From the outside Japan appears undisturbed by its long-lasting recession. It is a bit like a duck on a pond - it moves calmly with hardly a ripple, but beneath the surface is frenetic activity.

Evidence for this activity is best found in the corporate sector where a host of companies are dramatically restructuring.

This restructuring has three components - mergers, foreign takeovers, and overseas expansion.

Mergers
Companies in key sectors are being consolidated into bigger entities. This is happening in steel, pulp and paper, oil refining, cement, electronics, machine tools and auto components.

These mergers and subsequent rationalisations are being carried out by internal Japanese negotiation, often cutting across traditional kiretsu lines, and bringing together regionally-basaed Japanese companies.

Foreign takeovers
Some of the wreckage of corporate Japan is being left to foreigners, either as full takeovers (e.g. Shinsei Bank, the old Long Term Credit Corporation, by Ripplewood; Seiyu supermarket chain by Wal-Mart) or as joint ventures (e.g. Nissan/Renault and Mitsubishi Motors/DaimlerChrysler).

With Nissan/Renault and Mitsubishi Motors/DaimlerChrysler the foreign management has taken control and is reorganising the business, forming new strategic alliances with global capital formations.

Overseas expansion
Manufacturers are lowering their cost base by building new plant in low-wage countries - especially China - and making strategic acquisitions in the big markets of the US and Europe. Companies leading this overseas push include Toyota (expected pre-tax profit of 1.5 trillion yen - US$12.5 billion - in FY2002), Sony (owner of Columbia) Matsushita and Bridgestone (owner of Firestone).

As a result of this restructuring the Japanese workforce faces growing unemployment, corporate cost cutting (lower bonuses, more pressure on surviving workforces) and an end to lifetime job security. More than a quarter of Japanese are pessimistic about their personal prospects, according to a recent survey.

Large parts of the protected domestic economy are mired in problems including massive corporate debt, especially in property, construction, retail and entertainment industries. Japan¹s banks, now fewer in number after mergers, face increasing bad debt left over from the bubble economy of the late 1980s.

Tackling the debt requires drastic reform, as does the highly protected agricultural sector.

Japanese agriculture is extremely unproductive, characterised by tiny farms and an ageing workforce (more than half are over 65). It now contributes less than 2 per cent of GDP.

But close ties between the governing Liberal Democratic Party (LDP) and the protected business interests requiring reform (construction and property companies, farmers and small retailers) is the glue of Japanese politics.

Prime Minister Koizumi and the LDP are unable to disturb this relationship because measures to cut debt in these areas will bring bankruptcies and pain to the LDP core constituency.

The LDP strategy so far has been to prop up the economy with government spending which has now reached 140% of GDP. Most spending has been directed to infrastructure by issuing bonds and is coupled with a zero per cent interest policy. According to OECD estimates, 136 trillion Yen has been spent in 12 stimulus packages since 1992. How long the government can keep spending this way is an open question.

Japan¹s two economies - one dynamic and global, the other protected and domestic - have lived side by side for a long time.

Now the US is pressing Japan to open its finance sector to foreigners. The US-led world finance system sees tremendous opportunities if it can get hold of some of Japan¹s huge domestic savings. But so far they have been held at bay by an alliance of strong domestic interests led by the banks.

Japan may gain some extra leverage thanks to the US¹ massive military expansion. Japan will be required to aid this expansion by purchasing US debt. This could return Japan to a level of strategic importance approaching that it enjoyed throughout the Cold War period.

At some stage Japan will inevitably have to face a number of crucial questions:

• Will its No.1 relationship continue to be with the US or with China? Or can it balance both?
• How much will it have to open up the domestic economy, especially agriculture - and how fast?
• How to guarantee stability of resource supplies with increasing instability affecting or threatening many exporters (in the Middle East, Africa and South America) and with China becoming a major competitor in purchasing inputs to its economy.
• How to invest Japanese personal savings to provide secure retirement for elderly workers.

The next election is due in 2004 and it is hard to believe that the government would promote a form of shock therapy that would hurt many Japanese voters. On the other hand the ³muddle through² approach cannot go on indefinitely.

Whatever course Japan follows, the implications for Australia are important because Japan is still our biggest trading partner and a big investor here.

Japanese strategic investment in Australia may increase as the dynamic, globalised sectors of Japan¹s economy expand and its protected sectors are opened up. We may see more investment in Australian minerals and energy, agriculture, specialist manufactures and services.

Recent major Japanese purchases of Australian bonds shows there is a strong market in Japan for safe and higher yielding investments.

We are likely to see individual Japanese investors looking to Australia for both lifestyle opportunities and profitable, safe investments to pay for retirement.

A Japanese newspaper recently interviewed several Japanese retirees who have lived in Thailand and Australia for long periods. It commented that the Gold Coast is rapidly gaining popularity among Japanese retirees due to its warm climate, safety and relative proximity to Japan.  It said most Japanese living on the Gold Coast keep homes in Japan and return at least once a year.