Currently various liquor shops and rice selling shops are beginning to suffer from changing pricing policies by the government. A number of these liquor shops' profits are declining sharply. In addition, "gofuku" or "kimono" shops are suffering from weak demand from young women. But some of them are trying to build networks with other similar small shops. Some are converting themselves into supermarkets or convenience stores. In the case of "kimono" shops, some are developing brand businesses, using their well-known names to market handbags and jewelry.

One interesting example is Suzuran International Corp. This company is a Japanese "sake" producer in Iwate Prefecture. They are small but produce one of the best sakes in the Tohoku region. They established a network of small liquor shops and now their annual sales total 250 million yen. The president of this company founded a Japanese sake bottler in Australia, where rice prices are 1/8-1/9 compared with that of Japan. Down there the company can produce sake at less than half the cost in Japan. By importing sake produced and bottled in Australia back to Japan, they are selling via a distribution channel of networked small liquor shops around Japan. Suzuran International has made individually weak and unorganized small liquor shops a high performance retail network by realizing such a unique idea. This is one of the good examples how one can revitalize scattered and depressed small retailers.

There are various business opportunities in severely regulated sectors including agriculture, education, and medical industries. Mr. Taguchi, the former executive officer of Misumi, introduced the possibility of medical doctors without hospitals. The idea is to send doctors directly to patients' home. Visiting doctors can save patients' time.

In Japan, there are many established firms, which are fundamentally sound, but need to adopt more competitive financial, marketing and other business practices. In many ways these firms, which are not dependent on the development of new technologies and who already possess infrastructure and customer and business networks would seem to have less risk to investors -- who can gain dramatic increases in valuations through standard restructuring practices. Can you comment on the importance of restructuring and reengineering in Japan?

In the case of Nissan, Carlos Ghosn has been very successful in restructuring its operation and has made Nissan regenerate profits. There are many other examples similar to Nissan type restructuring. Especially construction companies and distribution sectors are suffering from very weak profits base and many manufacturing companies need to re-orient their business prospects. Now many consulting firms are helping such large and small companies to reorient themselves. I think Nissan is the tip of the iceberg. Gradually that trend (restructuring and reorienting) is spreading to small companies as well.

Foreign investors do not seem to understand the geographic diversity offered by Japan, believing that all business is conducted in Tokyo and perhaps Osaka. Can you talk a little about opportunities outside of these major metropolitan areas and the attractions offered by different local economies in Japan?

There is no doubt that 25-30% of companies are situated within a radius of 100 kilometers of Tokyo or in Kanto Plain. Many other parts of Japan seek opportunities in Tokyo and its suburbs as possible marketing places to raise funds. However, there is a very good chance for various Japanese and non-Japanese firms to establish themselves outside of Tokyo. The central government of course helps in such efforts, and prefectures and cities are also prepared to support those who will do business in local cities. The central and local governments find NAF quite useful to access such private sector needs. We hope to cooperate with such public sectors and provide matching coordination for private entities.

Can you also talk a little about the emergence of China, Japan's relationship with Korea, and other relevant factors as they pertain to foreign investors that are looking to increase their exposure in the region and with small to mid sized firms in particular.

China has a big presence in Japan and it is my belief that the emerging China will be favorable to Japan. China and Japan have been influencing each other through our long-term relationship, for 2000 years or more. China has always been a good partner of Japan. China is the main exporter to Japan and Japan exports cosmetics, underwear, and other vital items to China. We have cultivated a mutually profitable relationship. South Korea is also clearly an important partner for Japan, and I hope South Korea has the potential to become another Singapore in terms of developing a free economic zone concept.

One major problem foreign investors have when dealing with Japanese firms is their intense domestic focus and difficulties in understanding Japanese business and accounting practices and most importantly, monitoring investments after a transaction is completed. Cultural and language differences also often represent a real problem. Do you think that small to mid sized Japanese companies have a capacity for dealing with outside investors - both foreign and domestic?

Integrated and international companies such as Sony, Hitachi, and Toyota, these companies operate internationally and domestically. But are you aware of the "Ichiro effect", Hideki Matui , another of our baseball stars, has just signed a contract with the New York Yankees. Today Japanese individuals are becoming international stars in many fields. And after the successful World Cap Soccer Games held in Korea and Japan I feel internationalization is beginning to penetrate into smaller companies in Japan as well.

Some of the foreign investors and financial intermediaries we deal with are considering a funds-based approach to investing in Japan. Through these vehicles they are seeking to achieve additional diversity as well as the ability to rely upon professionals who are better able to interact with, and monitor, these companies and accelerate their long-term performance. From your perspective, which approach makes more sense for foreign investors and are their any particular factors, i.e. size of companies and investment, etc. that are especially important to consider when considering either option?

Definitely we propose a funds-based approach. Look at NAF and NAIC. We can interact between foreign investors and Japanese companies. We are in the same group offering various services for growing Japanese and foreign companies, offering both direct investment and funds.

Iura-san, you clearly have come a long way in only a few short years. What are your plans for the future? How would you like to see NAF/NAIC develop over the next few years? Do you have any plans to expand in markets outside Japan?

I have growing confidence in creating a new angels market in Japan thanks to the past three years' experience at NAF and NAIC. When the Japanese economy hits bottom, our activities will expand fairly quickly just like a forest fire. For the moment we are not planning on exploring other markets, say in U.S. or other part of the world although in the long run we envisage opportunities in the U.S. as well as Chinese and Korean markets.

Thank you so much for your time and attention. Do you have any final points you would like to make to our readers?

Media reports are always very negative and not productive. By activating sleeping finances, new businesses will bloom. I am confident that there are enough business opportunities in Japan, those areas, which Japan has neglected over the past 50 years.

Japan - Trials and Tribulations

By Scott B. MacDonald

FY2002 was another difficult year for Japan. The Koizumi government's reforms were consistently attacked and weakened by conservative elements in the ruling LDP-led coalition, the banking sector remains a headache, and the hope that export-led growth would trickle down into the domestic economy and stimulate wider-based growth appears less and less likely. The fiscal situation has not improved and Japan's ratings took a beating. Even the opposition (that is those opposed to the LDP outside of the government alliance) spent the year in disarray. Yet, not all is lost.

Prime Minister Koizumi remains committed to reforming the Japanese economy and reforms, though not as strong as originally intended, have been passed. He still has a team of like-minded reformers in his cabinet, including Economy Minister Heizo Takenaka, who clearly wants to overhaul the banking and corporate sectors. Although Takenaka's comments that no bank or company was too big to fail roiled the markets and evoked considerable resistance, Koizumi has remained steadfast in his support for his minister and not entirely given up on bank reform.

One result of Takenaka's bluntness was that it appears to be pushing Japan's major banks into reforming themselves. Japan's four major banks - Mizuho Financial Group, Sumitomo Mitsui Financial Group, UFJ Group and Mitsubishi Tokyo Financial Group - have all recently announced plans to restructure and dispose of nonperforming loans. The banks were already feeling the pressure of plummeting stock market prices, which was raising the delicate issue of their capitalization. Then came Takenaka. The combination of market forces and the threat of greater government intervention helped push the banks into what is hopefully a better approach to the bad loan problem.

Indeed, Mizuho is undergoing a substantial reorganization to create a new structure that allows for the efficient provision of banking and securities services to different sets of clients, ranging from the biggest corporate customers to small depositors. While announcing the programs is one step, the real test has yet to come - implementation. However, there is at least some momentum on this front, where before it was a glacial pace.

The Koizumi government has also had to deal with road rage. In early December, there was a dramatic end to the highway debate, which involved a government panel mandated with the privatization of four heavily indebted public highway corporations. The four companies together have a debt of 40 trillion yen ($320 billion). In a heated meeting, the head of the panel, Takashi Imai, who favored continuing certain highway projects, resigned in protest. Imai had earlier sought to present a report that included both a recommendation to continue road works and to discontinue them.

A clear majority -five out of seven members - objected to this and regarded it important to send a clear message of the panel's preference. Consequently, the five forced a vote, which provoked Imai to resign in protest. However, the majority sent a report to the Prime Minister clearly advocating the creation of a new entity to take on the four corporations - debts and assets. The report also states that the privatized companies should buy highways back from the new ownership entity 10 years later. This would be done to force the companies to concentrate on maintaining profitability from their inception. The task ahead for the Koizumi administration is to clean up the report, convert it into a bill and present it to the Diet in the 2004 session, with a view toward privatization in 2005.

Despite the symbolic importance of the reformers winning the battle over the panel's report, the opposition to any such reform remains strong. Influential LDP members are still pushing for new highway projects. As in anything that threatens the old political economy, passage of highway reform will face many trials and tribulations.

While the road reform is still moving, the government plan to overhaul eight public financial institutions, including the Development Bank of Japan, was shelved. The government stated that -financing by public lenders was essential- in an environment of continued economic deterioration. The plan was not completely abandoned, but the timetable for reform was pushed back.

Although it is easy to be critical of the Prime Minister and his team for not pressing ahead at a faster pace, it must be remembered that the task he faces is no less than to remake Japan - to restructure a political economy in which there are vested interests opposed to reform - many of them within the ruling party. Ironically, the LDP, both the backward-looking conservatives and the forward-looking reformer, need Koizumi. While the conservative hardliners like Taro Aso (the LDP policy chief) seek to stop reform and look to a weaker yen to help boost exports again in the forlorn hope of seeing some type of cyclical growth, Japan's foreign competitors (especially China and Korea) will continue to make inroads into their markets. Consequently, Japan is likely to have another year of trials and tribulations in 2003 - much the same as in 2002. If only they let Koizumi be Koizumi.

Korea's Economy Comes Full Circle: From Domestic Demand Back to Exports

By Caroline Cooper, Director of Congressional Affairs and Trade Policy at the Korea Economic Institute (KEI) in Washington

Visitors to Korea over the past year have witnessed a new phenomenon there - a surge in domestic demand. Domestic demand, rather than exports, sustained the Korean economy during the worst of the global economic downturn last year and for the first half of this year. But that trend is now changing. A recent Bank of Korea report shows that domestic demand as a portion of gross domestic product (GDP) decreased from 50.7% in the second quarter to 28.7% in the third quarter. Exports as a percentage of GDP increased from 49.3% in the second quarter to 71.3% in the third quarter. The return of exports as the primary driver of Korea's economic growth brings with it new challenges and opportunities. If trade is to sustain Korea's growth over the long-term, new emphasis must be placed on importing and diversifying Korea's export base.

Once Considered Bad, Consumption Proved Good for a Time

Despite the global economic downturn and a 6%+ drop in real GDP growth from 2000 to 2001, Korea managed to experience positive growth in 2001 and through much of this year. This was due in part to pro-growth policies of the government and a surge in household spending. The latter was the most surprising.

The Korean economy, which developed from a sustained high household savings rate, saw that rate plummet as consumer spending and credit card usage increased. The Korean government encouraged credit card use, in part according to the Ministry of Finance and Economy, "to bring the taxable income of the high-income self-employed more into the open."

The plan worked and brought with it a new credit culture in Korea. The majority of banks shifted their credit provision policy away from corporations to households. Koreans - both young and old - easily obtained credit cards and began spending. The results were at first positive - private consumption rose to never before seen levels, facilities investment increased, as did domestic production. The negative result, most evident in the past two months, read across the headlines of major global newspapers from The Wall Street Journal to Korean dailies such as the Chosun Ilbo: "Credit Card Usage Out of Control."Koreans, some not yet debt-ridden, were reported as taking on personal debt to bail out friends in severe financial turmoil - a sign that individualistic spending habits had taken a firm hold in Korea. According to the Chosun Ilbo, the average credit card default ratio rose to a record 7.3% in the third quarter.

The Financial Supervisory Service has stepped in to curb defaults, imposing caps on cash advance limits and raising the reserve ratio for credit provision at lending institutions. But these efforts coincide with a sharp decline in consumption, sparking fears among analysts that trends will worsen as the government continues its efforts to reign in spiraling household debt. A recent Bank of Korea report shows that the consumer goods sales index (measured year on year) declined by 25% from the first quarter of this year to the third quarter. According to the Samsung Economic Research Institute, the consumer expectation index and consumer evaluation index - leading indicators of consumer attitudes in Korea - each declined for the fourth straight month in October.

Imports and Exports are Both Good

Korea has long been fearful of an increase in imports, and that attitude does not appear to have changed. Higher consumption over the past year resulted in an increase in imports - both of consumer goods and capital goods. This precipitated a rise in import prices and fears among experts that a further increase in imports could threaten Korea's current account balance. According to the Bank of Korea, this reached a surplus of $459.7 billion in September.

A primary concern has been a worsening of Korea's terms of trade. While exports - now totaling $117 billion - continue to outpace imports, the latter grew at a faster rate than exports from the second quarter to the third quarter. Bank of Korea data also shows that import prices increased at a faster rate than export prices during the first three quarters of this year.

Analysts need not be worried. An increase in imports is positive and normal as an economy's shift becomes more fully developed, and production focuses more on services than manufacturing. Indeed, the government thinks that imports are positive. In a recent op-ed piece, Commerce, Industry, and Energy Minister Shin Kook-hwan wrote:

Proof that Korea's economy is changing in the right direction can be seen in the data. Increases in imports of capital goods and raw materials are indicative of investment by manufacturing companies. Minister Shin argues that "cheap, but good quality, raw materials and machinery component imports contribute to international competitiveness." The biggest percentage changes in imports from the second to third quarter were seen in raw materials such as iron and steel and chemicals (35% and 77% increase month to month), and in capital goods (43% increase), not consumer goods.

Another positive sign that Korea's economy is changing is that services now account for a larger percentage of Korea's GDP than manufacturing. According to the Bank of Korea, services as a percentage of GDP increased from 55.8% in the second quarter to 64.3% in the third quarter. Manufacturing as a percentage of GDP now accounts for only 38.7%.

Diversification Also Includes Services

In balancing its trade strategy, Korea needs to consider diversifying its export base - common advice given by experts. Korea's top exports are information technology goods (i.e., computers, semiconductors, and wireless telephony) and old favorites - heavy industry goods (i.e., autos, ships, steel, and chemicals). Diversifying this export base should mean that Korea puts priority on increasing production of more advanced IT goods and on opening IT service markets.

As has traditionally been the case in Korea, technology is first developed and tested in the home market before being exported. As the first country to commercialize Qualcomm's CDMA (code division multiple access technology) in 1996, Korea used its domestic market to capitalize on producing wireless handsets. These are now its top export item. Companies such as Samsung Electronics and LG Electronics have become world-class producers of CDMA handsets.

Korean's fascination with the Internet and limited landmass provided it with a logical testing ground to also develop a competitive wireless communications service industry. Capitalizing on technology already in place from fixed line broadband, Korean wireless service providers such as SK Telecom have developed wireless broadband products for export. But they are not looking to develop new opportunities in the United States, recognizing that the market there is not ripe for investment and that the economy is still in a downturn.

SK and other Korean fixed line and wireless telecommunications service providers are heading to China - now Korea's largest export market (including Hong Kong) - for business opportunities. They are smart to do so, especially as the domestic market becomes more saturated with service options, and demand in China's nascent wireless telecommunications industry keeps growing. Other Korean services industries would do well to follow suit, especially finance and retail, which could profit from increased e-commerce made available through advanced telecommunications service delivery in China.

Caroline Cooper is the Director of Congressional Affairs and Trade Policy at the Korea Economic Institute (KEI) in Washington. The views expressed here are those of the author and not KEI or KWR International.

Russia's Economic Sustainability Remains on the Agenda

By Sergei Blagov

The Russian economy has picked up somewhat following a decade-long decline. However, economists warn that a lot must be done to secure the country's sustainable development. In 2002, annual growth of Russia's Gross Domestic Product (GDP) is expected to reach 4 percent -- a drop from the 5.5 percent it achieved in 2001, which itself was substantially lower than 2000’s 10 percent growth rate.

Despite this slowdown, Russia outpaced many other nations in GDP growth for the second year running. However, last year the Kremlin went ahead with daring reforms, notably implementing a new Land Code and restructuring the pension system. Moreover, high prices for gas and oil exports had boosted Russia's revenues. In 2002, Russia expects its foreign trade surplus to exceed $30 billion - still lower compared to the $65 billion it generated in 2000. Correspondingly, according to the Central Bank the nation's gold and hard-currency reserves rose to nearly $48 billion, almost quadrupling the level of late 1998.

Riding on top of commodity exports, Russian government officials have depicted a rosy picture of the country's booming economy. However, experts warn that continued over-reliance on oil and gas, may eventually push the nation into a vicious circle of debt crises and an increasing dependence on commodity prices, a pattern well known among developing nations.

Russia's financial health has improved significantly since the 1998 crisis, largely due to high world market prices for its main energy and commodity exports. Its performance since the crisis has been impressive. However, Nobel laureate Joseph E. Stiglitz, professor of economics and finance at Columbia University, estimates that the country's GDP still remains almost 30 percent below where it was at the beginning of the 1990s. Stiglitz notes that at 4 percent growth per annum, it will take Russia another decade to get back to where it was before the beginning of transition.

Furthermore, another potential challenge to Russia's sustainable development is the country's foreign debt level. About $140 billion is owed to Western governments and banks, the World Bank and International Monetary Fund. Although Russia has managed to reduce its debt over the last three years, this debt still represents $1,000 per capita.

Russia is sitting on the world's richest natural wealth, priding itself with an impressive ranking in the oil and commodity ratings. It is the world's biggest natural gas producer and exporter, producing some 550 billion cubic meters (bcm) a year -- pumping over 200 bcm abroad. With the country's proven 12 billion metric tons of oil deposits, Russia is the world's second biggest oil producer, generating more than 7 million barrels per day (bpd).

However, most of Russia's oil and metals industries were sold to well-connected tycoons at dirt-cheap bargains. Oil and metal magnates have opted to siphon their cheaply-acquired assets out of the country via obscure off-shore entities – instead of investing in actual production. Now the top 65 private companies in Russia are controlled by no more than eight holding companies.

This concentration of ownership rights, the attendant small numbers of new firms entering the market and the lack of economic diversification all suggest that, despite its considerable achievements, there is still much reform work to be done, argued Christof Ruehl is World Bank chief economist for Russia.

In fact, Deputy Economic Development and Trade Minister Arkady Dvorkovich warns that the economy will start shrinking as early as 2004 if the pace of reforms is not accelerated.

If the governmentit wants sustainable growth, argues President Putin's top economic adviser, Andrei Illarionov, it must cut expenditures by nearly a third, . He said the government should cut spending to 25 percent of GDP from the current 35 percent. If the ratio remains at its present level, economic growth will average 2.9 percent a year through 2015, according to Illarionov's Institute for Economic Analysis. But if spending drops to 25 percent of GDP, he believes growth would average 8.9 percent.

President Putin has pledged that the average Russian will "be happy" by 2010. However, that date is well after the expiration of his maximum constitutional presidential term.

In 2002, Russia still seemed to be heading toward the light at the end of the tunnel. Favorable economic factors gave athe Kremlin yet another chance to secure the country's sustainable development. On the other hand, Russia faces a problem of the uncertainty over oil prices, fueled by worries of possible U.S. military strikes against Iraq. Since Russia is still dependent on oil, it remains a matter of debate whether the country can sustain its current level of growth with potentially lower commodity prices.