Japan is capable of overcoming its deep-seated economic problems, according to experts attending a recent symposium in London, but Western-based analysts were less optimistic than their Japanese counterparts that there is sufficient resolve at the political and boardroom levels to make the transition a smooth and simple one.
The symposium, held at the London Business School and sponsored by Japan’s Keizai Koho Center, opened with moderator Anthony Loehnis emphasizing that whatever route Japan takes to shake off its crises is “beset with dangers.”
“The contrast between today’s Japan and that of the 1980s is stark,” said Loehnis, executive director of the U.K.-Japan 21st Century Group.
Describing Japan at its peak as an “unstoppable juggernaut” that Britain looked to for economic inspiration, Loehnis detailed today’s stagnation in domestic consumption and business investment. He spoke of the failure of businesses to adapt and grow, the vicious cycle of rating agencies’ downgrades and, on the political front, the rise of leaders promising change but leaving the electorate’s hopes unfulfilled.
“Yet,” he emphasized, “Japan is still the second-largest economy in the world and its prosperity has implications for Asia and the wider international economy.”
Japan has rebuilt itself three times in modern history, he said: after the Meiji Restoration, at the end of World War II and following the 1974 oil crisis. Will this current bout of globalization be the fourth era of regeneration?
The first session of the symposium was devoted to corporate governance in Japan and ways to regain business vitality, with NEC Corp. Chairman Hajime Sasaki focusing on information technology within Japanese companies and their distinctive management style.
The two concepts of globalization and IT only emerged in the 1990s but have since become indivisible, he said. The United States and Japan, however, differed in their approaches to these new concepts, Sasaki added.
“It goes without saying that the U.S. enjoyed continuous prosperity during the period, in spite of stagnation at the start of the 1990s,” he said. “On the contrary, Japan’s economy has suffered continuous stagnation. The term ‘lost decade’ has become widely used in Japan, and globalization and IT have been used to describe the reasons behind victory and defeat.”
It is widely accepted that the U.S. decision to promote globalization and IT enhanced its growth by increasing efficiency in distribution, he pointed out, while Japan was slow to catch on, failed to adopt global standard management and suffered as a result.
But is the problem that simple? IT has been a booming sector in Japan, he said, with the Internet and cell phones “shooting stars” that are now common around the world. With the end of the ’90s, however, IT has hit a wall and we are left with the “IT recession.”
Initially, Japan’s IT sensation was based on three main factors, he said: the direct effect of capital increasing by IT investment; IT productivity improvements; and an increase in demand for IT-related industries, such as capital investment and consumption.
As a result, the proportion of IT in Japan’s total GDP increased from 15.9 percent in 1985 to 32.7 percent in 2000. The down side, he pointed out, was that it accelerated the descent into recession when the IT bubble burst, with falling IT demand hurting exports and capital investment, making the recessionary curve steeper.
“Today’s Japanese economy has a structure that is sensitive to the production phases of the IT industries,” Sasaki said. “Therefore, it is essential to promote structural revolution.”
Failure to radically reform the current employment situation and reorganize industry will leave Japan facing its “greatest challenge since the end of World War II,” he said.
Bill Emmott, editor of The Economist, considered macroeconomic change and paralysis by examining reform and corporate governance, and whether one is more important than the other within an economy.
“How can we tell if it is working well?” he asked. “By looking at profitability, the stock market and GDP growth. In Japan, when the economy was doing well it was thought that corporate governance was outstanding, but now we’re at the opposite extreme because the economy is doing badly and commentators say everything is doing badly.
“The TSE figure is a sign of wholesale corporate breakdown,” he said, “but the pendulum will swing back.”
Emmott identified the major problems as lying with the vast bad debts at banks and insurers, rather than the lesser debts of individual companies, along with scandals that have tarnished financial institutions, politicians and brokerages.
“So is there anything wrong in Japanese corporate governance? No. The real problems are in the labor laws, the macroeconomic climate, regulatory barriers and the structures and behavior of financial institutions,” he said.
Emmott identified macroeconomic areas where events are “making me optimistic.”
The first is in Japan’s labor market, where the rise in unemployment has not been as spectacular as expected and lifetime employment has “not really ended.” There is also an ongoing search for talented employees who are paid well and which, when coupled with the introduction of merit-based pay, is evidence of the underlying vitality of the economy.
The second positive indicator is the steady number of IPOs on Japan’s stock markets, despite the end of the dot-com boom and general stagnation of the market, he said.
Third is the successful restructuring in corporate Japan, Emmott said, citing the example of Carlos Ghosn at Nissan as well as changes for the better at NEC Corp., Toshiba and Fujitsu.
“Japan has ceased to play the role that it used to, but I believe I have good reason to be optimistic,” he ended.
The session concluded with questions from the floor, including one query to Sasaki concerning specific measures that NEC has taken to rework its corporate governance.
The NEC chief pointed out that his company has already made changes, adding that it is committed to “regaining its vitality and building up its business sector.”
Emmott was more cagey on future prospects, saying progress depends on a new commercial law. If that is not forthcoming, he said, there could be a “banking crisis that forces a complete clean-out of banks.”