Will Japan Inc. Shift to Japan.com?
By Hiromi Murakami and Clyde Prestowitz
27 April 2000
The Daily Yomiuri
Make no mistake, Prime Minister Yoshiro Mori is an old-school
apparatchik entrenched in the Liberal Democratic Party machine that has
dominated Japanese politics for nearly 50 years.
Despite Mori's declaration that he is "ready to share the pain with the
Japanese people," most Western observers are skeptical about the
prospects for economic reform with a traditional party boss at the
helm. The short-term outlook is bleak for the world's second-largest
economy. With slow growth, high unemployment and an upcoming election,
Japanese politicians continue to prime the fiscal pump--having already
spent 1 trillion dollars on stimulus programs in the 1990s--to boost
the economy. future are emerging: Its private sector is finally making
fundamental changes in the way it does business. Furthermore, the
impact of the "new economy" and the growth of electronic commerce are
raising hopes that the old "Japan Inc." will be transformed into the
Incredibly, the cornerstones of good old Japanese corporate
values--closed markets, cronyism, and lifetime employment--are under
threat. What makes these changes different from previous schemes?
Rather than relying on the government, these changes are market-driven.
As a result of increasing competition in the marketplace, Japan's
corporate landscape is beginning to change, which is rattling the
traditionally cordial business relationships in the Japanese financial
community. For example, Shoei Co., a real estate conglomerate, last
year rejected a takeover bid by a firm backed by Orix Corp., the
nation's largest leasing firm. The drama behind Japan's first hostile
takeover was the tussle between renegade Orix and Fuji Bank, an
established lender that serves as Shoei's main bank. At a closely
watched shareholders meeting on March 28, Shoei dramatically announced
a management change.
Another sign of change is that new companies without profits will be
allowed to sell shares to the Japanese public. The Tokyo Stock Exchange
has listed two such firms, and Nasdaq Japan, which opens for business
in June, is expected to boost entrepreneurship by providing financing
opportunities for start-up companies in Japan. Softbank Chief Executive
Officer Masayoshi Son, who aspires to model the success of U.S.
Internet firms in Japan, noted that the "Internet will be like air and
water. People will have to have it to survive."
These developments fall on the heels of last year's shocking
announcement of 50,000 job cuts by Mitsubishi, Nissan and NTT. And
there are other signs that Japan's inflexible labor market is beginning
The unemployment rate remains swollen at a historically high 4.9
percent. In reaction to the growing instability in the labor market,
unions are more concerned with preserving jobs than boosting workers'
wages, which had been artificially inflated under Japan's
seniority-based pay system. A union-led protest of 5,000 people against
Nissan's layoff plans was a clear sign of worker angst.
Ironically, the primary culprit that has thwarted economic reform in
the past is the web of business and political entanglements created by
the keiretsu, large corporate groups consisting of mutually dependent
financial institutions, manufacturers and others in the supply and
distribution chain. Contrary to longstanding Japanese dogma, however,
many business leaders today are seeing the keiretsu for what they are:
more of a burden than an economic advantage.
For example, Nissan's drastic "revival plan" trimmed its major
sheet-steel suppliers from six to two, reflecting not only the
company's economic needs, but also the erosion of loyalty along the
supply chain, because of price competition and other market forces.
This severing of Nissan's keiretsu ties has increased tension among
suppliers and encouraged further restructuring among other steel
Equally significant is the debate over intellectual property rights
among keiretsu members. Innovations previously have been shared within
the groups, but financial pressures have caused some innovations to
cross group lines. Denso, for example, recently sold technology jointly
developed with Toyota to the parent company of Subaru, prior to
Toyota's implementation of the technology in its own product line.
Consequently, Toyota took the unusual step of declaring explicit rules
governing production and intellectual property rights among its group
Yet another catalyst for change among keiretsu companies is the
weakened positions of their main banks, which, as a result of financial
liberalization, have lost their lock on industrial financing. In
September, Fuji Bank President Yoshiro Yamamoto expressed the sentiment
of many bankers when he declared that it was high time to terminate the
role of commercial banks as anchors for large industry groups. He
announced that the post-merger Fuji Bank would not support firms beyond
2002 unless there was a demonstrated "economic rationale."
Clearly, many Japanese business leaders recognize that, after three
years of zero gross domestic product growth, such prolonged stagnation
cannot be blamed solely on asset deflation, and they are beginning to
rethink the merits of Japan's corporate structure.
For example, Big Bang deregulation of the financial sector has exposed
inadequate risk-management practices under the keiretsu system.
Traditionally, main banks have purchased the shares of bankrupt member
firms, thus protecting credit ratings of poorly managed and inefficient
companies. Meanwhile, the cross-holding of shares within keiretsu
groups has also kept dividends to a minimum, generating growing
impatience among shareholders. Recently, however, more corporations
have chosen to disclose financial information under international
accounting standards, and they are urging the government to reform the
Japanese legal system.
In the 1980s, corporate America underwent a painful restructuring
process that spawned globally competitive U.S. firms. In Japan's case,
the announced job cuts are a modest beginning for the necessary
structural changes. Japanese corporations must continue to take
additional steps to manage risks and transparency, improve corporate
governance and end the debilitating dependence on the keiretsu system.
Of course, veteran Japan-watchers understand the imminent danger that
reform may succumb, once again, to politics. Mori naturally wants to
avoid economic pain in an election year, but Tokyo must be kept from
impeding the momentum of market-driven restructuring. By resisting the
narcotic of delaying tough reforms, and by swallowing a dose of courage
now, Japan's economy will be much healthier in the long term. A more
efficient, open and prosperous Japan is in the world's interest.