Jesper Koll, former chief economist of Merrill Lynch Japan and author of two books in Japanese, Towards a New Japanese Golden Age and The End of Heisei Deflation, has teamed up with Global Treehouse, a global community of leaders dedicated to what it calls “mind-fit-ness” and innovation, to release the first in an eight part deep dive into the positives of Japan’s economy.

Koll is unique as he tends to be one of the few consistent optimists about Japan’s approach to economy building and has spent a career presenting and interpreting lesser known facts about Japan’s economy often overlooked by other media.    

This fourth session outlines changes in corporate Japan that has reduced cross-shareholding that defined Japan's closed off system to a more open, overly competititive economic strcuture that is due for more M&A activity moving forward.

What does this have to do with real estate?  Everything happens in real estate and learning more about overall macroeconomic trends helps in deciding whether or not to purchase.

In this session's case, corporate Japan is gearing itself to take maximum advantage of the rise of APAC's middle class, which Koll believes will be the defining element of the global 21st century economy. 

For us as REthink Tokyo, a healthy middle class with longevity means a healthy and robust residential real estate market and understanding why the middle class is healthy is key to making sound investment deicsions.

Quoteable Quotes:

Japan was owned by the Japanese, specifically owned by corporate clubs, the keiretsu clubs like the Mitsubishi group, the Sumitomo group, the Mitsui group.  And you can show that by the end of 1989, half, 50% of the ownership was tied up in the cross-shareholdings of those ownership within the big industrial groups.

Now looking at Japan today, the big change is that this is no longer true.  The cross-shareholdings have come down from 50% to barely 4% and as a result of that you see that corporate Japan has actually opened up. 

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What is interesting is that the return on equity, the return on capital, yes, has improved but it is still lagging behind what we have in the United States.  I mean, as you probably know, in the United States the sort of average historical return on equity has always been around 14 or 15 percent; in Japan it is now between 8 and 9 percent. 

So there's still a gap and the question is “why is that gap?” and the big difference is that corporate Japan does not have any superstars.

What do I mean by that?  In the United States...you do find that there are about 12 to 14 percent of American corporations that are absolute superstars in terms of generating high return on equity, high return on capital.

Now, then the big question is why does Japan not have any superstars?  And the reason is very straightforward;  It is the domestic industrial structure marked by excessive competition. 

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As a capitalist you may say “what is he talking about, excess of competition?  Isn’t competition always a good thing?”  Well that depends, look at the difference in industrial structure.  In the United States, the top four firms in the various industries, from steel, pharmacies, telecommunications, airlines, you know, hairdressers, whatever it is; you find in America the top four firms control about 33 percent of the overall revenue stream in their respective industry.

In Japan it's not 33 percent, it's 11 percent.  So, much, much more competition here in the domestic market and again, we were looking to explain why is it that corporate Japan does not have any superstars; it is because the domestic industrial structure is way more competitive, there are way more players that carve up the various markets, and as a result of that,  you can't get these sort of super returns that you get in the United States of America.

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I believe that this is about to change over the next 5 to 10 years, and the big reason is the demographics of Japan.  And that is, the domestic industrial structure, of course, is dominated by small and medium sized enterprises.

Japan has about 3.6 million companies, 99 percent of these are small and medium size companies, which means that they employ fewer than 300 people. 

And when you look at this, at these 3.5 million companies that are small and medium sized companies, where the owner is over the age of 70 years old, that is now over 2.4 million companies, so imagine that a small to medium size company where the owner is over the age of 70, some generational succession is going to be happening.

But the point is that, according to surveys, no successor available applies for 1.3 million of those 2.4 million companies where the CEO, or the founder, is over the age of 70. 

So, there will have to be, because of the demographics, there will be a big industrial restructuring here in Japan now, and it is very interesting, you actually are beginning to see a big wave of mergers and acquisitions here in the belly of the Japanese economy. 

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So, the domestic part of the Japanese economy, number one, the ownership has changed from the club system towards an open system with the cross-shareholdings having come down, corporate Japan is open for business. 

The second driver, you have this natural force allowing for industrial reorganization and streamlining because of the age structure and the succession planning of many of the small and medium size enterprises here in Japan.

So, in other words, from my perspective, corporate Japan is open for business, and businesses are available to be bought. 

That's a wonderful way to actually grab a foothold here in the domestic economy of Japan.

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Now what about the global side of the business, and that's obviously not the small and medium size companies.  The global side of Japan Inc. is the large listed corporations.

What is exciting to see is how well they have adapted to the change in the global realities.  If you look at the earnings, where does corporate Japan make money?  You find that for the listed companies now, 63 percent of the profits are made from exports or producing overseas.

And that is now 63 percent; 10 years ago that was about 50 percent so it has actually grown, so corporate Japan has actually become more global. 

Very interestingly they have restructured their global production map and it's a much more balanced production map. 

What do I mean by that?  About 10 years ago, half of those overseas profits were dependent on the United States of America.  That is down to about 24 percent now, while in contrast, you find that the People’s Republic of China and Asia Pacific has actually grown and you now find that corporate Japan is no longer lopsidedly dependent on the United States of America but is much more balanced in terms of where profits, where earnings, where cash flow is actually going to be generated.

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And this is interesting, and it obviously shows that corporate Japan is in fact extremely global and very well geared and in an excellent position to benefit from the biggest economic upcycle that our generation is going to go through which is the rise of the middle class here in Asia Pacific.

Further Reading:

Jesper Koll on Why Japan's Young Have Great Economic Futures (REthink Tokyo; September, 2021)

Japan’s Elite and Leading by Example (REthink Tokyo; August, 2021)

Famed Japan-Based Economist Stars in First Installment of Fresh Take on Japan’s Economy (REthink Tokyo; July, 2021)

Tokyo Legacy (Hulu Japan; 2020)

Japanese Version of the Same Presentation.