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The Japanese art of downsizing can only go so far. Once liabilities have been cut to the bone, atrophy is the only possible outcome of continued retrenchment. A nation has to invest in its assets—its people—to grow. The third arrow of Abenomics appears to be aimed squarely at Japan’s own butt cheek.

There is nothing more Japanese than the tea ceremony, right? Japanese culture defines the ceremony itself. Human agency responding to change is the tea. Bureaucracy is a Styrofoam cup. Abenomics wants to take a styrofoam cup to the cremony.

This piece will likely come off like rough-handed trencherman’s work to some, but it's really not a Japanese story. It is about bureaucracy and the need to restrain it. This is a common problem everywhere. That said, bureaucratic downsizing is a major need for Abenomics to work. Abenomics seems resistant to giving it a go. Same old hang-ups.

Ahem. Japan has to reverse the stifling bureaucracies and sterotypical patterns that dampen human spontaneity. I can only imagine how sick Japanese people are of hearing the enormously complicated moving parts of their financial universe reduced to the name “Mrs. Watanabe”, some powerful carrier of the carry trade. It just doesn’t capture the dynamic. Rather, it sustains the gigantic myth that Japan is a country of old dis-savers colliding with young profligates and not enough money to go around. The reality is that Japan is in in downsizing mode, with both good and bad effects. It is not a sterotypical Mrs. Watanabe, but a very real Professor Nakamura that plays an important part in this story.

Japan has refined downsizing to an art-form. People adapted by circumstance to not be carried away by excess and not especially interested in cult of buying tons of worthless crap. Downsizing is both fantastically thoughtful as an adaptation to changing economic conditions. This mentality is summed up beautifully in a piece carried by the NY Times called “Japan and the Ancient Art of Shrugging” by Norihiro Kato.

It is a portrait of Japanese youth, a portrait of carefulness, frugality, and thoughtfulness about the future:

Three years ago, I saw a television program about a new breed of youngster: the nonconsumer. Japanese in their late teens and early 20s, it said, did not have cars. They didn’t drink alcohol. They didn’t spend Christmas Eve with their boyfriends or girlfriends at fancy hotels downtown the way earlier generations did. I have taught many students who fit this mold. They work hard at part-time jobs, spend hours at McDonald’s sipping cheap coffee, eat fast food lunches at Yoshinoya. They save their money for the future.

These are the Japanese who came of age after the bubble, never having known Japan as a flourishing economy. They are accustomed to being frugal. Today’s youths, living in a society older than any in the world, are the first since the late 19th century to feel so uneasy about the future.

I saw young Japanese in Paris, of course, vacationing or studying, but statistics show that they don’t travel the way we used to. Young people have grown less interested in studying foreign languages. They seem not to feel the urge to grow outward. Look, they say, Japan is a small country. And we’re O.K. with small.

It is, perhaps, a sort of maturity.

The rest of the world’s population is still exploding, and we are coming to see the limits of our resources. The age of “right shoulder up” is over. Japan doesn’t need to be No. 2 in the world, or No. 5 or 15. It’s time to look to more important things, to think more about the environment and about people less lucky than ourselves. To learn about organic farming. Or not. Maybe you’re busy enough just living your life. That, the new maturity says, is still cooler than right shoulder up.

They won’t change. They are too settled in an earlier stage of development, in a dream of limitless growth. But society matures around them.

Japan remembers what it is like to be old, to be quiet, to turn inward.

Instead of leveraged flamboyance, you see diminished loan demand, balance sheet conservatism, and a thoughtful view about what matters—from the experienced and elderly Mrs. Watanabe to the surprisingly worldly-wise youth of Japan. It offers a good explanation for low yield to maturity and equally low defaults of Japanese credit.

The bad effect is atrophy. Downsizing can only go so far before it translates into decay. Once liabilities have been cut to the bone, atrophy is the only possible outcome of continued retrenchment. You have to invest in assets to grow. In a nation the greatest asset is its people and their ability to adapt, in general have fun, and really live.

Japanese people have grown up inside a semi-planned economy. Politicians and bureaucrats made huge, society-altering decisions in a closed-door, behind the scenes kind of way. Not to say that these bureaucrats ran absolutely everything.

Small-business men were more or less free to buy and sell as they saw fit, nestled in a supportive and fore-bearing environment. But those who controlled the economy's strategically important financial and export industries were administrators and bureaucrats, not red-blooded risk-taking entrepreneurs. The key ingredient for success up the corporate ladder was conformism. People were valued for their loyalty not their innovations. As such, entrepreneurial abilities were channeled into political/corporate sleight of hand.

Beneath the surface of Abenomics, there is a titanic battle between bureaucratic spirit of the establishment versus entrepreneurial energy. A single lawsuit puts in in laser focus.

In 2014, Dr. Shuji Nakamura was awarded the Nobel Prize for Physics for his work in creating bright blue LEDs. When he began his efforts, Nakamura held only a master’s degree and worked with just one lab assistant for a small manufacturer in rural Japan, yet he was able to find a solution that had eluded some the highest paid, best-educated researchers in the world. His company compensated him a lousy $200 for his work. Kind of staggering, really.

In response, he instigated a landmark patent case, emigrated to the US, gave up his Japanese citizenship and became a vocal critic of his native country. Nakamura slammed Japan for failing to ensure that inventors are fairly compensated for their work, something that stifles innovation and provides “zero incentive” for employees to be creative.

He had something to say to young Japanese in his first national press conference since picking up his Nobel prize: “Leave”. Go to get a better education, go to expand their world view, go to be better compensated for their work. Just leave Japan.

“The most important thing is to go abroad and they can see Japan from outside the country. Understand this could be viewed as a bad thing for Japan. But it is the most important thing, no? Japanese people have to wake up about Japanese bad things, you know.

“If the Japanese government changes the patent law, it means basically there would no compensation [for inventors]. In that case, I recommend that Japanese employees go abroad.”

Nakamura spit venom like a scorned woman on the Japanese education system for focusing on route examinations that lead to secure jobs in big companies. He pointed out that it is failing to give young people the English skills they need to function on a global level. “In the world, Japanese people have the worst English skills. They are only concerned about Japanese life. That’s a problem.” He also said that lack of exposure to foreign cultures breeds a parochial ethnocentrism.

The bureaucracy responded to the lawsuit in a disappointing way via the Japan Business Federation. Instead of endorsing sweat-equity or some other compensation, they are lobbying to clarify the current patent law and place patent rights squarely with companies. Prime Minister Abe has hinted that he is all on board with this.

It will only stifle the very thing that Japan needs most right now: channeling entrepreneurs in the right direction. It is not that Japan lack entrepreneurs—not at all. The problem is that incentives lead the best and brightest to be entrepreneurs within the bureaucracy and political structures instead of commercial efforts. This is not to say that the Japanese quiet deliberate nature cannot be deployed to amazing commercial effect. The effect of Shiseido on a woman’s cheek is like a little miracle. Bureaucracy always stands in the way.

But the third arrow of Abenomics appears to be aimed squarely at Japan’s own butt cheek.

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