Bad times in Japan may one day come to be seen as good times for corporate Japan.
Crisis might push reforms of Japan's big corporations
After failing to heed the lessons of the 1990s, some signs of long-awaited change can already be detected.
By THE ECONOMIST
During the country's "lost decade" in the 1990s, Japanese firms shed some staff, but failed to make deeper structural changes. The new crisis has brought a sense of urgency. Companies are beginning to contemplate radical restructuring -- if only because the export markets that kept them going during the lost decade have now shut down. Although today's pain threatens to be worse, the hope is that Japan harnesses its misfortune to bring about widespread corporate reform.
The best Japanese companies are very good indeed. After taking market share for decades, Toyota recently surpassed General Motors as the world's biggest carmaker. Nintendo is a stalwart in gaming; Shimano in bicycle parts; Nikon in cameras and the precision lenses for making semiconductors.
But for every success, there are dozens of failures. At Japanese firms the return on equity is typically half to two-thirds of that at American and European ones. Productivity is poor. Companies tend to focus on the things that can drop on your foot and neglect lucrative revenues from services.
It is a big change from the miraculous corporate history of postwar Japan. In the 1950s "Made in Japan" conjured up images of cheap plastic toys. Just three decades later, its technology firms were obliterating America's consumer-electronics industry and enjoying a reputation for the highest quality.
Today, however, Japanese electronics is emblematic of the problems bedeviling the country's business. Even as they expanded abroad, the new multinationals never really focused their operations. Most ran their own banks, holiday resorts and travel agencies. Sony has more than 1,000 affiliates, including an advertising agency and a restaurant. One Panasonic unit imports canned tomatoes from Italy.
Optimists detect change. Toyota has stopped assembly lines, shuffled its management and considered job cuts. Appearances matter in Japan and the carmaker's zeal is being matched by others. Sony, NEC, Panasonic and Fujitsu have announced overhauls -- closing factories, melding business units and shedding staff -- that only months ago were unthinkable.
Corporate sprawl distracts managers, diverts resources and muddies valuations. Investors who want to back consumer electronics may not want exposure to hospitals. But many Japanese executives still say that if the units make money (and they often do), then nothing is wrong.
One reform above others would help: to unravel the spider's web of corporate shareholdings that institutionalizes the sprawl. Japanese companies and financial institutions together own half of the shares by value on the Tokyo Stock Exchange. In the 1960s this was a way to ward off foreign takeover. Then it was justified as a way to cement business ties.
The main effect of these shareholdings now is to cushion poor managers from market pressure. Public links to other firms limit the number of potential partners. The stakes lock up a company's capital and it is hard to claim they spread risk. When the Tokyo stock market ended the year down 42 percent on a year earlier, the balance sheets of Japan's banks and companies suffered huge losses, pummeling their share prices.
Instead of discouraging corporate shareholding, the government plans to entrench it. On Feb. 3 the Bank of Japan said it would spend $11 billion to buy lackluster shares from banks, to shore up their capital. Meanwhile the trade ministry said it wants to spend $16.3 billion to get banks to buy shares in struggling technology firms (the government would guarantee up to 80 percent of any losses).
A bank rescue is sensible, but not the expansion of their shareholdings. Rather than acting as portfolio managers, Japan's banks and companies would do better to concentrate on running themselves.
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THE ECONOMIST
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