Thursday, June 17, 2010

'Turnaround King' Wilbur Ross Discusses The Importance Of Business In Japan

Wilbur Ross talks freshness of Japan with The Nikkei.
"Generally speaking, westerners do not recognize the opportunities in investing in Japan, and they overestimate the risks. I hope to correct these misunderstandings through the activities of Japan Society." --Wilbur Ross

As we announced last month, Japan Society's new Chairman Wilbur L. Ross, Jr., CEO of WL Ross & Co. LLC, took the helm on June 9. He recently spoke with The Nikkei, Japan's most prominent business newspaper, about the importance of business in Japan, and common misconceptions investors have about East Asia. The article appears below in translation.

Education, Science, and Finance: The Strengths of Japan
“Japan’s Aging Society Hinders Growth” – Wilbur Ross, The King of Bankruptcy

American investor Wilbur L. Ross (72 years old), who has revived many distressed companies, was dubbed the “King of Turnaround” by Fortune magazine. Based on his 20-year investment history there, he sees a positive future in Japan. What does this influential investor see in Japan?

Nikkei: Rapid growth in Asia’s emerging markets has led to a pervasive loss of self-confidence in Japan.

Wilbur Ross: Because of its large population, it’s only natural that the scale of China’s economy is large.
Being number 2 or 3 is a matter of pride. The United States will eventually lose its number 1 status. Rather, if I were Japanese, I would ask myself, “Am I making full use of my abilities and resources?”

Japan has been doing a great job to maintain a trade surplus with China. There are only a few countries in the world able to do this. Japanese companies have built first-rate production bases in China, and in India, Suzuki holds the largest share of the automobile market. Japan has been contributing to the development of the emerging countries more than America. Although Japan’s economic growth rate is low, the future for Japanese companies is bright.

N: What are strengths of Japan?

Ross: One cannot forget that Japan’s education standards, its science and technology, labor productivity, and financial systems are far more advanced than those of China or India. Chinese banks, for instance, are huge, but they are still in the process of learning advanced international operations. Of course, China and India are attractive and we do invest in them. However, other investors pay too much attention to their high rates of economic growth. They don’t understand the fact that Japan’s small- to medium-sized engineering firms, the world’s leaders in pharmaceuticals and industrial machinery for example, are very low priced.

N: However, Japan’s growth rate has been low for an extended period.

Ross: One of the reasons is that the aftermath of the bubble economy was profound. The whole society was leveraged, just like the current situation in Europe and America. Another reason is the failure of policy after the bubble economy. Temporary stimulus through public works projects was not the solution. The government should have focused on long-term job creation.

They wasted huge amounts of government funds prior to the Koizumi administration. Creating sustainable industries is the key to job creation.

N: Political instability might be Japan’s biggest problem.

Ross: Stable leadership is critical. Coalition governments are inherently unstable and it is difficult for them to deal decisively with difficult issues. The September DPJ presidential election will make Mr. Kan’s task more difficult in the interim. The Futenma base discussion represents an unfortunate set of circumstance, but it is not powerful enough to ruin the U.S.-Japan relationship. Compared to the coverage this matter receives in Japan, it is not as much a topic of discussion in the U.S. press.

N: Does Japan’s high level of government debt represent a risk?

Ross: It’s not as serious as Europe. Most Japanese government debt is financed domestically. They have little external debt or debt held in foreign currency, which can cause a serious crisis.

The issue of the government debt is whether interest payments can continue to be made. Japan has a low long-term interest rate, so the burden of interest payments is relatively light. Of course debts should be reduced, but some Americans and Europeans do not have an accurate understanding of the situation in Japan, and therefore see the country’s problem as larger than it actually is.

N: What are your concerns about Japan?

Ross: Issues of aging. A declining labor pool limits the country’s growth. Interestingly, Italy’s demographics are similar to Japan and one out of five Italians is a pensioner. But their population is not decreasing, and Italy is still seen as “the country of young lovers.” What makes these two countries different is immigrants. Japan has two ways to combat the workforce problem. One way is to increase the number of immigrants. Another is to provide women more working opportunities.

N: How do American business people view Japan?

Ross: I see lots of misunderstanding and confusion. The harsh self-criticism and negative opinions within Japan have been reported in America, contributing to a negative image of Japan in the U.S.  The problem is that there are not many Americans who have actually visited Japan. Tourism leads to investment. Among developed countries, Japan has very little direct investment from overseas. The government must first encourage tourism.

First-hand understanding of Japan creates confidence in doing business there. This will solve the misperception that Japan is closed to foreign investors. After its failure, I had no difficulty buying Kofuku Bank from the Japanese government. Also, I would like Prime Minister Kan and other Japanese to visit America as well. I would be pleased to arrange for the Prime Minister to meet leading Wall Street and corporate executives. Westerners are not anti-Japan. Rather, we simply do not understand Japan.

N: Recently you have become the Chairman of Japan Society, which is the biggest single organization promoting U.S.-Japan relations in North America.

Ross: One of the reasons why I made this decision is because I felt it was unfortunate to see many Western investors pass over Japan and head to India or China. I actively invest in Japan and now I own more than 5% of some 15 listed companies. Generally speaking, westerners do not recognize the opportunities in investing in Japan, and they overestimate the risks. I hope to correct these misunderstandings through the activities of Japan Society.

Nikkei Veritas, June 13, 2010
Interviewer: Daisuke Zaima, NY correspondent, Nikkei

Translated by K.S. with C.P.

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