Today Moody downgraded Japan’s outlook from stable to negative. I am not sure how many in the market are shocked by this news. Not many, I suppose. An interview on Bloomberg with a journalist from Kuala Lumpur was not much concerned with the news “shock” factor. However, the journalist looked a bit worried and he particularly picked on the tone in the language Moody used to announce the downgrade. In his view the word “inexorable” stands out and that is a strong warning signal. Japan is moving towards a moment of reckoning with its huge debt.

The interesting part of the interview was about why Japan cannot fix this problem, at least in the current political climate. For one, Japan is ageing fast. Many politicians are old and they will never adopt measures to hurt themselves and the ones closed to them and force measures that are going to drastically change the system.

And this brings me to a point that I thought of yesterday whilst pondering about a recent report on Japanese students’ apathy towards international studies. Japan has one of the most inflexible immigration policies in the developed world. Combine this with the negative population growth and the huge debt and the unwillingness to reform the political system and you get a lethal recipe. Stagnation is the word that comes to mind.

Japan had a vibrant economy for many decades after the Second World War. Starting from a very low level Japan grew at rapid pace to become the second largest economy in the world and leaders in many top industries. The Japanese worked very hard and had a dedication to discipline. The school system was designed with ambition to become the best system in the world that produces students with superior results in all universally accepted indicators.

Preparing students for a successful life, which sometime ago was defined as lifetime employment at the best Japanese companies, was demanding big sacrifices from parents and children alike. Studying during extra curriculum activities became the norm. A TV documentary caused consternation a few years ago in Europe and US when it showed young children studying all day until 10pm struggling to cope in a very competitive and stressful environment.

The results were impressive from the business point of view. Students who survived the tough school environment and excelled in their field were selected to become the leaders of tomorrow.  The Keiretsu system helped their members to make sure they prosper and their workers had secure jobs for life.

All went well until the real estate bubble burst. Coincidently, at that time the world has entered the era of the internet and started to learn how to use the newly invented world wide web. The crash hit hard Japan because it came at a moment of demographic stagnation and the emergence of a new type of economy facilitated by the use of Internet.  In the following years the deflation kept eroding the national wealth. The Keiretsu culture and the stagnating population level ensured that the deflationary period was to be extended for many years.

After a period of fast growth and population going through a hard schooling system, with extended deflation, high debt and almost zero immigration, what would Japanese society do and feel like? It is a question leaning on the soft side, I know. However, I think is an important one. Deflation is difficult to fight. It is slow and it spreads through many aspects of society influencing its behaviour. The question is about the background of the overall mood of the society.

In the new internet based economy, the term is a bit passé, but nevertheless useful in this context, the creative turmoil of Silicon Valley has started a global transformation with broad impact. This is the antithesis of rigidity. Creative entrepreneurship does not bode well with rigid schooling system. Challenging the norm has become the new norm. This is difficult to imprint into the Japanese disciplined system. This adds an extra challenge to its political leaders.

Japan has an obsession with its long term security. As an island nation, security has been a priority for a long time. With a strong culture, Japan has never embraced immigration like other nations did. Knowing that the ageing will become a social issue in a few years time, Japan is investing a lot of resources into developing robots that can be used in the household for all sorts of chores. It is interesting how many of the demonstrations run the scenario of helping old people, including robots carrying in their arms pensioners who have a high degree of immobility. The robots seem to be a solution for an ageing population that will face loneliness and a large debt burden in the future.

I wonder if in the long term the conservative tendency will not lead to a new period of isolation similar to Sakoku, the foreign relations policy initiated by Tokugawa started in 1633. In a business sense this does not seem plausible because Japan has many global companies, among the best in the world. However, these companies invest increasingly more overseas, especially in the emerging economies where the workforce is dynamic, hungry and creative. This trend could accelerate the isolation and strengthen the preference for maintaining a stable but rigid environment characterised by risk aversion and consequently limiting opportunities for growth.