Sep 23, 2015, 9:09 AM ETConference Presentation, Panel

Asia Summit 2015 - The Rising Sun: Japan's Resurgence in the Asia-Pacific Region

The panel took place at the IGA summit, featuring experts from Blackstone (Masaya Kage), KKR (Kazutoshi Hirano), Standard & Poor's (Paul San), and the Ministry of Finance (Kazuaki Yamazaki), moderated by Professor Kotaro Tamura.
The discussion centered on Japan's economic shift from a two-decade "vicious circle" of zero growth and deflation to a period of cautious optimism driven by Abenomics.
A primary driver of change cited is the improvement in corporate balance sheets and institutional investor confidence following foreign exchange and stock market movements over the last two years.

Inflation and Growth: Despite current 0% growth and near-zero inflation, corporate profitability is projected to remain high, with forecasts for 2015–2016 fiscal years indicating a 10% profit level.
Labor Market Dynamics: Unemployment stands at a historically low 3.3%, creating a tight labor market that serves as a primary catalyst for rising wages, particularly for younger generations.
S&P Rating Decision: S&P Global downgraded Japan's sovereign rating to single A, citing slow recovery and modest progress in eliminating deflation expectations as key negative factors.
Fiscal Headwinds: The economy faces two major challenges: premature fiscal consolidation (specifically consumption tax hikes) and severe demographic decline.
Consumption Tax Impact: A 2017 consumption tax increase poses a significant risk to momentum, creating a "Groundhog Day" scenario of restarting growth cycles after tax-induced setbacks.
Nominal GDP Target: The government aims to achieve 3% nominal GDP growth to escape deflation, a challenging target given the shrinking labor force.
Demographics: Japan faces a low fertility rate and nearly non-existent immigration, resulting in a shrinking labor force and low potential growth.

Mindset Shift: Business leaders are increasingly moving away from risk aversion to take risks, driven by improved balance sheets and external pressure.
Corporate Governance Challenges: Three persistent hurdles remain: equity owners were historically undervalued compared to other stakeholders; management was slow to make hard decisions regarding core vs. non-core businesses; and the lifetime employment system encouraged risk aversion.
Capital Utilization: Japanese corporations hold massive retained earnings of over 350 trillion yen (approx. $3 trillion), representing over 70% of GDP, with a strategic shift toward utilizing these funds for wages, dividends, share buybacks, or investment.
Global Expansion: To counter domestic demographic decline, companies like Minibar (60–70% global market share) and 7-Eleven (one-third of stores in Japan, half in Asia-Pacific) are expanding aggressively in Asia.
M&A Activity: Japanese firms are engaging in global cross-border M&A, exemplified by Nikkei's acquisition of the Financial Times, signaling a new willingness to take global risks compared to less successful attempts 30 years ago.
Integration Hurdles: Post-merger integration remains difficult for Japanese firms due to a lack of governance experience, cultural monoculture, and inflexible compensation schemes.

Fiscal Targets: The government aims for a primary surplus in 2020 and to reduce the primary deficit to 1% of GDP by FY2018, while retaining flexibility for additional measures if economic conditions deteriorate.
Structural Reform Definition: Experts argue the "third arrow" (structural reform) consists not of single large initiatives but of incremental deregulation (e.g., 1,000 "small needles") and a cultural shift toward risk-taking and diversity.
Tourism Expansion: The sector is viewed as a strategic "demographic fix," with tourism numbers projected to reach 60 million by the 2020 Tokyo Olympics, potentially adding the economic equivalent of 10 million population growth.
Visa and Tax Deregulation: Recent reforms include relaxing visa requirements for ASEAN, Chinese, and Brazilian nationals and expanding tax-exempt items to boost tourist spending.
Agricultural Reform: A Diet bill passed on August 28th grants local agricultural cooperatives greater management flexibility to encourage new entrants and optimize farmland usage.
Labor Immigration: For the first time, Japan is allowing foreign housekeepers into strategic economic zones and plans to import nurses and caregivers under the technical trainee system starting the following year.

China's Economic Stability: S&P expects China to avoid a hard landing (3–4% growth) due to aggressive fiscal spending, SOE support, and public sector debt restructuring capabilities.
Japan's Exposure: Japan is rated as having "low beta" exposure to a Chinese investment slowdown due to its large economy, though a Chinese slowdown could strengthen the Yen, creating inflationary headwinds.
Currency Market Dynamics: The Yen has been viewed as a safe haven during risk-off periods, appreciating against other Asian currencies despite market concerns regarding currency wars.
AIIB Participation: Japan has not joined the Asian Infrastructure Investment Bank (AIIB) due to governance concerns but is actively monitoring the institution and exploring potential co-financing opportunities with other MDBs.

Fiscal Timing Mistake: Paul San and Paul San identify the timing of the first consumption tax hike as a policy error, arguing that fiscal tightening occurred before a sustainable growth momentum was fully established.
Future Policy Stance: Kazuaki Yamazaki indicates the government stands ready to implement additional fiscal or monetary measures if necessary, though the BOJ maintains independence.
Growth Strategy: The consensus is that Japan's future success depends on mobilizing retained corporate earnings, expanding into Asian markets, and utilizing tourism to offset demographic headwinds.
S&P Upgrade Context: S&P simultaneously upgraded South Korea's rating to investment grade, contrasting its economic trajectory with Japan's challenges.