TT-396 -- Adam (Abe) Smith, ebiz news from Japan

General Edition Sunday, October 22, 2006 Issue No. 396

- What's new
- News
- Candidate roundup
- Upcoming events
- News credits

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Prime Minister Abe may be embarking on an interesting new (for Japan) tax strategy, especially if you're a company shareholder. It appears that he is putting into place the building blocks needed to start making fundamental changes the country's tax code -- particularly in allowing corporations to keep more of their recent profits, in the hope that this will parlay into more R&D and capital investment, and thus even greater taxable revenues in coming years.

Has Abe discovered Adam Smith and supply-side economics?

It appears that Abe's team believes that lowering taxes will sustain a virtuous cycle of growth and prosperity. We tend to agree with them, but we wonder if the policy change won't be politically risky in egalitarian Japan, where everyone wants the fat cats to be taxed into equality.

Although Japan is nominally a capitalist democracy, in fact it has been run for the last 50 years by bureaucrats who are obsessed with having the State control and retain the nation's wealth. Indeed, their activities make Japan look more socialist than countries whose stated political system is socialism.

Among the bureacratic organizations involved in the control game, top of the list is the Ministry of Finance (MOF).
This ministry has had almost mythical control over the yearly budgets to other ministries, and thus reputedly can influence the decision-making of those other ministries.
Whether true or not, the heads of MOF appear to believe the only way to bring Japan back into fiscal balance is to tax at every given opportunity and make people suffer for the nation's excesses in the 1990's. While this sense of "taking your medicine" may make someone in MOF feel better, it has proved to be disastrous with the economy at large, killing off at least two previous recoveries in short order.

So we agree with Abe that the time seems to be the right to try something different. Japan's corporations are under tremendous pressure from low-cost manufacturing centers such as China. For them to stay competitve, they need a chance to rebuild their capital bases and increase R&D and investment in plant and equipment.

[Continued below.]

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[Article continues]

An important first step for Abe to seize control from the bureacrats has been to successfully appoint his own pro-tax reduction advocate as the new head of the Tax Commission, a government advisory group that pretty much sets the direction and content of the nation's tax laws. Typically this organization has had to work from blueprints created by the MOF, and thus its recommendations on tax breaks for have been stingy to say the least. But with the new chairman, Osaka University Prof. Masaki Homma, in the hot seat, things are looking up for a power transfer.

Although outright slashing of corporate tax in Japan has not been tried in recent memory, various special temporary programs have been conducted with great effect. So it is likely that Abe's team is looking at overseas experiences as a reference point. If they are doing this, they surely will look at one of the most resounding international successes in tax tinkering -- Ireland.

In the period between 1980 and 1986, Ireland was in a bad way. Government expenditure had grown from 54% of GDP to 62%, and public debt increased from 87% to 120%.
Budget deficits exceeded 10% of GDP annually and over 30% of all tax revenue was being used to service the national debt.

Sounds remarkably familiar doesn't it?!

And yet, after some comprehensive soul-searching, the Irish government bravely embarked on a program of labor and tax law changes to bring back incentive -- both for the Irish population and also for foreign companies attracted to the island. After these changes were implemented, in just 20 years the country has been completely transformed into a manufacturing and services powerhouse in Europe. This despite Ireland having no natural resources, limited land space, and little previous history of such a commercial turn-around.

At least Japan is ahead in this last respect.

Certainly something has to be done here in Japan, because the high corporate tax rates are both encouraging tax minimization (if not outright tax avoidance), and discouraging serious pursuit of building a business beyond a basic level. We believe that it is for these two reasons that an incredible 70% of the nation's 5m+ corporations do not make a profit and probably never will!

Japan's tax system is extremely paternalistic, and assumes that small companies should be nurtured while large ones should be taxed. This serves to encourage most of the 5m companies to stay small and keep making losses, while many of those that are growing are taxed to a standstill and lose their momentum.

Also, for Abe, bringing some relief to smaller companies is not such a bad idea politically. Business owners are typically LDP supporters, and not only the 5m owners, but also many of their employees -- a full 80% or more of Japanese work for companies of 50 people or less -- will be wanting to see their companies improve financially as well.
Most employees understand that a healthy company generally means better working conditions, modernization of plant, better products, and therefore better salaries.

Control of the Tax Commission is expected to pass out of the hands of the MOF, and into Abe's, via Homma, in November. This is quite a coup for Abe, given that the MOF has successfully resisted the demands of many Prime Ministers, including Koizumi. Abe has done an end-run and his man appears to be planning to open up the economy substantially. If he/they are successful, think of what happened in Ireland in the 1980's and 1990's, and Japan could be looking pretty good as a long-term investment play. Of course, it's early days yet, but if you think of how much Japanese money (versus that of foreign investors) is flowing from private bank accounts into the stock market and investment funds -- up 40% over last year -- any improvement in corporate earnings will directly drive a huge improvement in the personal wealth of ordinary investing citizens.

At risk of sounding like rabid capitalists, our beliefe in the Maslow hierarchy of needs leads us to conclude that markets are built on human nature, and one of the most fundamental aspects of human nature is the need for incentive. Accordingly, we leave you with this entertaining comment on supply-side economics from the Adam Smith Institute.

"Supply side economics is really just an elaboration of the notion that you shouldn't kill the goose that lays the golden eggs. Socialists are almost immediately hostile to supply-side economics. That's because they are not interested in collecting the fruits of production.
Socialists are interested in controlling the means of production. They don't want the eggs. They want the goose.
If you explain to a socialist that lowering tax rates will generate more revenue for social programs, they're not interested, because they know that at the same time there will be some people who will be getting richer."

...The information janitors/

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+++ NEWS

- Kim may nuke Japan
- Segway enters Japan
- Farmland rental organization
- Hello Kitty gets a clue
- Daiei earnings jump

-> Kim may nuke Japan

LDP policy chief Shoichi Nakagawa has said that his party's leadership is worried that being a diabetic, North Korean leader Kim Jong Il may suffer an episode and in a corresponding lapse of judgement order a nuclear attack on Japan. Nakagawa is one of the right wingers behind calls for Japan to go nuclear and build its own arsenal. (Source:
TT commentary from, Oct 21, 2006)

->Segway enters Japan

We've heard all about drunk riders of bicycles getting fined, now we wonder how the authorities will react to revellers riding Segways -- probably they'll have to catch them first! The fast and famous gyroscope controlled 2-wheelers are now coming to Japan, via the SGI Japan company, which will become Segway's authorized distributor here. SGI says it will sell the Segway Personal Transporters into the auto and electronic, warehousing, and distribution industries, as well as to universities, research institutes with large campuses, airports and shopping malls. ***Ed: We think they're missing the target.
The real prospects for the PT are document courier firms.
Especially since Segway has storage bin attachments...**
(Source: TT commentary from, Oct 20, 2006)

->Farmland rental organization
The Ministry of Agriculture is planning to set up a semi-governmental body to broker the rental of unused farmland to companies entering into or expanding on their current farming business. According to the Ministry, as of 2005, about 10% of the nation's farmland, about 380,000 hectares, was left unused -- up about 70% from 1990. There are now 173 registered companies farming land commercially.
(Source: TT commentary from, Oct 21, 2006)

->Hello Kitty gets a clue

American kids' favorite puzzle-solving TV program, Blue's Clues, will be licenced by Hello Kitty owner Sanrio here in Japan. The tie-up will create toys, clothes, and stationary decorated with the floppy-eared blue dog side-by-side with Hello Kitty. Blue is owned by Nickelodeon & Viacom Consumer Products. ***Ed: This could be an interesting experiment.
We'd like to see what an already well-penetrated Japanese brand owner such as Sanrio can do with a blue colored
dog?** (Source: TT commentary from, Oct 22,

-> Daiei earnings jump

Thanks not to its retail operations but rather the OMC consumer credit side of the business, supermarket operator Daiei's operating profit for the first half of 2006 jumped 41.9%, putting the business firmly in the black. The company earned JPY25.45bn (US$210m) on sales which were down 22% on last year, at JPY672bn (US$5.69bn). ***Ed:
Doesn't this story look remarkably like the GM business -- where the GMAC consumer credit side of the business was responsible for most of the shareholder value? Only, here in Japan, we don't expect a spin-off to quickly raise cash.
Instead, the OMC profits will be slowly be ploughed back into recovering the retail business. Hard to say if this is really a viable strategy or not. We suspect that the sheer size of Daiei and the condition of its retail business will prove to be an expensive turn-around.** (Source: TT commentary from, Oct 20, 2006)

NOTE: Broken links
Many online news sources are now removing their articles after just a few days of posting them, thus breaking our links -- we apologize for the inconvenience.

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ICA Events - Nov 1

Speaker: Atsuko Morimoto, Founder of AM Associates Presentation Title: "Learning from Innovative Marketers"

In EA-Tokyo's upcoming seminar, Morimoto-san will be sharing her insights into successful marketing tactics taken by several successful Japanese companies she has worked with. Her company, AM Associates is a consulting company specialized in Marketing & Communications. It offers services in IMC (Integrated Marketing Communications), including Acquisition, Customer Relationship & Loyalty Marketing and Branding.

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In this section we run comments and corrections submitted by readers. We encourage you to spot our mistakes and amplify our points, by email, to

-> TT 394. We covered the use of Titanium Oxide in the
treatment of living spaces of people suffering from allergies such as hay fever. Judging from the amount of email we got, this is clearly a highly relevant topic for many readers.

*** Reader response
Many readers wrote in with their own tried and true remedies, some of which seem quite credible. We reproduce one such email here.

"I`ve been in Japan 11 years now and for the first 7 of them I never had hay fever, nor when I lived at in my own home country. So it was a great shock one spring to find myself suffering from similar symptoms as you described.

I tried everything - chinese teas by the gallon, pills, sprays, flushes - but nothing worked. That spring and summer was just awful.

The following year I had started seeing an acupuncturist for a sore back on the recommendation of a friend and he was great. Part of the treatment included a specific prescription for a kanpoyaku (Chinese and Japanese herbs) recipe which was easily filled at the local kanpo store.
It consisted of a small sachet of powder (slightly licorice
tasting) taken three times per day.

It just so happened that I started taking this at the end of January and continued taking it for the next 3 months.
And I am sure you can guess what happened - no hayfever.
No pills, no sprays, etc., just a small sachet three times a day. Spring came and went, summer rolled around and no hayfever at all!

Next year I recommended it to 2 friends both of whom had been long term sufferers of hayfever and they both had no hayfever the following spring."

Thanks for the feedback.

...The information janitors/


You're Vending What?

Japan is home to the highest density of vending machines in the world, with about 5.6m machines, or one for every 23 people. You can buy almost anything, and the Japanese do, with about JPY6.67trn (US$56bn) being spent every year.

Yet, apart from the obvious players such as major soft drinks companies, there have been no foreign owners of this massive direct sales medium - until now.

Market Pioneer Japan is proud to announce that as of October, 2006, it has built a network of 1,000 vending machines placed nationwide, selling stickers and print logos. We invite owners of licenceable characters to contact us with a view to distributing your IP assets into the Japanese market.

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