the yen up from ¥80 to ¥100. It worked as production surged, but it has run its course.
More Yen Devaluation Please, Mr. Abe
In early August of this year, I called for yet another gutting of the yen, and of sizable degree. I estimated at least 10% or companies won’t change their behaviors.
A cheap yen only goes so far. It works in commodity products where price is the issue (consumer electronics, cars, etc.). The long-term problem is that the products desired by global consumers are not the products Japan makes, which means exports will slow and production will contract. Eventually the yen will reach 140 yen/dollar.
¥115 is coming, but it still won’t stop Japan’s death spiral. Japan’s economy continues to shrink and the game plan is boost exports by crushing the Yen, but don’t expect it to work.