Machinehead Does Japan

[machinehead]

Last week I was in Japan with my business associate Man of Steel (hereafter, MS). On the Shinkansen train from Niigata to Tokyo, crossing the Japan Alps, I asked him whether people were still speculating in golf club memberships, which traded like tulip bulbs in the bubble era.

 

He answered that his own membership in a celebrity-designed course is now worth about $20,000 ... BELOW guaranteed par value of $25,000. But then, golf courses have their own debt problems, and are far from blue-clip credits. MS said that they now provide carts rather than forcing members to hire a caddy and walk, as was the Japanese standard a decade ago. Green fees are way down, too.

 

Golf club memberships had been valued as high as a million dollars in the bubble era. Did people buy them on margin back then, I inquired? If you were a corporate middle manager, MS replied, banks would lend you the entire purchase price. After the bubble popped, and club memberships embarked on their 90%-plus collapse, and corporations started hitting the wall and pushing out the old management, about 300,000 corporate managers ended up filing for personal bankruptcy. There were some suicides, too.

 

You wouldn't know of such distress walking around Tokyo. Tokyo still glitters and hustles as it always did. Our hosts (the largest steel company in Japan) invited us to dinner at their guest house, essentially a private restaurant operated by the company. It's kind of cool having a twenty-something kimono-clad cutie kneeling on the tatami next to you -- her face a foot away from yours -- refilling your beer glass or sake cup with faithful dedication. If only real life were like this ...

 

Afterward at the hotel (just around the corner from the Tokyo Stock Exchange) we were joined by a couple of our counterparts. The youngest one -- Mr. Itoh, 27 -- had just been married last year. He described his long hours, usually coming home at midnight. Our American client innocently asked him, "How does your wife like that?"

 

"She ... ANGRY," he replied, making a face. He obviously wasn't kidding.

 

I heard the distaff side of a similar story from MS. His 24-year-old daughter had married a salaryman at the utility company where she works. He would also arrive home late every evening after drinking with co-workers. (This was not necessarily neglect; more of an obligation in group-oriented Japan.) After three months sitting at home in the evening doing his laundry -- and perhaps influenced by her ten years spent outside Japan -- she said "screw this" and came back home to live with Mom and Dad.

 

Another evening we visited MS's house, located in a relatively new and spacious suburban area between Kyoto and Nara. It's a two-story prefab, with three bedrooms and a bath upstairs, and living/dining/kitchen and bath downstairs. No basement, as usual in Japan. The floor area is probably only 1,200 square feet. The bare sideyard is about 10 x 30 feet, just enough for a dog run for the family shi-tzu. The house is set back perhaps 5 feet from the street.

 

The American concept of "master bedroom suite" is unknown. The parents' bedroom was the same size as the other two -- perhaps 10 x 12 feet at best -- and a bath in the hall served all three.

 

The house has gas-fired baseboard heating downstairs only. The theory is that the heat will rise to the second floor. But they admitted that the upstairs rooms are chilly in winter. Air conditioning is via individual evaporator-fan units in each room, connected to external condenser-compressor units. The absence of central HVAC means that "open plan" doesn't work, so each room including the living room has a door.

 

MS said that the house is worth around $500,000 -- $250,000 for the postage-stamp lot and $250,000 for the structure. He bought just two years ago, with a government-subsidized 2% mortgage. Property taxes are low -- perhaps $1,000 annually -- so the carrying cost is not that high, despite the big price tag.

 

And prices in the neighborhood are down from over $1 million in the bubble era. Some punters bought -- you guessed it -- on 100% or 120% mortgages. They were wiped out. The realtors told MS there had been some suicides in the neighborhood as a result.

 

Given that the house is in a densely-populated coastal area, with excellent transit connections to nearby cities, comparing its price to New York or California levels is not unreasonable. But the quality of room layout, creature comforts, materials and finishes is spartan ... well below what would be acceptable in the U.S.

 

What would it rent for, I asked MS. About $1,000 to $1,500 per month, he estimated.

 

"You're kidding," I replied. "Why wouldn't a $500,000 house in an urban area rent for $2,000 or $2,500 a month?"

 

For one thing, MS explained, Japanese housing law is tilted toward tenants. It's risky to rent single-family houses because the tenant may obtain legal tenure and refuse to leave. But even if a tenant can be buffaloed into signing a postdated letter confirming his imminent departure, the 2 to 3% gross yield emphasizes the near impossibility of making money in Japanese real estate when prices aren't rising.

 

Toward the end of our trip, we stayed at Arima Onsen, a hot spring resort. Our colleague Makoto K. came up from Kyushu to join us. On a crisp evening, after a soak in the ninth-floor indoor spa, we stepped out onto the terrace buck naked and plopped into the outdoor hot pool, filled with reddish iron-rich water. Lights of other resort hotels spangled the mountain valley. The black bulk of Mt. Rokko was backlit by the city lights of Kobe. Orion rode low in the southern sky.

 

MS spoke of his elderly parents, in their eighties. His father, becoming senile, is in an assisted-living facility. His mother lives at home, but was hospitalized during our visit. He indicated that their health costs are mostly paid by government schemes, and they receive a pension of around $2,000 monthly besides. MS felt that their benefits were generous, even lavish. But he sincerely believes that as the baby-boomer taxpayers retire, the Japanese welfare state will not survive more than ten years. He has no expectation of himself and his wife receiving such benefits.

 

I told MS of my expectation that the U.S. faces a similar plight, which will be resolved in hyperinflationary fashion. He nodded in acknowledgement, but clearly could not envision such a future for Japan. There don't seem to be any bubbles in Japan now. Real estate, golf memberships, gold, Japanese stocks -- all are stagnant in yen terms. MS's wife had made some money buying beat-up Japanese industrials, and also had made money in some Chinese (Shanghai) stock speculations. But these were rather small-scale.

 

His parents live about a 6-hour drive away in Fukuoka. He said it costs $250 in freeway tolls to get there by car. So they often take a 12-hour overnight ferry ride, with the car on board, at a cost of $300 one-way. Tolls are ubiquitous in Japan -- every 5 or 10 miles -- and getting around is costly. The toll just to cross the bridge to New Kansai Airport is $16.

 

Makoto K. spelled out the realities of life for the 40 employees in his company. They work from 8 a.m. to 9 p.m. Monday through Friday, and on every 2nd and 4th Saturday as well. That's 60 or 72 hours per week, alternating weeks. For this, they earn (including overtime) about $5,000 per month. The workplace is an uninsulated metal building, hot in summer and cold in winter. During breaks the workers warm their hands over a charcoal barrel.

 

He observed that some of the company's suppliers had laid off staff. Those remaining now work later hours, and more on weekends. He observed that his IT-industry customers first beat down the price ruthlessly, then place orders at the last minute (without any provision for cancellation charges) with urgent delivery demands. All of this pressure ultimately devolves upon the hapless labor force.

 

The big draw in Osaka on Sunday was the new Yodobashi Camera store, a 9-story discount electronics merchandiser which was packed with shoppers and creating traffic jams in the roads around Umeda station. The store was liberally supplied with giant plasma screens, home theater systems, and the latest generation of DV and mini-DV video cameras. Prices seemed somewhat higher than U.S. levels, though, and a 5% consumer tax applies.

 

At the big Kinokuniya bookstore (an old haunt during my former days as a Kansai cowboy) I came across an interesting Japan-related book, Dogs and Demons: The Fall of Modern Japan. The author, Alex Kerr, lived in Japan for 35 years and fluently speaks and writes Japanese. Having studied at Yale and Oxford, though, he's capable of commenting from a cross-cultural western point of view.

 

Kerr picks up where Karel van Wolferen left off in his "Japan revisionist" magnum opus of the late bubble period (1989), The Enigma of Japanese Power. Van Wolferen assailed the legitimacy of the Japanese political system, with its unelected bureaucrats.

 

Kerr takes a different tack, deploring the "cultural trauma" of modern Japan. In a manner reminiscent of Rachel Carson's Silent Spring, he rails against the rampant pollution, overpaving, and destruction of wetlands and native forests in Japan. His verdict is harsh: Japan is a case of "failed modernization." Like a machine on autopilot, Japan's dysfunctional financial system and its rapacious "construction state" are running the economy into the ground.

 

Dogs and Demons is the first book which attempts to resolve the tremendous cognitive disssonance experienced by visitors to Japan, when they compare the exquisite taste and refinement of Edo-era arts, culture and architecture to modern Japan's jumbled urban blight, concrete-channeled rivers, and shallow commercialized culture. Kerr takes a very downbeat view of Japan's prospects, saying that without a (highly unlikely) revolution in the nation's fossilized way of doing things, it's headed for environmental doom and a cultural train wreck. Highly recommended.

[BigWave]

Very informative MH..Tanks for the insight..I pray this is not what we have to look forward to, but at this point, I don't see how we avoid their fate..

 

Do you speak japanese?

[EasyAl]

MH:

 

Thanks for sharing your thought on Japan.

[dozer]

MH, that was a pleasure to read. You're an excellent writer, as well as observer. My thanks.

 

Did the subject of the gov/boj pouring money in the doolar toilet come up at all? I would be most interested in what the Japanese -people- think of it...

[Soros]

The Pitiful, Helpless Giant

http://jimrogers.com/content/stories/articles/pitiful.html

[yellowfish]

thanks for the info MM...plan to vist there in September 2004.

[Guest]

Thank you for taking the time to put your latest Japanese experience into words for us. Enjoyed reading it. Excellent.

[Hiding Bear]

Informative summary. Nice job.

 

I am curious if you ever have the occasion to discuss the 100 year mortgage with anyone there - or maybe you can shed some of your insights about it. Does the heir have to accept the mortgage? Does it apply to only those who actually have children already?

[FauxCaster]

Damn, MH. That was good. You could be a professional writer.

 

Portrait of MH, 100 w pixels x 107 h pixels

[GregFokker]

As always, MH, your writing straightens up my intellectual posture.

 

Welcome back!

 

Passed through Narita once on my way to Indonesia. Was struck by the price of my glass of weak orange juice, the police with large broomsticks, the exceptional roadfeel of the airport shuttle bus, and the aggression of the short, ancient women elbowing me in the airport. It was less than a 12 hour stay.

[The brown one]

Very informative and well written,MH.

Only been there once in the early nineties and the one thing that sticks in my mind were some managers of a company we met to do a photo shoot.For the first 15 minutes of a 30 minute meeting they lead us to believe that they didn't speak a word of English and later we discovered that their English was pretty good.It was as if they were inspecting us first,maybe waiting for us to say something wrong amongst ourselves(which we didn't),and then ,after assessment we were found to be ok!

 

Truly bizarre.

 

Soros: Good read from Rogers-always interesting to hear his obsevations.

[DrStool]

Tanks 'chine!

 

Da best!

[BeerMarket]

tanks MH - great stuff!

[Short'em High]

Great take machinehead. Fascinating stories.

 

This high tech rancher has had the good fortune to visit Japan

a couple of times, once for a vacation with my 13yr son.

 

We walked around a great deal and explored various parts of Tokyo.

Overall, everyone was pleasant and polite. Your Edo period comment

vs today's modernization is spot on.

 

In spite of a supposed economic maliase, people were busy living their

lives in the usual harmonious Japanese manner. I knew colleagues who

had to work those long hours also, but someone they have accepted

this is now how things are to be. Life carries on.

 

Japan is really a land of strange contrasts and personal values of the

people. It seems that without the willingness of the average Japanese

person to work hard and save, their country would be in deep trouble

right now.

 

I do not know if the new generation shares the same values as the older

Japanese, so who knows what the future holds.

 

One thing for sure (which you briefly touched on) is that the Japanese have a

huge demographic problem, too many aging Japanese and too few young

people going forward. Big social problems coming.

 

Thanks again for the great read.

 

SEH

[machinehead]

Very informative MH..Tanks for the insight..I pray this is not what we have to look forward to, but at this point, I don't see how we avoid their fate..

 

Do you speak japanese?

I meant to add that Americans and Canadians are in no position to say "there but for the grace of God go I." Japan, with its higher debt ratio and faster-aging population, may preceed us into debt default or debt hyperinflation (take your pick). But there are definitely lessons there for North America and Europe.

 

I speak only tourist Japanese, picking up the subject matter of Japanese conversations from "key words," but not many details. Man of Steel is quite bilingual and bicultural, and serves as my window into Japan.

 

Dozer, I heard more complaints about the "construction state" than I did about dollar propping. Man of Steel pointed out an enormous, palatial new "job training center" just down the road from his house. It doesn't actually offer any jobs, just (theoretically) "trains" people for jobs, which often as not are for street-sweepers or after-five security guards. "Why do we need this giant building?" was the question in the neighborhood, MS said. Obviously, any jobs created were offshoots of the building's construction, not its operation.

 

The tragedy of Japan's vast investment in "multi-purpose cultural halls" and "community theaters" in every podunk village is that having no need or use, they are essentially worthless at the moment of completion. The vast sums spent on them are unrecoverable, as there is no buyer. I suggested that aged baby-boomers might one day live in them, at least using them as squatter shelters.

 

Hiding Bear - no, we didn't talk about 100-year mortgages. Like the 100-year bonds issued here in the U.S. in the late Nineties, long maturities are basically bubble phenomena. They are probably scarcer now.

 

FauxCaster - a blast from the past. That avatar is still my alter ego. Thanks.