The Independent Investor: Japan's new frontier

After almost 30 years of stagnation, Japan is seeking to re-gain its competitive edge. Critics argue that this island nation needs to re-invent itself if it ever hopes to find its place amid a multitude of fiercely competitive global players. The question is, how can that be done?

For any other nation, re-inventing one's self might be an impossible task but Japan has a proven track record in doing just that. As far back as the Meiji Restoration in the 19th century, for example, Japan was able to leap- frog into the industrial world by skipping the age of sail altogether. Despite the opposition of powerful industrialized nations, backed up by gunboat diplomacy, the Japanese developed a formidable steam-powered navy that was the marvel of the world.

Against all odds, Japan became a world power by the onset of World War II. After its defeat and dismemberment at the hands of the U.S. and its allies, this pauperized nation rose from the ashes once again during the 1950s. Thirty years later it was the export wonder of the world, benefiting from enormous demand for its state-of-the-art electronics and automobiles.

In my last column I argued that social, economic and geopolitical events have conspired to present Japan with both a challenge and an opportunity today. Japan faces serious regional challenges that will only grow as long as it lacks an advanced deterrence capability. In this day of U.S. budget cuts, it can no longer afford to rely solely on America to be its policeman in Southeast Asia. For Japan, however, a strong defense industry could also evolve into a lucrative export industry.

Japan's aerospace and defense industries (A&D) have made great progress since the days after the Pacific War. Today they build components for most advanced civilian aircraft while co-producing advanced military aircraft such as the F-15s. Thanks to cooperation with the U.S., Japan already has one of the most advanced missile defense systems in the world. As for ship-building, some of the biggest, most sophisticated commercial vessels in the world have been produced there for decades. Manufacturing more aircraft carriers like the recently-launched Izumo would be child's play for the Japanese.

Japan's competitive strengths are in high-technology, high value-added manufacturing and reliability in quality and scheduling. They are also skilled in industrial security and intellectual property. In addition, they excel in long term acquisition and planning, cost containment and highly efficient production capacity. All of the above skills can easily be applied to the defense sector.

By beefing up their own aerospace and defense spending, Japan can reduce military imports and increase exports while strengthening ties with its allies. It can assume the responsibility and obligation to protect its own borders and at the same time present potential enemies with a significant deterrent to further territorial encroachment. For the domestic economy the benefits could be enormous.

Typically, A&D industries hire workers with experience and education, i.e. high-quality employment for Japanese citizens, while reducing unemployment and increasing tax revenues. In addition, investment in defense tends to spur development in other industries. Japan's ability to develop new breakthrough technologies ("leap frogging") in defense can also be applied to the electronics, computing and commercial aerospace industries. In addition, the skills required to develop complex defense systems are easily transferrable to other businesses and commercial industries.

Re-arming may not be the only way, or even the best way, of re-inventing Japan but it is a viable option. Certainly, the United States government, in my opinion, would welcome such a development while other countries, with more to gain by maintaining the status quo, will express their outrage. So what else is new?

Are the majority of Japanese people ready for such a radical new direction today, probably not. But Japan is a nation of consensus and building agreement among its people will take time. In order to accomplish such a momentous and historic step, the present leaders of Japan will have to work slowly and carefully, acquiring public approval at every turn.

So far they appear to be doing just that. The new government, for example, is working on changing its arm export policies as you read this. I believe much of the ground work to move forward has already been laid behind the scenes (as is the custom within Japan). I expect we will hear a great deal more about Japan's defense sector and Article 9 in the months ahead. Stay tuned.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.