Synopsis of Japans Macro Economic Challenges.
By Dietmar Kielnhofer Ph.D
Wednesday, 9th May 2012
This abstract is an overview of the challenges Japan, in particular Tokyo and the hotel industry is confronted with.

Its intend is to highlight the problems the hospitality sector is facing and what action ought to be taken to mitigate the financial impact on performance in light of increasing competition in the luxury market and the strengthening of the Yen.

The March 11 earthquake and ensuing tsunami and fallout from radiation had catastrophic consequences for Japan's economy no more is it impact more severely felt as in the hotel and manufacturing industry. Prior the earthquake the economy was expected to expand by 1.6 (source: B.O.J.) but this was reduced in May to 0.6%.

As a result of this disturbance Japan will faces strong downward pressure for the time being. Corporate profits are expected to shrink significantly this year and private consumption and business investment will remain weak in the foreseeable future. A slight upward trend is only expected towards the end of Q3. Japan has amongst all the industrialized nations in the world the highest public debt. It is, as of March 2011, over 200% of its GDP.

For the last two decades the economy has, at its best been stagnant, at its worst contracted – economists refer to this as the lost decade. Prices have largely remained flat as purchasing power has been eroded; inflation in 2010 was at -0.9% and in 2009 it was estimated to be -1.4%. Assets that have been purchased in the late 80's and 90's in anticipation of appreciating in value have unfortunately not materialized – on the contrary, this "asset bubble" has burst a long time ago and asset prices have been depressed by up to 30% for the last 15 years as companies struggled to reduce the debt load on their balance sheets.

Current economic activity remains anemic even though the government makes "some" attempts to remain competitive. Japan is among a handful of (industrialized) nations that are plagued by persistent deflationary activity. Japan failed the litmus test in quarter 1 of this year when it lost its coveted number 2 spot to China as the second largest economy in the world. Economic growth in the 90's was approximately 1.7% compared to 5% and 4.9% in the 70"s and respective 80's.

The persistent strength of the Yen does not help the selling position either. The below list of the exchange rate of the yen over the past five years versus the dollar is self-explanatory; it just accentuates how market dynamics have changes against us.

If the Yen (¥) remains at its current strength (and all economic indicators show it will), export opportunities will be eroded further and Japan will lose its competitive position even further. A continuing deterioration of Japan's export driven economy is unsustainable as food, coal, petrochemical products and other agrarian products (aside from rice) are all imported. Hence access to US Dollars is imperative to economic sustainability.

What applies to the export sector is equally relevant to the hospitality sector. The central bank left its benchmark interest rate at close to zero which makes investment in Japanese unattractive for speculators and investors. On a more positive side the prospect for recovery commencing as of April until 2012 is expected to be 2.9% - this however is subject to uninterrupted power supply, a recovery in the construction / rebuilding sector and free flow of components and spare parts for the manufacturing sector.

Perhaps it is also time to face the economic realities that Japan's largely stagnant economy has reached its earning peak decades ago and growth will remain elusive. Japans political and economical leadership has to realize (tacitly they admit it probably already) that the period of industrial buoyancy of the 70's and 80's is largely behind it and growth has reached a plateau that cannot be breached in the near future. G.D.P. growth and inflation has been for more then a decade hovering around the one percent mark - a noteworthy exception was 2008 and 2010 where growth reached 3%. That alone should be an indicator that economic output reached its zenith a long time ago.

An exception to this economic malaise is Japan's thriving automobile industry fueled by newer models (Toyota's hybrid car the Prius) with better gas efficiency then their European and American car models, but that alone is not sufficient to galvanize the rest of the economy into a spending spree. Even though the interest rate by the Bank of Japan (BOJ) is kept at a record low at 0.10 percent, it is not enough to stimulate domestic demand through interest rate cuts. Simultaneously, the Ministry of Finance (MOF) contemplates an increase in sales tax.

To stimulate growth, Japan needs to promote domestic consumption, (save less and spend more; the private sector holds trillions of Yen in savings), become less dependent on food and energy imports, invest in renewable energy and reduce public spending significantly - in particular infrastructure projects. What Japan needs is change, primarily in the political arena. Decision-making needs to move away from a culture of consensuses building protecting the status quo to focus on decisive decision making and elicit a culture of healthy competition, internationally as well as domestically, a sensitive subject largely taboo in Japan's corporate boardrooms.

Having a monopolistic approach to competition undermines the basic economic fundamentals of creating value for consumers and society. No nation is an island by itself anymore; large multinational companies operate on a global stage that transcends conventional business practices. Nations grow and prosper by trading goods and services with each other to improve their trade balances. An insular, protectionist narrow-minded corporate (and political) approach is tantamount to commercial hara-kiri.

A competitive environment serves the consumer; it gives them choices they would otherwise not have. But it also provides companies with a stimulus to innovate faster, increase R & R expenditure thereby creating a sustainable competitive advantage vis-à-vis its trade adversaries. Thus, a culture of meritocracy, innovation and service excellence is created that propels not only individual companies forward but societies and a national economy as well.

As international competition increases in its intensity Japans is considered a laggard within Asia where developing countries like China and India are expanding at significant higher growth rates. Competition in the lucrative high-tech sector, in particular product design an innovation, does not necessarily come from south-east Asia like Malaysia and Thailand but more form South Korea and Taiwan. Japan needs to make the step from a fully industrialized country to a service driven society.

It reached its economic zenith two decades ago as a wealth generating society that thrived on competition and a strong entrepreneurial culture. Once the level of maturity and complacency set in its inescapable decline henceforth began. Japan needs to revert to what made it great; innovative thinking, healthy competition, creating a culture of risk taking, transparency and bold investment decisions instead of playing safe and protecting cash.

The characteristics of an industrialized country are process driven systems and procedures, a fully automated manufacturing process with strong input-output focus relying on computer models to deliver end results. Whereas a service driven society needs more focus on critical thinking, spotting trends before anybody else does and looking beyond the curve of what is changing and to what extended. Classical examples are finance and consulting industries, these industry segments are less dependent on proven systems and an automated manufacturing process.

In the age of globalization and interconnectivity, competition is more transparent than ever, it became the ultimate sine qua non. Trade secrets or a threshold competency can only be protected for a short period of time before a competitor emulates a trade patent or develops better operating or manufacturing systems before the sequence of innovation begins anew. 

No more is this cycle more prominent than in the international manufacturing industry (cars, semiconductors, computer, home-entertainment, household appliances, pharmaceuticals etc.) in particular when it comes to trade and commerce, trade barriers do not exist anymore unless artificially i.e. politically imposed to protect the home market.

Perhaps growth might reach again two or three percent but it will never reach the annual output projections of China or India. In an economically mature society, growth comes primarily from product innovation, service industries, technology advancements and improvement in manufacturing processes.

An aging population and crushing social security network is in place that has to support the declining population aggravates an already dire situation further (Japan has a negative population growth rate of -0.24%). This already dismal situation is compounded further by an ever younger workforce i.e. less productive (and experienced) workers that have to support a waning population. In a pluralistic and politically mature society the different political parties have to overcome their disagreements, diverging agendas and pass appropriate legislation to protect the interest of the nation.

Lawmakers have to overcome their bipartisan ideologies and political preferences for the greater good of the state. Overtaxing an economy during this hardship period is not the solution; taxes need to come down to encourage spending and consumption.

Trade barriers need to be eased and the playing field must to be leveled to create fairness for all trading partners. Red tape and a cumbersome bureaucracy do not encourage foreign investors, and that is exactly what Japan needs right now to stimulate its moribund economy.

Hospitality industry related challenges

The aforementioned scenario is the economic backdrop in which the hotel industry in Tokyo has to operate. An individual enterprise is not in position to alter the economic landscape of Japan. What it can do is adjust its strategic direction to minimize any further negative impact that could harm its business interests.

So the question that remains to be answered is how to be deliver the business plan for 2012 and beyond without compromising image and reputation? Increasing rates in such a depressing environment is very difficult if not downright impossible (aside from some marginal opportunities) that can and will be exploited.

The United States and Europe have just recovered from the worst financial crisis since the great depression in the 1930's and all indicators point to another cycle of economic downturn. Executives do not have the spending power they had five years ago and paying for a hotel room in Tokyo ¥ 35,000 to ¥ 40,000 is untenable. This type of corporate excess is not tolerable any longer by shareholders.

Whilst the recent downgrading of  Japans economy by Moody's and credit rating agency Standard & Poor may have no material impact on Japan's economy it is a question of wider image that needs to be considered. Having confidence in one's economy and its national currency is critical to building sustainable consumer confidence - even though most of the debt is held by domestic banks and not international lending institutions.

With an exchange at ¥ 73 (bank rate) to the dollar, Japan remains exorbitantly expensive for tourists or corporate executives from overseas. Some economists and investment banks even predict an exchange of Yen 70 to the US Dollar at year end. That will bring inbound tourism to a standstill and tourism and marketing executives need to focus to the more resilient and increasingly affluent domestic market.

The current economic and political crisis provides an excellent incentive to combine the strategic resources of all stakeholders to actively promote Japan in the international tourist arena. In this case, hotel operators, airlines, wholesales agents and government officials endorsing Japan should work towards a common goal to promote the destination and galvanize the international tourist community to return. Individual hotel companies cannot achieve sufficient critical momentum promoting their own brands.

An overarching, independent entity, in this cases the ministry of tourism in conjunction with JATA, need to take the lead. Japan's well developed tourism infrastructure cannot depend solely on strong domestic demand that presently enjoys unprecedented buoyancy, partially, from the ever appreciating Yen. Long-term sustainable tourism growth must inevitably come from multiple international source markets in order to benefit from diversified income streams.

About the author:
The author of this article lives in Tokyo and works as a General Manager for a multinational company headquartered in New York whose stock is listed on the New York Stock Exchange. He has worked in international companies in senior management positions in Africa, the Middle East, Europe and South East Asia and can be contacted under
kielnhofer@yahoo.com or dietmarkielnhofer@hotmail.com

The thoughts expressed in this article are those of the author only.

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