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May 28, 2017

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Japan's Economy: Perspective from Two Brothers-in-Law

Japan starts the New Year under its seventh prime minister, Shinzo Abe, in seven years. Given that he's been prime minister before (2006-7), is this really a breath of fresh air or a political game of musical chairs? The list of Japan's challenges is long and familiar: deflation, the strong yen, an aging population and an expensive country in which to live. All of this existed well before the damage from the tsunami, earthquake and nuclear disaster in March 2011.

Two Tokyo businessmen who happen to be brothers-in-law give me a snapshot of how the economy affects them. Both are skeptical about whether the new leadership is capable of dramatic change. Shigeki Koshiba is chef and owner of Hainan Jeefan Shokudo, a restaurant that specializes in Singaporean food. Paul Yang is CEO of Delta Capital, a real estate development company.

Yang says the biggest problem in Japan is the lack of innovation in big business. Corporate tax is 40 percent which drives many foreign businesses out. He says the government needs to offer more incentives for companies to stay in Japan. His own development company is getting creative by moving away from traditional business models. Delta Capital is talking to Japanese universities about leasing their land, building dormitories and managing them. "We're trying to stay away from buying land and we're borrowing land instead," Yang says. He believes Japan's complex rules make leasing a better option. "It's economically more viable because yields and returns are so much better if you don't have to buy the land. We're trying to create a new real estate asset class."

Koshiba's restaurant is casual and the average lunch costs US$10. "We don't feel the economy slowing down because business is constant. For me and a lot of my restaurant friends, turnover is not bad."

But he keeps his eye on the cost of electricity. Since the nuclear crisis at Fukishima, the cost of power has increased. Koshiba now has to pay US$600 more per month at his two restaurant locations. He's also watching the yen which has weakened significantly since Abe called for more stimulus in November. While a weaker yen helps exporters by making their products cheaper overseas, it can have an adverse affect on businesses like restaurants and supermarkets that need to buy imports. "It depends how long the yen weakening lasts. A lot of food stuff is imported from outside," says Koshiba. "There's always a time lag. If this (weakening yen) continues, it'll affect a lot of people."

During the recent campaign, Abe promised more stimulus spending even though Japan's debt to GDP ratio is already 220 percent — one of the highest in the world.

"Abenomics" is the nickname given to the Prime Minister's calls for more quantitative easing from the Bank of Japan and a doubling of the inflation rate to 2 percent. Jesper Koll, head of Japan Equities at JP Morgan, tells CNN, "Abenomics is not just about the central bank. It is about coordinating policy which is something here in Japan we have not had in basically five or six years." Koll says the acceleration of both fiscal and monetary policy is key. "That's where the good news is going to be coming from in Japan the next six to nine months."

But Yonghao Pu, UBS Chief Investment Strategist for Asia-Pacific, says more stimulus is not as simple as it sounds. "That's the trick question. If you print a lot more money, you're more likely to have inflation than deflation. On the positive side, quantitative easing can reduce deflation. But if you have inflation come back, the investors (in Japanese government bonds) are not going to be happy with 2-percent inflation because the net return will be negative 1 percent. So they (Abe) cannot overdo it."

Both Koshiba and Yang will watch the political leadership with a wary eye. "I voted for Abe and the Liberal Democratic Party," says Koshiba. "I decided to give them another chance. I give these guys a last chance."

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