[Viewpoint] Five ways Japan can arrest the fall

So you’re a global entrepreneur and wondering where to set up shop. Do you choose a place where corporate taxes are 17 percent or almost 36 percent?

It doesn’t take a Harvard business graduate to know that Hong Kong (16.5 percent) and Singapore (17 percent) make better business sense than Japan (40.7 percent). Now, Prime Minister Naoto Kan wants to make it less of a no-brainer with a 5 percentage point cut starting in the next fiscal year.

It’s the rare policy step that both indicates a move in the right direction and shows why Japan is becoming an also-ran. A 35.7 percent Japanese tax rate still wouldn’t stack up well against 28 percent in the U.K. and 25 percent in China.

Deflationary Japan has been sliding off investors’ radar screens for years. Yet I’m struck by how the dynamic accelerated in 2010. Travel to London, New York or Singapore these days and the third-biggest economy almost never comes up.

Here are five ways Japan can arrest the fall in 2011.

One: taxes. Raising them would be economic suicide in the current global environment, and yet it often dominates the discourse in Tokyo. So much energy goes into debating whether to increase consumption taxes to pay down Japan’s massive debt. Little goes into questioning how doing so would make things worse.

Japan needs to increase wealth and get consumers to spend more. Increasing taxes on consumption for already over-taxed households is economic suicide. It didn’t work in the late 1990s and it won’t work now.

Lower taxes are the way to go, and Kan falls short. It’s an incision, not a serious tax cut. Supply-side economics is a discredited dogma. Yet Japan needs to empower small to mid-sized companies to create new economic energy and jobs. Tax cuts could be paid for by halting wasteful public works projects.

Two: get serious about trade. South Korea is gushing over its hard-won free-trade agreement with the U.S. Why can’t Japan do the same? The nation’s agriculture-industrial complex would be a place to start. Farmers are lavished with generous government subsidies and more political leverage than their modest share of gross domestic product warrants.

Nor is the strong yen the problem - it’s Japan’s protection of domestic inefficiencies. Kan’s Democratic Party of Japan needs to think about the rest of the country’s 126 million people, not just narrow special-interest groups. In the age of China, it has no choice. Japan can continue fighting an unwinnable war against globalization or welcome the benefits that come with freer trade.

Three: speak more English. It’s no coincidence that two of Japan’s most innovative companies, clothing chain Fast Retailing Co. and Internet shopping mall Rakuten Inc., are pushing the world’s business language on employees. As the population shrinks and a strong yen swells companies’ buying power for overseas acquisitions, better international communication is crucial.

So is wooing top-quality talent. Ask any hedge-fund adviser or economist why they aren’t flocking to Tokyo and language is almost certain to come up. For an economy that has peaked, becoming a more hospitable place for those Harvard M.B.A.s and other talent is vital. The best way to take advantage of a changing world is to speak its language.

Four: tap the aging population. On recent trips to China I’ve been amazed by all the 60-something Japanese you run into there, all gainfully employed. While it’s hard to quantify, a recent Asahi Shimbun article tells the tale of IAT (China) Auto Technology Co., an automobile design and development company.

About 40 Japanese engineers who used to work for names like Isuzu Motors Ltd. and Mitsubishi Motors Corp. are playing a central role in developing China’s assault on auto makers, Asahi reported. Japan should do more to benefit from what Nicholas Smith, director of equity research at MF Global in Tokyo, calls “perfect demographics.”

Japan has a surplus of skilled retirees and women to drive economic growth. It’s not doing enough to harness either strength. A nation with a declining birth rate and aging workforce needs to do with what it has.

Five: get hip to immigration. An obvious way to take advantage of Asia’s growth is relaxing immigration rules. Foreigners made up just 1.7 percent of Japan’s population in 2009. That compares with 25 percent in Australia and 14 percent in the U.S. as of 2008, based on Organization for Economic Cooperation and Development statistics.

The U.S. is far more entrepreneurial than Japan and boasts higher productivity. Australia is one of the only major economies to steer around the global crisis. In both cases, diverse, vibrant and flexible labor forces served their economies well.

Kan wants to double the number of skilled foreign workers by 2020. Japan needs to go much further than attracting the Harvard set. It needs to welcome loads of low-wage workers, too. Just like the corporate tax plan, this does show that Japan is evolving. The trouble is, it’s doing so too glacially to make much of a difference.

It’s time to pick up the pace of change, and 2011 is the year to do it.

*The writer is a Bloomberg News columnist.

By William Pesek