If the Bank of Japan wonders why its monetary magic is gone, officials can find answers in the battle over Sharp.
On Jan. 29, Bank of Japan Gov. Haruhiko Kuroda tapped his wand and conjured up yet another surprise. At first, Kuroda’s trick involving negative interest rates worked wonders as the Nikkei soared and the yen plunged. A week later, it’s clear Kuroda’s spell has fallen flat. Why? Investors are looking behind the curtain and disenchanted by who’s really managing the show: a ghostly corporate sector.
Sharp alone dispels the notion of an ascendant Japan. Sure, the electronics giant may get a happy ending. Word is, Sharp may accept a takeover bid from Taiwan’s Foxconn, and that’s a good thing. But the way this deal came about is emblematic of why the BOJ’s sorcery isn’t what it used to be.
As I’ve argued before, Prime Minister Shinzo Abe doesn’t have the stomach for the radical reforms on which he campaigned before he took office in December 2012. Instead, he attempted a sleight of hand. The BOJ would drive down the yen to boost exports and corporate profits. The illusion of bold change would prompt executives to fatten paychecks, up investments and enrich 126 million Japanese. The ruse hasn’t worked, as data on inflation, income, household spending, exports and industrial production attest.
Weak global growth gets some of the blame. But the real problem is an insular and uncompetitive corporate sector that no longer works as a growth-transmission mechanism. Abe and Kuroda assumed the Japan Inc. model of old would work its magic to end the nation’s deflationary funk. But they didn’t appreciate the zombie factor. Japan has long been known for its huge stable of walking-dead companies for decades even as profits disappeared. Less appreciated is how this phenomenon has infected an entire $4 trillion economy.
The zombification of Japan began by stealth in the late 1990s, when government entities, zero interest rates, compliant banks and docile investors gave executives a pass on restructuring — a bailout here, a debt forgiveness package there, cross-shareholdings to repel pesky foreign bidders over yonder. In 2006, when Abe began his first stint as prime minister, Tokyo pooh-poohed warnings loose money, easy debt and financial socialism were deadening the animal spirits stirring in South Korea, China and Southeast Asia.
Fast forward to 2012, when Abe returned to power and Sharp, Exhibit A for zombie aficionados, was on the ropes. That year, a then little known Taiwanese businessman, Terry Gou, wanted the Japan Inc. icon badly. His company, Foxconn, even offered Sharp about $4.23 per share, compared with $1.35 today. Sharp demurred because that’s what Japan Inc. does. Repelling gaijin offers has long been standard operating procedure.
Global investors expected Sharp to go with a much lower offer from a government-backed fund called Innovation Network Corp. of Japan. Floundering companies long relied on the state, and why should Sharp be any different? Its banks seemed fine with the low-ball offer and stockholders weren’t complaining. And it’s not like Abe’s corporate-governance push has amounted to much.
In this context, Sharp going to Foxconn after all these years seems a win-win. Abe gets bragging rights for a household-name giant acting in the interest of shareholders; Gou finally gets his prize, and less than half what he offered in 2012. But Japan only wins if the corporate establishment follows Sharp’s lead and also increases competitiveness.
If only Sharp hadn’t squandered the last three-plus years — and billions of dollars in market capitalization — ricocheting from one bank rescue to another, desperately trying to avoid restructuring. For years, analysts recommended an exit from display panels and the solar-power business. As Sharp over- expanded, forgot core competencies and grew complacent, it became a microcosm for what ails Japan. But just as it takes a village to raise a child, it takes an entire corporate establishment to create a Sharp.
The Innovation Network Corp. of Japan is part of the problem. Opened in 2009, this corporate contradiction in terms aims to stimulate entrepreneurship. What, then, is Japan’s strategy to raise its competitive game doing bidding on a 104 year-old name that might be better off just dying? “The key issue is to create and implement valid business models for Japan’s huge existing electronics sector, and more importantly, create a basis for the growth valid new companies — not just reviving old ones,” says Gerhard Fasol, chief executive at Eurotechnology Japan.
Calls to “let this zombie die,” Fasol says, are “not an option” for Abe’s Japan. One reason: Sharp has hundreds of products and divisions on which Japan Inc. relies. Another: the absence of safety nets in the third-biggest economy.
Nostalgia explains some of why Sharp long avoided a foreign takeover — or failure. In 2012, when Foxconn was knocking on its door, Sharp was celebrating its 100th anniversary. It opened those doors the same year Emperor Meiji, who morphed Japan from feudal state to capitalist power, died. By 1964, the year of the Tokyo Olympics, Sharp was a poster child of Japan’s technological prowess, unveiling the first transistor calculator. Thirty-three years later, it produced the first commercial camera phone, long before Steve Jobs dreamed up the smartphone. So, Sharp matters to Japan.
Its role as employer of 50,000 people matters, too. All those pink slips would be a huge blow at a time when Tokyo is struggling to raise wages. That’s part of the problem: because Japan has few conventional social nets — like unemployment insurance — companies perform that role. Japan’s zombification is the result of the government supporting banks so banks could prop up unprofitable companies. It’s troubling to see that the Innovation Network Corp. of Japan appears to be stuck in a mindset that Abenomics promised to change.
Kuroda wants to smash another mindset — a deflationary one that’s proving beyond his repertoire of tricks. The BOJ’s problem isn’t a lack of ambition or firepower, but a lifeless corporate audience that isn’t playing along.
William Pesek is executive editor of Barron’s Asia. www.barronsasia.com