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"Economics of GMS Agricultural trade in goods and services towards the world market"

Chiangmai, Thailand Sep 8-12.


(04/27/00 - Murakami) Will Japan Inc. Shift to Japan.com?

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 new "Japan.com."

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 to bend.

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 producers.

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 companies.

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.

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