ThatÆs a strange and even ominous remark to make given that the Japanese last studied Britain at the turn of the 20th century, in particular the Royal Navy. Later, they also studied manufacturing. The result was a resounding naval defeat for the British in the Pacific at the start of World War II and the disappearance of the UK manufacturing industry in the 1960s and 70s.
But the Japanese, increasingly obsessed by the threat from China, see the UKÆs recent economic boom as evidence that its æspecial relationshipÆ with the US has served the country well. So perhaps JapanÆs next step is to take over BritainÆs role as AmericaÆs most loyal poodle.
ôJapan canÆt have an independent foreign policy, so we might as well look at how the UK has capitalised on its relationship with the US,ö says Honda.
Japan is also seriously concerned about the role of South Korea, the third largest economy in the region and traditionally a Western ally.
ôThe Japanese navy doesnÆt share sonar information with the South Korean navy any longer, because they believe it goes straight to China,ö he says, adding the Japanese navy is planning to increase its expenditure on destroyers to counter the Chinese submarine threat.
For this senior figure, in fact, foreign policy - in other words, the China threat - is far more important than economics. That's an interesting realignment of priorities, given the countryÆs ongoing turmoil on that front.
ôChina is a strong power economically which benefits from its integration in the world economy. But so was Germany in the 1890s. That didnÆt stop World War I,ö he notes.
When asked about his indifference to economic issue, he shrugs his shoulders.
ôThe private sectorÆs restructuring is almost completed. And the public sector will never reform.ö
Perhaps thereÆs a sense of resignation there. On the economic front, this figure was initially wary of drawing any conclusions about how Japan could raise itself to the next level û as Britain did under Thatcher in the 1980s and the US did around the same time under Ronald Reagan. Recall both countries were in mess at the time. The US had been brought to its knees by the Vietnam War, while the UK seemed as inept at politics as at business and economics.
ôThe US model doesnÆt work for us, and the Japanese model doesnÆt work either. What are we to do?ö
In some ways, this figure sees the restructuring as having been successful as witnessed by bulging corporate profits. But he thinks an excessively shareholder friendly system will hand out dividends to the detriment of workers û a classic instance of the different emphasis the Japanese put on corporate stakeholders. He also reckons that the practice of cross-shareholdings is on the rise again as ingrained Japanese habits re-emerge to challenge Wall Street capitalism (although there is little evidence of this in the most recent figures released by the authorities in Japan). The practice whereby companies buy or swap stakes in each other makes it very difficult for them to be taken over in hostile circumstances.
In any case, perhaps thatÆs why Honda is unmoved by the recent political turmoil, involving the abrupt resignation of Shinzo Abe last month, the LDP prime minister who resigned after less than a year in the job.
That's to say, if the bulk of the restructuring that can be done has been done, then perhaps Japan can afford to go back to the old style of factional politics.
Faction-driven the political situation certainly is, and Honda does not think current prime minister Yasuo Fukuda is likely to survive for long. ôFukuda is supported by eight out of the nine factions of Liberal Democratic Party, so he is beholden to them all. The result will be deadlock,ö he says.
That deadlock will be compounded by the opposition party, the Democratic Party of Japan, which has taken over the upper house after thrashing the LDP in the July elections. They appear keen to spoil any policies the LDP is trying to push through, such as doubling the consumer tax from 5% to 10%.
So business as usual, then û since political gridlock and/or outrageous horse trading was the pre-Koizumi pattern. The driving force for change, former primer minister Junichiro Koizumi, was possibly an expression of the urgency of the moment, and unlikely to be replicated: a man like Bill Clinton, with a common touch allied to an understanding of technical issue and the ability to unite factions (Koizumi was known for his independence). He managed to convince a very conservative country that the situation was so urgent that radical measures needed to be taken. Now that those reforms have been accomplished, to the extent they can be, he can fade back into the genteel semi-retirement of the university scholar.
The effect of ærestructuringÆ is clear. Companies have merged with each other to maximise market share, have laid off permanent staff in favour of part-timers, slashed salaries, and upgraded their information technology systems. They are relying more on the capital markets, rather than bank loans, and profits have been increasing 25% per annum, according to brokerage CLSA. But there is still a lot of resistance to the idea of companies being composed of interchangeable parts, like a Lego toy. The Lego toy is the US model, in which individuals and whole divisions are lopped off and reassembled in different configurations, based on needs and efficiencies, all in pursuance of shareholder returns.
JapanÆs attitude to shareholder returns was illustrated when its most famous shareholder activist, Yoshiaki Murakami, was clapped into jail for two years, accused of insider trading with the other æenfant terribleÆ of corporate Japan, Takafumi Horie. That "was the revenge of grey-haired Japan on the younger generation daring to try to shake things up,ö one banker told FinanceAsia at the time.
So the parallel to the UK is interesting. Just as the privatisation of British Telecom in 1984 (followed by British Gas, Rolls Royce and British Airways in short order) acted like the application of an electric cattle prod to the UK economy, so maybe the planned privatisation of Japan Post (JP) to Japan. JP is even more significant than BT was, given its one of the largest depositaries of savings in the world.
But Honda dismisses the idea that the privatisation of large institutions will kick off a shareholder/financial culture. ôWe have thought of turning Japan into a financial services economy like the UK. We have the second-largest stock market in the world and for a while we tried to make it international. But we got nowhere.ö
Indeed, the Tokyo stockmarket is losing ground massively to other competitors in the region, especially Hong Kong, Singapore and increasingly Shanghai. Almost no non-Japanese companies bother listing in Tokyo, because trading volumes in foreign stocks are minuscule.
The lack of development in the Japanese financial sector is obvious, especially when compared to what happened in the UK under Thatcher. Not only did the UK government enthuse the population about the stock market by selling them under-priced state assets, but it also allowed an unprecedented wave of M&A in the financial sector. In 1986, foreign firms from Europe and Wall Street poured into the UK, triggering the revival of London as one of the financial capitals of the world. As a result, there is currently not a single British-owned merchant bank.
Japan has seen very little foreign-domestic financial sector M&A. The outstanding exception is the acquisition of Nikko Cordial Securities this year by Citi. In fact, many Western securities houses have seen their expansion plans in Japan flounder.
For Honda, Japan must focus on its strengths. And thatÆs its social model and its talent for manufacturing. This time, the manufacturing will be a bit different.
Honda picks up his Samsung mobile phone. ôWho is making money manufacturing mobile phones? Is Samsung? I donÆt think so.ö Then he opens the strip of rubber covering a cable port on the phone and shows it to me. ôThat port is gold plated. The company that makes that is Japanese. ItÆs the top company in its space and it has profit margins of 60%.ö
He rattles off the names of half a dozen names, all of which he claims are world leaders in their space û albeit very small spaces.
ôThese are the companies which will be driving the Japanese economy,ö he says disparaging the heavyweight companies investors in Japan normally think of. Honda doesn't even like Sony, which is why (unusually for a Japanese person) he has a Korean mobile phone.
The success of these companies is very Japanese, estimates Honda. ôThey are small companies with around 50 employees, family-owned and unlisted. They will have started off with old technology such as dies and moulds, or soldering. They have been around for three generations, and the grandson is now taking over. He has a phenomenal data base and an ancestral skill set to draw on to adapt this old technology to new requirements û just like the welding and soldering that was done for the mobile phone. That is what I mean about playing to JapanÆs traditional strengths,ö he says.
Indeed, little sign of financial engineering, M&A, capital market activity or private equity activity in the scenario he describes. That will disappoint Wall Street bankers, but may just be more realistic from the Japanese perspective.
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