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[after a long speech by the director in Japanese] (translator) “Umm, he want you to turn, looking at camera. Okay?” (Bob) “That’s all he said?” – quote by Bob Harris, played by Bill Murray, in Lost in Translation.
 
During the New Year’s holidays, I was with my in-laws’ families who mostly live in Niigata prefecture. As I’m sure you had heard, there was a powerful earthquake that hit the Noto peninsula in Ishikawa prefecture adjacent to Niigata. While not as frightening as the magnitude 7.6 earthquake in Noto peninsula, the earthquake shook Niigata City, where we were visiting that day, with a 5+ quake, and Nagaoka City, where we were staying, was a 6-. It was the largest earthquake I had ever personally experienced. Post quake aftershocks continue with a 6.0 quake just two days ago in Nagaoka City and, even now, they are hit with daily 2s, 3s and 4s at least once an hour. Thankfully, not only were my family safe, but amazingly, no damage was done to my brother-in-laws’ homes in Niigata City or my mother-in-law’s apartment in Nagaoka City. Surprisingly, everyone was relative calm, evacuating to safe locations in an orderly manner while the earth shook. Niigata had experienced large earthquakes several times in the past such as in 2004 with a magnitude 6.8 and again in 2007 that halted the Kashiwazaki nuclear power plant, the world's largest nuclear power plant (and owned by TEPCO, the same company that runs the plants in Fukushima). As such, the residents of Niigata appear to be fairly well prepared for large tremors. In fact, after the big one hit on New Year’s Day, the restaurant that our families were planning to meet for dinner was still open, so we all ate together, not knowing how truly horrifying the after effect of the Noto earthquake was (and continues to be) until late at night when we got home and watched the news.
 
The bullet train ride from Niigata to Nagaoka is about 20 minutes but, of course, all train service in the area had been suspended (although they were back running normally by early PM of the next day). And so, my brother-in-law drove us back to Niigata, which would normally take just one hour but, as they had also closed the highway that connects the two cities, it took over twice as long. I had never spent such a long and isolated time with my wife’s younger brother before. He has a rather interesting background. Against his father’s wishes of entering the medical profession like most of the family and relatives, he dropped out of high school and chose to become a comedian. He was, therefore, estranged from his father for several years. As with any new entertainer, life was difficult during the early part of his career but he has since secured many steady gigs; he’s even the MC for the extremely popular Albirex Niigata professional soccer team for all of their home games and has become a bit of a local celebrity. Having learned about life from the street, I found him to be incredibly intelligent (as I suspect is true for any successful comedian) despite the fact that he has rarely left Niigata prefecture, much less the country.
 
And so, as is often the case with someone one hasn’t seen in a while, COVID-19 came up in the conversation. We were discussing how the reaction and subsequent countermeasures to the pandemic were so different by region, notably between China, Japan and the US. I mentioned to him how Americans (and other Western countries) seemed very uncomfortable with wearing surgical masks whereas many of us in Japan don them even now (a cursory glance on my train from work guestimates about 30~40%, though this figure is probably higher than normal due to it being flu season). Admittedly, I, too, am a bit uncomfortable with them, having grown up in the US myself. But being the typical Japanese, I tolerated them for 3 full years. And then he made a rather interesting observation. He said that we Japanese are often (comparably) uncomfortable with sunglasses unlike Westerners who commonly wear them. I always thought that this had to do with eye color and differing sensitivities to light. But he thinks Japanese people dislike not being able to see someone’s eyes whereas, his hypothesis was that, perhaps, Westerners dislike not being able to see someone’s mouth.
 
And I thought there might be some truth to that (at least the Japanese angle). For example, most of us in Japan, even I, naturally know how to smile with our eyes. Apparently, there is a word for it – it’s called the “Duchenne smile” or “smizing”. I actually remember seeing YouTube videos on how to smile with your eyes back when most everyone globally were being forced to wear masks (and found it interesting that it had to be taught). There is even a commonly used phrase in Japanese, “me ga waratte nai”, literally translated as “their eyes are not smiling”. It is negatively used when the person you are referring to looks to be happy with positive overall body expressions but their eyes have a blank, dead look, hinting that their intentions are not good or genuine, perhaps even a bit frightening. He noted that this may be why thieves and other criminals are often seen in Japan wearing both a mask and sunglasses. And it is often true (at least from my observations) that, outside of highly bright days, we look back if we pass by someone wearing sunglasses; we assume that they might be someone famous who is trying to hide their identity from the public, even though the sunglasses generally draws attention rather than deflecting it. He suggested that, perhaps Westerners, who he had assumed are always wearing sunglasses, need to see their mouths to interpret non-verbal expressions whereas we do it more so with the eyes.
 
I have absolutely no idea about the Westerner angle. I just think masks are uncomfortable and difficult to breathe through. But I do believe in our ability to read people via their eyes, as well as overall body language. Because the Japanese language is so subtle, direct translations often do not make sense. It is often said that Japanese management teams don’t give you a straight answer. Even when there is an answer, there are often many caveats attached, leading to a non-answer. "Yes” might mean yes or no and “No” might mean no or yes. To figure out which, we use visible signs via body language including their eyes. And, like the verbal language, the body language expressed by a typical Japanese is also very subtle and minute and not as animated or dynamic as Westerners. That is precisely why I had asked, even during the most difficult pandemic period during the summer of 2020, for face-to-face meetings with companies which, of course, were denied. But there were still some companies, even during the worst period of the lockdowns, that surprisingly agreed. I also think that is why many Japanese management teams are not proponents of remote work.

 

This is also why we chose to have a physical presence in Japan when starting up our firm despite the much higher personal and corporate tax rates – I wanted to be able to do face-to-face meetings, not conference calls, and we would be unable to read those subtle body gestures. Zoom (and other video conferencing methods) don’t cut it either. While we may see the eyes (assuming great throughput and no network issues), there are a multitude of minute messages being sent with the body that helps us assess what seems like a very vague answer, and it is hard to note the brief micro-gestures via a video conference call. After a few consecutive meetings, we start to learn certain “tells” that may be unique to a specific individual, helping understand the conversation even further. A neutral answer by a Japanese is often signaling a yay or nay via the facial and body expressions and may take years of meetings to figure out. To make matters more difficult, the message being expressed to a non-Japanese might be slightly different to that being expressed to a Japanese often due to the language barrier; even my own Q&A conversations regarding the same topic might be purposely a little more vague when I speak in Japanese versus the same conversation in English because I can't seem to find the same subtle nuances in the English vocabulary unless I become excessively verbose (which I've been cautioned of many times ...). I can use vague wording and let my body talk to express what I feel in Japanese much easier than in English.
 
Now I admit that reading too much into these subtle gestures can also be dangerous. In fact, our concern throughout 2023 was not just the actual fact that orders were declining but was the lack of confidence coming from these gestures, or at least the relative change in confidence. They are regurgitating the numbers and whatever is in the script, but their eyes and bodies express discomfort. One notices and probes and comes to understand that their future visibility is based on hope rather than fact (and, more often than one might think, is also biased by the hypothesis of other buy-/sell-side analysts whom they have previously met who come looking for positive reinforcement of their theses). Perhaps Japanese management teams have been overly pessimistic as very few people have lived through a period of sustained price hikes and the effect on demand was uncertain. Even I, who graduated college in 1992, have never seen a period of sustained price hikes, wage inflation, and a strong economy all at the same time, and I’ve been working in Japan for over 30 years. It was probably natural for management to be cautious, especially with so many head fakes during the last 3 decades.
 
Now, I am a believer of those dangerous 4 words, "this time is different", at least in this case. I do believe that after 3 decades of disinflation, we might enter a period of sustained wage inflation, price hikes, and possibly even positive real interest rates. I believe that the declining working population is a boon for companies that can automate quickly or can attract the best talent because they can afford to, being the leader in their field with the highest margins amongst their peer group. I believe the aging management teams who lack heirs to takeover their businesses will anxiously look for opportunities to consolidate or simply leave the business, causing the industry leaders to naturally take share, especially the strongest. But I also don't think the process will be linear. The recent inflation was supply-led from a cost push generated from outside of the country. This is the first time we saw this in 3 decades and while we accepted it, we are starting to feel price hike fatigue, just like the rest of the world. The perpetual decline in the Kishida administration approval ratings has driven them to provide a national (one-off) household subsidy to offset the effect of inflation (while, at the same time, raising corporate taxes) although this hasn't stopped his rating from declining and earned him the offensive monicker "tax hike eyeglasses". I'm not sure what eyeglasses has anything to do with it, given 50% of the population wears them; I terribly disliked him from day 1, but it had nothing to do with his glasses ... apparently, only 8 of the last 24 post-war LDP prime ministers wore glasses and that the average days in office was 597 days vs 1133 days for those who didn't wear glasses. Of course, if you take out the highly popular Abe Shinzo, Sato Eisaku (the first and only Japanese to win the Nobel Peace Prize), Koizumi Junichiro, and Nakasone Yasuhiro, the average is about the same. In any case, price hikes will be marginally more difficult. If the yen does strengthen from here, we'll see commodity costs in Japan fall; unlike the US where gas prices are significantly lower than a year ago, our prices at the pump are still higher due to the yen. And so, price hikes may be even more difficult toward the second half. But labor cost increases will not cease. I think it is things like this that are weighing on corporate management's minds. And why the calculus is not quite straightforward for 2024.
 
So my teammates and I will continue our 1on1 meetings, listening to what they say, how they say it, and watching their eyes and bodies at the same time for any clues of how this year will progress.
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