JIN-256 -- Talkin' Tankan -- Japan's Year-End Surprises

J@pan Inc Magazine Presents:

T H E J @ P A N I N C N E W S L E T T E R

Commentary on the Week's Business, Technology and Cultural News

Issue No. 256
Tuesday, December 16, 2003

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@@ VIEWPOINT: Talkin' Tankan -- Japan's Year-End Surprises

++ READERS RESPOND: Thomas T. Winant exposes the gaps between Western
and Japanese notions of jurisprudence. Read his rebuttal.


Prior to the confinement of Saddam Hussein this weekend, we received
numerous letters from around the globe concerning Japan's imminent
deployment of forces to Iraq.

We regret that we cannot publish all of them here, but we present some
of the more thoughtful responses for your perusal at the close of this
newsletter. Thanks to all who contributed!

-- The Editors

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@@ VIEWPOINT: Talkin' Tankan -- Japan's Year-End Surprises

The heavyweights of corporate Japan have ended 2003 with a forecast-
busting vote of confidence in current business conditions.

In the Bank of Japan's quarterly Tankan survey, a majority of the
country痴 manufacturing titans declared their most positive view of
the business environment since 1997, giving the market a glimmer of
hope that the likes of Toyota, Matsushita and Hitachi may finally
be hardening their defenses against a persistently strong yen.

Leading the optimists were the electrical equipment makers, who have
now definitively shed the worries they had earlier in the year.
Boosted particularly by strong domestic and Asian demand, they are
currently thriving on a ravenous consumer appetite for the so-called
"holy trinity" of home equipment: a flat-panel television, a DVD player
and a digital camera. The non-ferrous metal sector, which provides
materials used in electronics, was buoyant in its opinion of the
market, and automakers' optimism made a dramatic jump.

The large manufacturers, whose views are seen as the most critical
commentary on the Japanese economy, pushed their part of the Tankan's
critical Diffusion Index (DI) to a reading of +11 -- its highest level
for six and a half years and the second straight quarter of improvement.
The result, which is calculated by subtracting the percentage of
companies with a negative outlook from the percentage of positives,
contrasts strikingly with the misery of March 2003, when Tokyo stocks
plumbed a 20-year low.

Last Friday's survey marked only the second positive result since
December 2000.

Analysts, including Mamoru Yamazaki of Barclays Capital, point out the
significant change in dollar/yen exchange rate assumptions made by large
manufacturers -- a yen strengthening to 111.40 for the second half from the
previous level of 117.53. 鉄ince the yen is currently stronger than even
this revised rate, its direction should exert some negative impact on
profits going forward,・Yamazaki tells us. 鉄till, the DI improved sharply
and sales forecasts were revised upwards for the sector in the second half,
indicating the Japanese economy has strengthened its resistance to yen

The market had been expecting a moderate improvement, with an average
forecast of just +6 on the large manufacturers' business condition
diffusion index.

The results appeared to take the 1,365 major companies that answered the
survey by surprise as well -- their consensus prediction back in
September was for a DI reading of +3.

Although the Tankan is a reliably explosive market-mover, the surprise
leap to +11 did not produce the sort of rally that many expected.
Accompanying the major companies' cheerfulness on the current conditions
was a note of caution on the short-term outlook -- they believe that the
sentiment index will be at +8 in the March 2004 Tankan.

Medium and small manufacturers also became more positive, mainly because
they expect to reap the rewards of expanding spending plans by the big
players. But outside that sector, the improvement was less striking, and
in the case of large non-manufacturers did not propel the reading into
net positive territory. Across the board, the widening gap between
manufacturers and non-manufacturers provides sceptics of Japan痴
apparent recovery with evidence that it is too reliant on exports.

Construction is feeling the effects of a sharp drop in public works
projects, and the telecoms companies, already savaged by fierce
competition, are expecting many months of price war still to come.


The survey provoked the Japanese government into one of its biggest
bouts of market intervention ever.

Although the Bank of Japan and Finance Ministry keep very quiet about
their levels of intervention in the dollar/yen rate, traders believe
that the government has lavished more than dollars 17 billion in recent
trading days on a giant effort to stop the yen climbing against the

The move adds to what is already a year of record intervention. By the
end of November 2003, the Bank of Japan had sold 17.8 trillion yen in
its attempt to stem the yen's rise. Reports from Finance Ministry
sources suggest that the government may seek to raise the amount it
can use in intervention efforts to 20 trillion yen per year from
fiscal 2004.

The dollar has been falling steadily against most major currencies in
recent weeks, but its weakening gives the greatest headache to Japanese
companies who are now relying on their exports to fuel the nascent

The government, in line with the market, was fully expecting the Tankan
survey to send a broadly upbeat message about the state of the Japanese
economy, and accordingly give the yen another hearty boost against the

The word on the currency trading floors on the days before the Tankan
results were released was that the Japanese government would do everything
in its power to prevent the yen breaking through the 106.74 high it hit
on Tuesday of last week. The suspected intervention held the yen around
the 108 level for most of Thursday and Friday.

"You know the signs to look for and they were all there from last Wednesday
afternoon,・says one Nomura currency broker. "Every single time you saw
a significant move up, the screens were suddenly filled with a massive
bid from one of the Japanese clearing houses. With momentum as strong
as this, the Japanese government must be using billions just to keep
everything where it is. When the actual Tankan came out, logic would have
suggested something spectacular, but instead what you got was stagnant.・

Analysts confirmed the view that the intervention effort in the run up to
the Tankan was vast, with one senior economist calculating that every tenth
of a cent movement the market wants to make is being defended with about
a half-billion dollars worth of yen-selling.

>>Tankan Highlights

*Large Manufacturers Business Sentiment Diffusion Index: rose to +11 from
+1 in September, beating a consensus analyst prediction of +6

*Large non-Manufacturers BSDI: rose to minus 9 from minus 13 in September

*Large manufacturers・average dollar/yen rate assumptions for whole of
fiscal 2003: 114.68 from 117.53

-- The Editors

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@@ READERS RESPOND: In his rebuttal, Thomas T. Winant exposes the gaps
between Western and Japanese notions of jurisprudence.

To The Editors,

Regarding Bryan J. Koslow's letter (JIN # 255 --
in response to my comments on your Nick Baker feature story
(J@pan Inc, November 2003):

My thanks to Mr. Bryan J. Koslow for instructing me in the finer points
of the Law. I was, however, aware of all that. My frame of reference was
Japan, not the Law that Mr. Koslow refers to, and I apologize for not
making that clearer. I thank him too for allowing me to reiterate my
comment that those who would support Mr. Baker are immune to knowledge
about how the Law is delivered in Japan. Nothing Mr. Koslow wrote changes
a thing in respect to the said Mr. Baker.

In respect to the latter, he was arrested, charged, tried and convicted
under Japanese "Horitsu," not Western "Law." That does make a fairly
significant difference. Assuming that Japan and other nations are
"just like us" in a legal sense is to ignore that the Rule of Law means
different things to different people, especially outside the Anglo-
Saxon framework. How things "should work" is rather more of a value
judgment than you might think.

Justice may be blind atop the buildings of English-speaking countries,
but not everyone in the world believes that she ought to keep that
blindfold on.

If someone has never been in a Japanese court of law, or been part of a
Japanese legal process, especially a criminal or administrative process,
how it works is a mystery that only experience may enlighten.

Mr. Koslow is right about the Law, but not about Japanese Horitsu.
He is encouraged to reread Rudyard Kipling's poem, "Three Blind Men and
the Elephant." Assuming much about how one's own cultural mores
translate outside that cultural cocoon leads to all sorts of interesting
results and/or consequences.

Just because Japanese process is "different," doesn't make it "wrong."
Bad, perhaps, by Western standards, but certainly Japanese authorities
have not behaved in this case very much differently than they would in
any other of a similar nature. The premise from which they are working
is simply not the same. There are very good reasons why the US State
Department Web site says some fairly blunt things about the Japanese
legal system. Travelers, and their foreign attornies, might find the
comments therein revealing.

-- Thomas T. Winant

**ORIGINAL STORY: "And Justice For All ... "

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To The Editors:

As an Englishman, I am from a country that already has troops committed
in Iraq. Therefore, it's good news that Japan has decided to commit its
highly-skilled defense forces to the situation in Iraq.

Japan should look forward and be proud that it has taken this momentous

Well done, Japan.

-- Glenn Aris

In my view, the Japanese Prime Minister's decision is right. It is true that
Japan hasn't gone to war since World War II. But sending troops to Iraq is
only to help the people rebuild their country. So helping the people is
good for Japan.

In my country, Sri Lanka, we have had ethnic conflict for more than 20 years.
And even here we are considering sending troops to help the people in Iraq.

-- Prabath
Sri Lanka

Japan had better be ready for the deaths of its self-defense forces should
they go to Iraq. As shown by the recent deaths of the Japanese and Spanish
diplomats, those in Iraq will do whatever they can to disrupt and discourage
those who are trying to bring about change in Iraq. They will target the
Japanese and everyone should be aware of that fact from the outset.

I am an American businessman who lived in Japan until the end of September
2003. I am now back in the States. The view of the US fiasco in Iraq is not
better from this side of the Pacific. The war was ill-conceived and ill-timed.
The desire for vengeance on the part of this Administration has clouded clear
strategic planning about the consequences of military action. The US has
unleashed forces in Iraq that they do not understand and are not equipped to

The escalating force being used by the US military will result in hardened
attitudes against the occupation of Iraq. That hardened attitude will
lead to attacks on all coalition forces. Japan should steel itself for the
sight of bodies returning home in pieces. When that happens, the strength
of the US-Japan relationship will be tested in direct proportion to the
number of casualties Japan suffers. It's not IF, it's WHEN.

Thanks for the opportunity to comment.

-- Kent Millington

While a great many Japanese consider the arguments stated daily by those
supporting or opposed to the dispatch of the SDF to aid the US-led forces
in Iraq, last week's overdue decision by Prime Minister Koizumi and his
cabinet means that they will be going.

The question of what will happen should Japanese casualties be taken, however,
seems wholly geared towards the likelihood that only "enemy" fire will
inflict such tragedies. The broader picture of how deaths occur in war has
been somewhat ignored.

Injury and death are indeed possibilities, as daily attacks on troops of
all nationalities and local and foreign civilian aid agencies continue to
occur. But considering this point and the probable reaction after the event
in which Japan possibly loses its first soldier in action in 50 years, Japan
MUST consider the following:

If the Japanese troops suffer their first loss at the hands of US (yes - US)
"friendly fire" -- what will happen?

From a total of around 57,000 fatalities, thousands upon thousands
(around 17 percent) of Americans in Vietnam suffered this fate. ALL British
"combat" deaths in the first Gulf War were reportedly at the hands of their

Of course, friendly fire DOES happen in war, but the extent that the
US is involved appears somewhat extreme when considering the above numbers.

Speaking from the experience of being in Southeast Turkey and then northern
Iraq in the mid-90s, when the US downed two of its own Blackhawk helicopters,
killing a great many friendlies (Kurds, British, French, Turks and Americans),
and seeing firsthand the news blackout on the US base in the region -- I,
and perhaps all who were there at the time were left thinking: How? Why?

Going from village to village in the area and meeting the locals soon
thereafter, I was more afraid of the Green Berets at my elbow than any
possibility of unfriendly locals or Iraqi attack. And I know for sure that my
feelings are not now and were not then mine alone.

Japan: are you aware of such a possibility, and if so, what will you do if a
situation not unlike the above happens to your troops? It could, and the
longer you stay in Iraq, the greater the chance that it will.

But how it might affect your relationship with the US should be examined
before the possibilty turns into a reality.

To the troops of the SDF I offer my best wishes -- and look forward to their
safe return.

-- Mark Buckton
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Written and edited by Roland Kelts and
Leo Lewis (editors@japaninc.com)


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