Taking aimEconomicrecovery packagecontinues toplease observersPage 2

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The big prizeGovernor deploysa princess andspying tactics tosecure OlympicsPage 3

Safe returnThe propertymarket is enjoyinga new lease of lifePage 3

Highs and lowsA tale of mixedfortunes for twogiants: cars andelectronicsPage 4

FT SPECIAL REPORT

JapanThursday October 31 2013 www.ft.com/reports | @ftreports

In the course of Japan’s seven-yearcampaign to bring the Olympicsback to Tokyo – the city thatbroadcast its postwar resurrectionwhen it first hosted the event in

1964 – a central characteristic of itspitch was modesty. There would benone of the suburb-devouring con-struction or spiralling budget over-runs of recent games. A Tokyo Olym-pics would be, in the words of thecity’s proposal for 2016, “the mostcompact and efficient Olympic Gamesever”.

Although Tokyo’s bid did not makeit for that year, the descriptionseemed to fit contemporary Japanitself – meticulous, unassuming,happy enough with small ambitions.

Ever since their country’s stock andproperty bubble burst at the start ofthe 1990s, beginning two decades ofeconomic decline, Japanese have beenadjusting to the idea of a diminishedplace in the world.

They have done so quite smoothly.Most shrugged when China’s grosseconomic output overtook Japan’s in2010. As a government minister said,questioning public funding for aproject to build the world’s fastestsupercomputer: “What’s wrong withbeing number two?”

On September 8 in Buenos Aires,the International Olympic Committeechose Tokyo to host the 2020 games.The decision was greeted with(mostly) jubilation in Japan and visi-tors can expect all the scrupuloussmall-footprint-ism that Japan hasbeen promising.

The games will use many of thecity’s existing facilities, and mostevents will be staged within a fewkilometres of the Olympic Village, ashort hop from the downtown Ginzashopping district. The budget, atabout $8bn, is less than half that sub-mitted by Istanbul, one of two citiesthat Tokyo defeated.

Yet the narrative of modestyhas given way to something else.It is not chest-thumping bravado,exactly – this is still Japan – buta sense that, as in 1964, the gamescould become a symbol of Japaneseresurgence, a chance to climb arung or two back up the global statusladder.

The change in mood owes much toShinzo Abe, the prime minister,whose motto since winning office inDecember last year has been “Japanis back”. He has embarked on anambitious effort to “reflate” the econ-omy, using a combination of govern-ment spending, aggressive monetarystimulus and the promise of struc-tural reform. The hope is to reversea prolonged slide in consumer pricesand rekindle growth.

“I want to make the Olympicsa trigger for sweeping away 15 years

of deflation and economic decline,”he said after the IOC decision.

“Abenomics” is going almost eerilyto plan. Japan’s economy grew at anannualised rate of about 4 per cent inthe first half of the year, easily thefastest pace among the Group ofSeven big developed countries.

The yen, which had been strength-ening relentlessly since 2007, whenother countries’ central banks startedflooding markets with their curren-cies in response to the global financialcrisis, has weakened, aiding Japaneseexporters. The stock market is up bytwo-thirds since last year’s electioncampaign and even consumer pricesare creeping up.

Doubters remain. Some focus on theunfinished business of Abenomics,not least deregulation. Under Mr Abe,Japan has entered talks over theTrans-Pacific Partnership, a proposed12-country bloc whose members wouldbe committed, in theory at least, to

eliminating virtually all barriers totrade. Joining it would jolt protectedJapanese industries such as agricul-ture. The government has submittedeight deregulation bills to parliamentfor the autumn, covering areas fromfarmland ownership to competition inthe electricity industry.

Some parts of Mr Abe’s reformagenda, such as loosening Japan’sstrong job protections for full-timeworkers, remain little more thanwishlist items. He wants to cut corpo-rate taxes – the second-highest in theOECD, at 38 per cent – and faces oppo-sition from the finance ministry andparts of his ruling coalition.

He must balance his reflation strat-egy with the long-term risks pre-sented by Japan’s public debt, thegrowth of which has acceleratedunder his government. It will soonreach the equivalent of two and a halfyears’ economic output, by far thehighest ratio in the developed world.

On October 1, Mr Abe approved along-debated increase in the sales tax,which is to rise from 5 to 8 per cent inApril. New fiscal stimulus worth Y5tn($51bn) will cushion the blow togrowth, but only by sacrificing someof the budget-balancing effect that thetax was designed to create.

Japan is experiencing a period ofpolitical stability unknown since MrAbe’s mentor, Junichiro Koizumi, wasin charge from 2001-06. Six prime min-isters followed in six years, includingMr Abe from 2006-07.

Ten months into his second term inoffice, Mr Abe’s approval ratingsremain above 60 per cent in mostpolls, with no national electionsplanned until 2016. The ruling coali-tion, led by Mr Abe’s Liberal Demo-cratic party, added control of theupper house of parliament this sum-mer to the lower-house majority itwon in December, ensuring that it canpass most bills.

Game on as Abenomics takes offPositive leadership andthe prospect of theOlympics returning toTokyo are boostingconfidence, writesJonathan Soble

Resurgence: jubilation met Japan’s successful bid to host a modest, compact and efficient 2020 Olympic Games in Tokyo Getty

Today’s Japan Special Reportmarks the start of closereditorial co-operation betweenthe Financial Times and theNikkei, Japan’s premierbusiness media group.It contains two comment

articles by distinguished Nikkeijournalists as well as the usualmix of analysis and featuresfrom FT correspondentsstationed in Tokyo.

The report will appear inboth newspapers and on bothour websites. In this way, wehope to provide added insightsto our respective readershipsby combining the best of theFT’s “outside” view of Japanwith the Nikkei’s deepunderstanding from inside.In addition, the Financial

Times and the Nikkei will soonlink to each other’s English-

language websites throughshared headlines and exploreother ways in which we cancombine our joint editorialexcellence for the benefit of ourreaders.Both news organisations

maintain an extensive networkof domestic and internationalcorrespondents and remaincommitted to providingobjective and insightful news

and analysis to our busy andsophisticated audience.This is a time of heightened

interest in Japan. The worldwants to know whether“Abenomics” is for real andwhether it can lead to a periodof sustained economic recoveryin the world’s third-biggesteconomy. This year, in whichthe FT is celebrating 125 yearsin print, seems an appropriate

one in which to deepen ouralready friendly ties with theNikkei, which boasts a similarlylong history and a readership ofmore than 3m.I am delighted to offer this

report to our readers and tothose of the Nikkei. I hope itwill be the start of a long andfruitful collaboration.

Lionel Barber

Editor’s introduction Welcome to the FT and Nikkei’s editorial co-operation

It is a concept that linksbrand names as disparateas Hello Kitty and IsseyMiyake and activities fromsushi to sumo.

The notion of “CoolJapan” has long beenembraced by governmentofficials and business lead-ers as a framework toencourage foreign demandfor Japanese consumergoods and services.

The term “Gross NationalCool” was brought to publicattention by US writer

Douglas McGray in a 2002article for Foreign Policy.He cited Japan as an exam-ple of how a country thatwas not a superpower inthe military sense couldnevertheless project itsinfluence and cultureacross the globe.

“What made Japan asuperpower, more than justa wealthy country, was theway its great firms stakedclaim to a collective intel-lectual high ground thatleft competitors, even in the

United States, scramblingto reverse-engineer Japa-nese successes,” he wrote.

In 2010, Japan’s ministryof economy, trade andindustry (Meti) establisheda creative industries promo-tion office to champion sec-tors such as fashion, foodand music under the CoolJapan banner.

The new administrationof Shinzo Abe has contin-ued the trend. “Japan’sstrengths in content, fash-ion and culture and tradi-

tion are also attractingattention from the world,”Mr Abe told lawmakers in aFebruary speech.

He added: “As wework to ensure that theboom in anime andother content does notend as a temporary fad,besides promoting Japan asa tourism-oriented countrythat attracts people fromaround the world, let usalso make Cool Japan into aworld-class business.”

The rationale goes beyond

national pride. Mr Abe isleaving no stone unturnedas he attempts to reverse 15years of stagnant growth,

against the backdrop ofa rapidly ageing and

shrinking domestic popu-lation.

About 32m people, aquarter of the overall popu-lation, are aged over 65according to official statis-tics. Japan is the first coun-

try to hit the 25 per centmark. In the face of adeclining domestic market,the government has gonefurther than any other toencourage the consumptionof Japanese goods abroad tohelp drive growth.

It has set up a Cool Japanfund, administered throughMeti, with promised back-ing of Y50bn. It is hopedthat a further Y10bn will beraised through contribu-

Continued on Page 4

Leaders choose to play it cool in a global pitch of national identityCulture

Idiosyncratic brandsare seen as a crucialto success, reportsJennifer Thompson

Cool for cats: Hello Kitty ispart of a nationwide strategy

The prime minister’s “Japan isback” agenda includes a more asser-tive foreign policy. He describes it as“active pacifism” and has ordered thefirst rise in defence spending in 11years. He wants to reinterpret theanti-war constitution to allow Japan’sforces to fight in defence of its allies.

“We can’t preserve peace in Japanby thinking only of Japan itself,” MrAbe says. “Peace in Japan depends onregional stability and on the world asa whole becoming more peaceful.”

When he was prime minister thefirst time, he repaired relations withChina after they were damaged by MrKoizumi’s regular visits to the contro-versial Yasukuni war shrine. Thistime, the gulf between Tokyo and Bei-jing is bigger, with the sides stalkingeach other near the Japan-controlledSenkaku Islands, which China claimsand calls the Diaoyu. Behind-the-scenes efforts to arrange a summitmeeting have proved fruitless so far.

Park Geun-hye, president of SouthKorea, has been cool towards Mr Abe,who is loathed by many Koreans forhis attempts to play down officialresponsibility for the wartime abuseof women by occupying Japaneseforces. Mr Abe’s best bet for a diplo-matic success might be Russia, whichhas agreed to resume long-frozentalks over four islands seized fromJapan by the Soviet Union at the endof the second world war. VladimirPutin wants to sell Japan natural gasand Mr Abe needs new energy sourcesafter the Fukushima nuclear disaster.A deal to normalise the border anddevelop the islands looks tempting.

The aftermath of the March 2011earthquake and tsunami remains aproblem. Leaks of contaminated waterat Fukushima were the final hurdlefor Japan’s Olympic bid and it wascleared only after Mr Abe pledged tointervene more forcefully in theclean-up. That has been left largely tothe plant’s owner, Tokyo ElectricPower. Protests against Tepco and thenuclear industry that swelled lastyear have died down, but the leaksthreaten to make more Japaneseoppose the restarting of some of the 50undamaged reactors made idle follow-ing the accident.

After Tokyo’s Olympic-bid victory,some Japanese complained thatspending money on the games wasobscene when tens of thousands ofpeople in the disaster-stricken north-east remained without permanenthomes. Political wrangling andbureaucratic inertia actually appearto be bigger obstacles to recovery.

As such, Mr Abe has work to dobefore all of “Japan is back”.

2 ★ FINANCIAL TIMES THURSDAY OCTOBER 31 2013

Japan

Jonathan SobleTokyo bureau chief

Ben McLannahanTokyo correspondent

Jennifer ThompsonTokyo correspondent

David A McNeillFreelance journalist

Yoichi TakitaSenior Nikkei staff writer

Yasuhiko OtaSenior Nikkei staff writer

Ian MossCommissioning editor

Andy MearsPicture editor

Steven BirdDesigner

Rachel SavageResearch

For advertising details,contact: Michiko Hayashi,+81 3 3581 2097, emailmichiko.hayashi@ft.com, oryour usual FT representative.

All FT Reports are availableon FT.com at ft.com/reportsFollow us on Twitter attwitter.com/ftreports

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Contributors »

Almost all those Japanesewho oppose the Trans-Pacific Partnership, aplanned 12-membereconomic bloc that Japanis involved in creating, getmuch of their informationfrom a single website.

In Japanese, it is called:Saru Demo Wakaru TPP.Loosely translated, itmeans TPP for Monkeys.The site is run by a non-profit organisation in apart of the country thatspecialises in organicfarming.

In Japan, a Twittersearch for TPP will turnup a bevy of tweets thatportray the agreement as aUS plot to sap Japan’seconomic power andweaken its sovereignty.

Since Prime MinisterShinzo Abe announced inMarch that Japan wouldjoin the negotiations, theonline anti-TPP campaignhas lost some steam. Yet,although most Japaneseunderstand the importanceof the country’s alliancewith the US and recognisethe value of dismantlingtrade barriers, thereremains a group ofinternet dwellers for whomthe TPP is a dangerous plot.

According to TPP forMonkeys, if Japan becomesa member of the bloc –which would regulate theflow of goods, money,intellectual property andeven impinge on somenational laws – manythings that the Japanese

take for granted wouldcome under threat. “Ouruniversal health insurancecoverage may disappear,”the cute monkey characteron the site shouts. “Anappendectomy would cost asmuch as Y2m. Those whodo not have that kind ofcash would be left to die.”

The site also sounds analarmist note about what itsays would be the TPP’seffect on Japanese farming.“Food self-sufficiencywould fall from 39 per centto 11 per cent. With theworld bound to experiencea food shortage in the nearfuture, a sudden disruptionof food imports wouldbring starvation.”

Such scaremongeringundermines the case ofthose opposed to the TPP.In Washington, Brussels,London and other bastionsof capitalism, most peoplehave probably never heardof the TPP. So why has theissue aroused suchcontroversy in Japan?

The hysteria is probablya reflection of an anti-American sentimentnursed by somefrustrated segments ofthe population,especially those whohave grown up duringthe “lost two decades”of deflation andeconomic decline.

Part of their objectionis political. They cannotstomach the existence ofwhat they perceive as a USthat behaves as though itowns Okinawa, where thebulk of US bases in Japanare located.

But there has beenalmost no protestagainst aproposed freetrade

bloc between Japan andthe European Union that isevery bit as wide in scope.

One mystery is whymanufacturers, which havemuch to gain throughbetter access to foreignmarkets, have not beenmore vocal in theirsupport. It may be becauseUS tariffs on Japaneseproducts are already prettylow, while some of theother nations sitting at theTPP negotiating table –such as New Zealand andSingapore – are too smallto make much of animpact on Japan’s exports.

That makes the country’sindustrialists less preparedthan they otherwise mightbe to stick their necks outin support of the TPP.

But Japan’s economy hasmore to gain than thisimplies. In August,Japanese journalists,

officials from agriculturalco-operatives and politiciansbeholden to farmersflocked to Brunei, whereclosed-door TPP talks weretaking place. Yet no onecame to represent Japan’sinternet services, ITsectors, financial industry,or music and entertainmentstudios. Their absence wasin stark contrast to thecrowd of lobbyists fromother countries.

This reveals a flaw inJapanese thinking. MostJapanese still associatetrade only with the exportand import of physicalgoods. Japan as a wholehas yet to grasp thesignificance of trans-borderrules governing intellectualproperty rights, investmentand electronic commerce,all of which are integral totoday’s economy.

Participating in thecreation of these rules –while reforming thedomestic economy so thatit shifts more quickly tothese high value-addedindustries – would bring

great benefits.Mr Abe’s government

has made the serviceand software sectorspillars of its growthstrategy. But if corporateJapan cannot overcome a

mindset that neglects“soft” industries andregards physical exports asall-important, it might finditself turning to a newwebsite for advice:Economics for Monkeys.

Yasuhiko Ota is a seniorNikkei staff writer

Importance of TPP tomore tradeleaves no room tomonkey aboutCommentaryYASUHIKO OTA

Last October, posters sud-denly appeared on thestreets of the Japanese capi-tal declaring that “the cen-tre of the world economy iscoming to Tokyo”.

The posters were refer-ring to the annual meetingsof the International Mone-tary Fund and World Bank,then being held in Japan.

To many, however, thephrasing must have seemedludicrous. Deflation-plaguedJapan was mired in an eco-nomic slump under the lastdays of a failing govern-ment led by the DemocraticParty of Japan.

One year later, the moodis much brighter. The Lib-eral Democratic Party’sShinzo Abe, back in theprime minister’s post for asecond time, addressed theNew York Stock Exchangein September. He told hisaudience to “Buy my Abe-nomics”, suggesting Japanwas back and had a centralrole to play in the globaleconomic recovery.

The “three arrows” of MrAbe’s programme – aggres-sive monetary easing; flexi-ble fiscal policy; and a pri-vate-sector-led growth strat-egy – seem to be on target.The results have beenimpressive.

The super-strong yen hasreversed direction and thestalled stock market is upnearly two-thirds. Thenation has recorded annual-ised real growth of about 4per cent for two straightquarters.

Many like to bathe in thereflected glory and claim to

have supported the idea allalong. In fact, when I usedthe word “Abenomics” inthe Nikkei last November,many experts were decid-edly cool about the idea.

Typical of the commentswas: “Extreme monetaryand fiscal policies engendermore adverse effects thanintended ones.”

Behind the criticismlurked a cynicism and mas-ochistic psychology borneof years of disappointment.

Mr Abe and his aideshave sought to countersuch scepticism throughvigorous activism.

The Bank of Japan madethe first move by introduc-ing a “new dimension” tomonetary easing, helpingstem the yen’s appreciationand reverse the stock mar-ket’s long slide. The admin-istration moved quickly tojoin the Trans-Pacific Part-

nership free trade talks.And it unveiled a plan fortax breaks related to corpo-rate capital investment.

Mr Abe’s pattern hasbeen to announce headline-making measures everymonth or two, winning overthe markets, investors andpublic who crave signs ofchange in Japan. Thisapproach, unusual for aJapanese prime minister,has been crucial to Abe-nomics’ success so far.

When the stock marketwas going through a down-ward correction in June, forinstance, Mr Abe broughtforward the announcementof the corporate tax breaks.

He used the same tacticsto the fullest effect in decid-ing to go through with the

plan to raise Japan’s 5 percent consumption tax to 8per cent next April, a policysupported by most, if notall, market participants.

Using the success of the2020 Olympic Games bid asleverage, Mr Abe had theministry of finance preparea Y5tn ($51bn) stimuluspackage in return for theconsumption tax rise.

He also started a discus-sion on lowering Japan’seffective corporate tax rate.He was thus able toannounce the tax increasein conjunction with growth-oriented initiatives.

But does the prime minis-ter have any blind spotsthat could imperil his pro-gramme? Some argue thathe could risk his economicachievements by wastingpolitical capital on diplo-matic and national securityissues. Still, the Abe admin-istration looks pragmatic,and its stance of prioritisingthe economy is unlikely tochange until a recovery isin full swing.

It is at that hypotheticalpoint, when Japan hasdefeated deflation andreturned to steady growth,that the real threat to Abe-nomics may appear. Theprogramme has drawn itsvigour from an acute senseof crisis over Japan’sdecline. If that urgencyfades, policy makers maygrow complacent and Abe-nomics could unravel.

Robert Feldman, chiefeconomist at Morgan Stan-ley in Japan, says that sincethe bubble economy col-lapsed more than 20 yearsago, Japan has been stuckin a “CRIC cycle” – crisis,response, improvement andcomplacency. Mr Abe’s abil-ity to avoid slipping backinto complacency may bethe most important factordetermining whether Abe-nomics will lead to Japan’seconomic resurgence, or not.

Yoichi Takita is a seniorNikkei staff writer

Complacency is biggestthreat to resurgenceAbenomics

Prime minister muststay the course withsuccessful measures,writes Yoichi Takita

The programmehas drawn its vigourfrom an acutesense of crisis overJapan’s decline

Aplan seems to be comingtogether. Before Japan wentto the polls in December,Shinzo Abe set out his stall.If elected prime minister,

the Liberal Democratic Party leaderwould end the “corrosive” deflationthat had lingered in the world’s third-largest economy for most of the previ-ous 15 years.

He would get things going with asupplementary budget. He would leanon the Bank of Japan to embrace“unlimited” monetary easing toachieve a higher, harder inflation tar-get of 2 per cent. And he would starttackling some structural impedimentsto growth, while leaving some of thetrickier matters – such as how to pro-tect certain industries in multilateraltrade deals, or how to restart idlednuclear power plants – until afterupper-house elections in July.

A happy side-effect of this big effort,Mr Abe’s advisers agreed, would be aweaker yen. The subsequent lift tocorporate profits, stock prices andsummer bonuses should ensure vic-tory for the LDP in the upper-houseelection, thus cementing Mr Abe’sgrip on power for the next few years.

Ten months on, and it is remarkablehow much of this scenario has playedout. Thanks largely to fiscal and mon-etary stimulus – the first two“arrows” of Mr Abe’s programme –Japan’s real growth in the first half ofthe year was about 4 per cent on anannualised basis, eight or nine timeshigher than the potential growth rate.

The election, framed by the LDP asa referendum on “Abenomics”, was nocontest. Inflation rose to a five-yearhigh of 0.8 per cent in August, pushedup by a big fall in the currency.

And some longer-term growth initia-tives are now under way. Eight bills

will be submitted to the Diet in theextraordinary session that began onOctober 15, covering areas such asfarmland reform, renewable energyand the establishment of special “stra-tegic zones” for investment.

Just about the only pre-election eco-nomic policy pledge yet to be fleshedout is a cut in corporate taxes, tobring Japan’s 38 per cent effectiverate closer to Germany’s 29 per cent,China’s 25 per cent and Korea’s 24 percent. The ministry of finance says it isnow working on a plan.

“We’ve seen several false dawns,but this seems much more aggressivethan before,” says Adrian Brindle, along-time Japan hand now building afinancial services firm under the Evo-lution brand. “It’s a dangerous experi-ment. But to escape deflation youneed to knock the orb off its axis.”

But will it work? The biggest obsta-cle could be the private sector. Gov-ernment and BoJ officials are unitedin exasperation that companies haveyet to respond to the improved out-look by raising base salaries or ramp-ing up plans to spend more in Japanon plant and equipment. Both meas-ures are seen as vital to create a virtu-ous cycle of higher profits, wages andconsumption.

Yet recent data on private consump-tion have been softer than expected,suggesting rising prices – and higherfuel bills, in particular – have begunto weigh on households’ purchasingpower. Many policy makers fear thatif total cash earnings remain flat inthe run-up to the rise in consumptiontax next April and beyond, the econ-omy could take a big hit, threateningJapan’s exit from deflation.

Mr Abe has built in safeguards inthe form of a stimulus package worthabout Y5tn ($51bn), which more than

offsets the theoretical knock to theeconomy from the tax increase ofabout Y1.8tn. There will also be hand-outs to those on low incomes.

But within ministries there is a feel-ing that base salaries have to go up tobuttress demand. Last month, thegovernment held a meeting with busi-ness leaders in which it discussed taxincentives to boost incomes, and isdue to hold another this month, to bechaired by Mr Abe himself.

Employers’ associations have longresisted politicians’ calls to pay peoplemore, arguing that lifting fixed costsamid uncertain global demand willhurt Japan’s competitiveness. Yoshi-hide Suga, chief cabinet secretary,told a press conference last month thegovernment aimed to reach a “sharedunderstanding” with the private sec-tor by the end of this fiscal year.

Capital spending, too, is yet to makea convincing recovery. Quarterlyinvestment by businesses in newplant and equipment shrank for fivestraight quarters before rising 1.3 percent between March and June.

A pick-up is possible from here, saysMasayuki Kichikawa, chief Japaneconomist at Bank of America MerrillLynch in Tokyo. But many companieshave “lingering capacity overhangs”and manufacturers will be looking toproduce where the demand is, toavoid exchange rate exposure.

“As a result, business investment islikely to increase in emerging coun-tries rather than in Japan,” he says.

Most analysts agree that gettinggroups on board depends on the in-centives in Abenomics’ “third arrow”– a set of linked initiatives across pol-icy areas. Mr Abe deserves a lot ofcredit, they say, for challenging broadassumptions of continuing decline.But the hard work starts here.

Two arrows ontarget but thirdyet to hit home

Economy Companies have yet to respond tothe improved outlook, saysBenMcLannahan

On track so far: Shinzo Abe,Japan’s prime minister

‘It’s a dangerousexperiment. But toescape deflationyou need to knockthe orb off its axis’

Yasuhiko Ota

FINANCIAL TIMES THURSDAY OCTOBER 31 2013 ★ 3

Japan

Perhaps only in a conversa-tion with Naoki Inose, thevoluble nonfiction writerturned governor of Tokyo,could a question about theJapanese capital’s Olympicbid elicit a 20-minute dis-course on Pearl Harbor,James Bond and the Russo-Japanese war.

We are sitting in a recep-tion room at the Tokyo met-ropolitan government head-quarters in Shinjuku ward,a skyscraper complex com-missioned during the 1980sbubble years that now hasdingy, yellowed wallpaperand fading carpets.

His point, when we get toit, is about information, andits value in winning battlesof both the military andsports-diplomacy kind.

The British, Mr Inosesays, are masters of infor-mation gathering. Heknows this from history –British spies helped Japanbeat the Russians in 1905 bypassing along intelligenceabout Russian ship move-ments – and also from morerecent experience.

When Tokyo was honingits bid to host the 2020Olympics, the governor,who chaired the campaign,asked London games offi-cials how to woo the Inter-national Olympic Commit-tee. Act like a covert opera-tive, he was told.

“It’s the country of 007.They said to find out whenIOC members were visitingdifferent competition ven-ues, then to go and pretendyou just bumped into themthere. You have to havethat information,” he says.

Mr Inose is the secondconsecutive governor ofTokyo to have had a previ-ous career as an author. Hispredecessor, Shintaro Ishi-hara, started out in fictionbefore becoming the outspo-ken champion of Japan’snationalist right. Someblame his disparaging com-ments about foreigners andwomen for Tokyo’s failureto win the 2016 games.

In April, Mr Inose causedsome trouble when he wasquoted in a New YorkTimes interview as malign-

ing the facilities in Madridand Istanbul, Tokyo’s rivalsfor the games. He sought toweaken Turkey’s appeal aspotentially the first Islamiccountry to host the Olym-pics, by saying Muslimswere always “fighting witheach other”. (He later quali-fied his remarks, thoughthe civil war in neighbour-ing Syria ultimately didhurt Istanbul’s case.)

Mr Inose shares Mr Ishi-hara’s disdain for Japan’snational bureaucracy. Theministries, he says, arebeholden to special inter-ests and territorial to thepoint of ignoring thenational good – a complainthe illustrates with a storyabout preparations for warin the Pacific, in 1941.

“The navy and the armywouldn’t tell each otherhow much oil they hadstockpiled,” he says. “Thisis before fighting theenemy. Government hadalready collapsed. That’sthe condition in which wefought America. There wasno way we could win.”

For the Olympic bid, MrInose had to corral a groupof mutually distrustfulbureaucrats, sports federa-tions, corporations and theminders of the royal family.

“I visited the ImperialHousehold Agency manytimes, always surrepti-tiously of course,” he says.He wanted a royal to addglamour to Tokyo’s delega-tion in Buenos Aires, butworried he might be criti-cised for involving the mon-archy in a political venture.

All this work came at adifficult personal momentfor the governor. Sevenweeks before the Olympicdecision, his wife, Yuriko,died of a brain tumour. Hekept up his schedule andrarely mentioned it, savefor a few obliquely mourn-ful messages on Twitter.

Mr Inose got his royal inthe end: the Cambridge-educated Princess Hisako ofTakamado, widow of theemperor’s cousin, made awell-received presentationat the IOC meeting. “Theatmosphere really changedbecause of that,” he says.

“Madrid had brought outPrince Felipe at the IOCgeneral meeting inLausanne on July 3, sothey’d already used theirtrump card. They had nosurprises left . . . We wereclever to save our princessfor the end.”

Spy tactics andprincess helpseal the dealOlympics

Tokyo’s governortells Jonathan Soblehow the 2020games were won

Twelve months ago shares inIchigo Group Holdings, aTokyo-based property man-ager, were languishing atabout Y45 ($0.46). They are

now 10 times higher, and on averagedaily trading volumes more than 80times greater. But this is no bubble,says chairman Scott Callon.

What has happened, says Mr Callon,is that monetary policy has been“normalised” by a new Bank of Japangovernor. Under Haruhiko Kuroda,installed by prime minister ShinzoAbe in April, there is a much clearer

commitment to bringing an end to thedeflation that has sapped spirits andstifled investment for much of thepast 15 years.

Mr Kuroda has said he aims to hit a2 per cent target for consumer pricerises by doubling Japan’s monetarybase by the end of next year. Thatpledge, followed up by about Y7tn ofbond purchases each month, has hada transformative effect on risky assetsin general and the property sector inparticular, with a near-60 per cent risein the Topix real estate index sincethe turn of the year.

“For two decades the BoJ wasrunning too tight a monetary policy,cutting off oxygen from the system,”says Mr Callon, a resident of Japansince 1989. “For guys like me, it’s aneffort to remember when Japan wasmore vibrant. We’ve not experiencedthis kind of operating environment inan entire generation.”

In the commercial sector, there ismounting evidence of a pick-up inrents in Tokyo, which had slid prettysteadily – 2006-2008 excepted – overthe past two decades. Data from MikiShoji, a real estate agency, show new

buildings in the five central districtsachieved about a 10 per cent rise inasking rents between January andSeptember. Total rents across thesemain business areas – Chiyoda, Chuo,Minato, Shinjuku and Shibuya –dropped about 2 per cent over thatperiod.

But Ichigo’s Mr Callon says thatreal rents – defined as advertised rentminus incentives – have been increas-ing for a while. After the global finan-cial crisis, some landlords desperateto fill space were offering tenants asmuch as eight months rent-free on a

two-year lease, he says. As vacancyrates continue to fall – down to athree-year low of 7.9 per cent in Sep-tember, from a peak of 9.4 per centlast June – freebies are falling too.“The first move is always in incen-tives, which have collapsed”, he says.

Analysts say that preparations forthe 2020 Olympics should keep pricesfirm in the relatively rundown area ofShinagawa, which is set to be redevel-oped as a transport and accommoda-tion hub for passengers arriving fromTokyo’s two main airports.

Other obvious beneficiaries are theunfashionable Harumi and Toyosudistricts on Tokyo Bay, where theOlympic Village and other event facil-ities will be built.

“To get to Toyosu from Ginza takessix minutes by subway, but judgingby occupancy and rents, you might aswell have slid off the face of theearth”, says Christian Mancini, chiefexecutive of north Asia at Savills, theproperty services group.

The residential property market isalso picking up steam.

Year-on-year growth in new Tokyocondominium sales averaged almost40 per cent between May and August,according to the Real Estate EconomyResearch Institute – five times therate last year.

Brokers say some of that demandwas due to buyers seeking to avoid ahigher rate of consumption tax, set torise from 5 per cent to 8 per cent nextApril. But equally, as “Abenomics”begins to generate expectations ofinflation, borrowers are becomingconscious that ultra-low interest ratesmay not be around forever. Banks arealso taking a more positive view ofprice rises, pushing out mortgage

loans to as much as 95 per cent of thevalue of the property.

A new Mitsubishi-built complex atChidorigafuchi, one of the prettiestspots on the perimeter of Tokyo’sImperial Palace, achieved the highestprices since the financial crisis whenapartments were sold in September.All 22 units found buyers immedi-ately, at an average price of Y270m.

“Unit prices above Y100m were hardto sell a year ago; now units aboveY150m are selling very well,” saysAkihiko Mizuno, head of capitalmarkets Japan at property consult-ants, Jones Lang LaSalle.

Much of the activity at the high endis driven by rich Asian families, whohave seen the recent fall in the yen asan opportunity to pile into Japaneseassets. Tokyu Livable, a Tokyo-basedcompany that began ventures inShanghai and Singapore within thepast year, is now planning to set upshop in Hong Kong and Seoul.

“This is just the beginning,” saysToshihiro Kitagawa, senior executivedirector. “The trend has turned.”

Institutional investors in Europeand the US are circling too, lured byfunding costs below 2 per cent andrental yields of about 5 per cent.

“Japan has been the proverbial bas-ket case for the past five years”, saysMr Mancini of Savills. “But now,against, say, overheated Hong Kongor Singapore, or mainland China,where competition with domesticmoney is too intense, it stacks up veryfavourably.”

Mr Callon of Ichigo adds: “If rentstake a hammering, you’ll get [a yieldof] 4 instead of 5 per cent. It’s the bestrisk-adjusted investment in theworld.”

From proverbialbasket case toa sensible bet

Real estate Easiermonetary policy has givena boost to the sector, writesBenMcLannahan High times: rents have risen 10 per cent in Tokyo’s business districts Dreamstime

‘The government has protectedagriculture too much, so it doesn’thave enough ability to competewith foreign industries. It shouldquit protecting them and getthem to become globalcompetitors. To this end,the Trans-PacificPartnership is a greatchance.’

Ayami Ohno, 21, student,Keio University, Tokyo

Voice of youthAyami Ohno

4 ★ FINANCIAL TIMES THURSDAY OCTOBER 31 2013

Japan

The two pillars of the electron-ics and automobile industriesdefined postwar Japan. Rais-ing living standards for ordi-nary Japanese and providing

the expectation that a job was for life,they also gave the wider world suchindispensable gadgets as the pocketcalculator and the Sony Walkman.Meanwhile, Japanese cars were ubiq-uitous.

Those days of unbridled success,however, are long gone.

The biggest Japanese companieshave suffered from 15 years of defla-tion in their domestic market, while astrong yen made their productsuncompetitive abroad.

Yet Japanese carmakers have comeroaring back after the financial crisis,fuelled by renewed global demand,especially from fast growing econo-mies in Asia, and aided by cost-cutting and now a cheaper yen.

This stands in sharp contrast toconsumer electronics groups whichare focused on restructuring in anattempt to stem multibillion dollarlosses.

So why are these former giants lan-guishing? The most obvious explana-tion is intensifying competition. Intelevisions, the old guard is compet-ing not only against South Koreangroups such as Samsung or LG, whichmake high-quality models and haveinvested aggressively in marketing,but against Chinese makers such asTCL or Hisense Electric, which focuson cheaper alternatives.

Japanese groups are having a toughtime. In television sales, they havelost market share. Mark Newman,analyst at Bernstein, says: “TVs cap-ture a large part of total consumerelectronics revenue, but are a low-growth and low-returns business.

“Only Samsung and LGE [LG Elec-tronics] plus some of the low-end tele-vision makers are profitable, withthese groups gaining share at theexpense of the Japanese, which arestuck in the middle.”

The share of global market sales ofthose “stuck in the middle” hasroughly halved since 2006. Koreanmakers dominate, with 37 per cent,

while Chinese manufacturers have 28per cent. Japanese makers account forless than a fifth of sales.

For the smartphone market, the sit-uation is similar: Apple has stolen amarch in software and design innova-tion; at the same time huge-scale,low-cost hardware makers such asTaiwan’s Hon Hai have emerged.

Demand for certain goods is also onthe wane. Games console makers havecome under pressure, as mobile gam-ing becomes more popular, while TVsellers have suffered from the rise ofthe smartphone and tablet devices. Bycontrast, carmakers have seendemand rise, spurred by demand inIndia, China and southeast Asia.

Electronic consumer goods that arebeing sold are not as profitable asbefore. Their producers have battledagainst falling prices, as manufactur-

ing becomes more efficient, drivingdown costs. So, what can Japanesecompanies do? The most obvious, andmost painful, option is restructuring.

Toshiba recently announced it washalving its television production unit,with the loss of 3,000 jobs, and shut-tering two of three factories. After thecuts, production will be at one over-seas factory and a joint venture inEgypt. When operating four factoriesthree years ago, the company wasmaking some 14m units annually. In2013, it hopes to make 11m.

Other Japanese television makershave also retreated from manufactur-ing in recent years. Sony cut its mid-term sales target for liquid-crystal dis-play units by half, from 40m to 20m,two years ago. It expects sales of 15msets in the present fiscal year.

This year, Panasonic agreed to sell

to private equity group KKR a major-ity stake in its healthcare business,which makes blood-sugar monitoringequipment for diabetics and medicalrecord-keeping systems, in an attemptto slim down. It is also stopping mak-ing smartphones.

Another option for groups would befinding new areas for growth.Toshiba’s boss Hisao Tanaka citeddata storage and healthcare as themost promising possibilities.

The more challenging route wouldbe to regain the technological edge.Sony has sought to unite its expertisein cameras and smartphones bylaunching standalone lenses thatattach to phones, in an effort to createthe best-quality camera phone.

More broadly, Japanese makers aremoving into the manufacture of smarttelevision models that contain

features such as access to the internetThey are certainly coming under

more pressure to change tack.Sharp made the deeply embarrass-

ing admission late last year that therewas “material doubt” about its abilityto stay in business, and activist inves-tor Dan Loeb called on Sony to sellpart of its entertainment business tosecure funds to revive the consumerelectronics arm.

Masami Kashiwagi, analyst at For-rester, says: “The market is changingrapidly, and competition is intensify-ing, especially with Chinese andKorean manufacturers with muchstronger cost competitiveness thanJapanese groups.” He says Japanesecompanies lack a sense of urgency toadjust their businesses. “Stakeholderssurely want companies to spend dol-lars in profitable businesses.”

tions from the private sector, includ-ing banks and the bigger manufactur-ers.

Based on the idea that Japanesesmall and medium-sized enterprisesoften make attractive and high-quality goods but do not have thecapacity to invest in overseas distri-bution, the funds will be used to helpthem expand abroad in return for asmall equity stake in the participatingbusinesses.

“Japanese businesses have notinvested enough by themselves in for-eign countries” says Hideaki Ibuki,director of creative industries at Meti.“This investment fund should be thetrigger.” His department has received80 proposals, with the winningprojects to be selected next month.

The countries that Japanese busi-nesses are most likely to focus on arethose in Asean (Association of South-east Asian Nations) such asIndonesia, Thailand, Malaysia andthe Philippines. Some companies areexpected to strike out further.

Cosmetics goods suppliers areexpected to target China. The US andEurope are regarded as promisingmarkets for high-quality homeware.

Some of the 80 proposals wereprompted by Tokyo recently winningthe 2020 Olympics and the prospectthat interest in Japanese culture willincrease.

Meti admits the pressure is on forthe project to be a success, given thesize of the investment and fact thatbusinesses that are not involved willbe watching the Cool Japan fund’sprogress to decide whether theyshould follow suit.

Other challenges remain. The com-petition is intensifying betweenChina, Japan and South Korea to pro-mote their languages and culturesoverseas. China’s Confucius instituteshave proliferated in southeast Asiaover the past decade, for instance,while South Korean pop music hassoared in popularity.

Like many “soft power” initiatives,the Cool Japan fund’s success ineconomic terms will be difficult tomeasure.

Continued from Page 1

Global pitchof nationalidentityplays it cool

Former export giants try to bounce backIndustry Electronicsin search of a newcompetitive edge, saysJennifer Thompson

Automobiles Consumer electronicsRetail market size ($bn)Production, 2012 (million)

Market shares by company (%)

1998 2000

2007 08 09 10 11 12

05 10 12

45

50

55

60

65

70

0

5

10

15

Toshiba

Panasonic

Sharp

Sony

Apple

Japanese consumers Planned purchases overnext 12 months (%)*

Exports by destination, 2012 (’000)

Exports, 2012 (million)

1998 2000 05 10 12

1998 2000 05 10 12

8

9

11

10

12

3

4

5

6

7

157 103

SmartphoneHDTV ComputerTablet PC

* Based on 11,100 survey respondents

Lowest among US, Brazil, Russia, India, China,Germany, France, Sweden, South Africa and UK

570

526

849

1,886

347 165 449

Asia

OceaniaAfrica

Middle East

Europe

Central andSouth America

NorthAmerica

Sources: Japan Automobile Manufacturing Association; Euromonitor; Accenture FT graphic

Manufacturing: highs and lows

Photos: Bloomberg; Getty; Dreamstime

The village of Odohama onJapan’s beautiful northeastcoast, once made its livingfrom the world’s largestocean. Today, it exists onlyon old maps.

Thirty-one months agothe tectonic plates beneaththe Pacific shifted violentlyabout 60 miles east of here,triggering an earthquakeand tsunami that carriedaway Odohama’s 146 homesand sent its residents run-ning for higher ground.

Most now live in tempo-rary housing a few milesaway, patiently waiting fortheir lives to restart. Thegovernment has offeredY2m toward the cost of newhomes, and will cover theinterest on old mortgages.

But even with that help,older villagers such as KojiIwamura, nearing the endof their working lives, can-not get bank loans for newhouses. “We will probablyend up in a publicly ownedapartment,” he says. In themeantime, he and his wifewhile away their days in atwo-roomed shelter.

The March 11 2011 disas-ter flattened hundreds ofsimilar towns. Across Miy-agi, Iwate and Fukushima,more than 1m buildingswere damaged or destroyedand nearly 19,000 peopledeclared dead or missing.

An initial damage esti-

mate of $235bn by theWorld Bank is almost cer-tainly too low, renderedobsolete by the price tag forcleaning up the Fukushimanuclear disaster triggeredby the tsunami.

Mountains of twistedmetal and splintered woodare neatly piled up on theoutskirts of coastal townsand cities. But rebuildinghas been agonisingly slow,stalled by bureaucracy anddisputes over levees andwhere to relocate housesand businesses.

Futoshi Toba, mayor ofRikuzentakata, which lostmost of its city centre andnearly a tenth of its people,said this year: “My sense ofhopelessness for the futureis shared by many of thevictims.”

Mr Toba cites a slow-mov-ing plan to relocate hun-dreds of homeless familiesto hills overlooking the city,bringing him into collisionwith multiple bureaucra-cies. Clearing the hillsideforest, levelling and rezon-ing land, and reconstruct-ing large buildings must allbe cleared by overlappinggovernment agencies, eat-ing up precious time.

The problem, for now atleast, is not money. On thesecond anniversary of thedisaster, Prime MinisterShinzo Abe topped up thereconstruction budget byY6tn to Y25tn over fiveyears.

“What’s needed is imagi-nation and politicians wholead and take responsibil-ity,” says Mr Toba.

This article appears in fullat FT.com.

Tsunami zonewaits in hopeAftermath

Reconstruction indisaster area is miredin bureaucracy, saysDavid A McNeill

‘The Japanese welfare state is nowcollapsing. Social security is basicallysustained by today’s generation for over65-year-olds. I believe that the solution for

now is either to accept moreimmigrants, or to raise the

consumption tax.’Yuto Aoki, 22,

student, Kwansei GakuinUniversity,

Nishinomiya

Voice of youthYuto Aoki

Japan’s successful bid tohost the 2020 Olympics hasreminded the world of thecountry’s many attractivequalities, from deliciousfood to safe streets andpunctual trains. But it hasalso refocused attention ona sore spot: the continuingefforts to deal with theaftermath of the Fukushimanuclear disaster.

Two and a half years afterthe triple meltdown, newfailures at the strickenplant seem to be reportedeach week. Most have to dowith contaminated water.Hundreds of tons of watercycle through each day,either as coolant pumpedinto still-hot reactors, or asgroundwater seeping in andout of cracked plant base-ments.

Containing it all hasproved to be beyond thecapacity of Tokyo ElectricPower (Tepco), the much-criticised owner. Somewater has leaked out, expos-ing workers to radiationand contaminating the seaaround the coastal site.

Experts say there is littlerisk to Olympic-hostingTokyo, 240km south, butthe situation looks a sham-bles: in a Nikkei newspaper

poll, 80 per cent of respond-ents said they distrusted anassurance given to theInternational OlympicCommittee by Shinzo Abe,the prime minister, thatthe clean-up was “undercontrol”.

All this has complicatedMr Abe’s efforts to getJapan’s nuclear industryback on its feet. In themonths after the accidentin March 2011, nearly all ofJapan’s 50 surviving reac-tors were closed indefi-nitely, amid public anxietyover safety and politicalwrangling between localgovernments and Tokyo.

The result pleased manyJapanese – slightly morethan half say they want thecountry to go nuclear-free –but left utilities strugglingto replace an energy sourcethat had provided 30 percent of Japan’s electricity.

Power bills have risen by8-17 per cent, greenhousegas emissions have jumped,and the cost of importinggas and other fuels haspushed a country that ranfearsome trade surplusesinto a persistent deficit.

Mr Abe has been pushinggently but firmly for change– or, in the view of the anti-nuclear movement, a returnto a scaled-down version ofthe pre-Fukushima statusquo. Since coming to powerin December, he has effec-tively abandoned a pledgeby the previous, left-leaninggovernment to end nuclearpower by 2040. Instead, hehas supported applications

by utilities to restart adozen idled reactors.

A new and more vocalnuclear regulator has bothhelped and hindered MrAbe’s cause. The NuclearRegulation Authority hasbeen more critical of safetyflaws than its predecessors:at least one plant has beendeemed unfit to reopenbecause it is sitting on anactive faultline.

Mr Abe is counting on theNRA’s perceived strictnessto assuage public fears andinhibit opposition to restart-ing the plants. Utilities sub-mitted the first applicationsfor recertification in July;the NRA is expected to takeuntil next spring to inspectthe facilities, which haveundergone safety upgrades,and make its first rulings.

Most expect permission tobe granted. Still, even if allthe reactors are allowed toreopen, Japan would havejust a third the number ofworking reactors that it hadbefore Fukushima.

More could be put back inservice, but experts say atmost half are new enoughor far enough from Fuku-shima to be viable. Thatwill keep pressure on thegovernment to cultivatealternative energy sources,from renewables to USshale gas.

“Japan is thinking hardabout its energy mix,” saysGeorge Borovas, head ofnuclear projects at Pills-bury, an international lawfirm. Japan’s nuclear-equip-ment builders – Hitachi,Toshiba and MitsubishiHeavy Industries – havebecome more assertive inpursuing deals abroad, headds. Hitachi’s acquisitionof the Horizon nuclearproject in the UK last year,for instance, put the com-pany in charge of an entireatomic-energy enterprise –

a departure from its usual,more limited role as abuilder of reactors.

Meanwhile, there is stillFukushima to contend with.Ahead of the Olympic host-city decision in September,Mr Abe’s government beganasserting more control overthe clean-up. In August, itsaid it would fund a projectto freeze soil around theplant, to prevent groundwa-ter seeping in and mixingwith irradiated coolant.

“This is a critical issue ofstrong interest to the Japa-nese people,” Mr Abe saidat the time. “Instead ofleaving everything toTepco, we need to create afirm national strategy.”

Some are now urging are-examination of Tepco’sfuture, reviving a debatedormant since the monthsafter the meltdowns.

Clean-up and compensa-tion costs had threatenedthe utility with bankruptcyuntil the previous govern-ment stepped in with Y1tnin capital and a promise tounderwrite payments totens of thousands of evacu-ated Fukushima residents.

Tepco is in effect ownednow by the state, butthrough a complicatedstructure that allows thecompany to operate inde-pendently. Critics say thathas left ultimate responsi-bility for the Fukushimasite unclear, and may havecontributed to the string ofproblems at the site.

Yasuhisa Shiozaki, a sen-ior LDP politician andformer chief cabinet secre-tary, says the governmentmight end up taking clearercontrol – either of Tepcoitself, the Fukushima siteor of all Japanese reactorsthat are to be abandonedrather than restarted.

“I think it’s inevitable,”he said in September.

Fukushimahurts nuclearrevival hopesEnergy

Poll suggests that 80per cent doubt Abe’sOlympic assurances,says Jonathan Soble

‘Japan will have to resolve itsproblem of a declining and ageingpopulation. This is reducing thenumber of workers, so Japanneeds to employ foreigners. Thecountry needs to be ready forthis by improving people’scommunication ability, such asspeaking English.’

Hiromi Hamashima, 22,student, Saitama

Voice of youthHiromi Hamashima

The Japanese premier (red hat) on a visit to Fukushima Getty