As the business world obsesses over Sharp’s new lease on life, let’s pause for a moment and wish the maker of Aquos TVs died instead.
Japan Inc. has, as we all know, a zombie problem. Bloated, uncompetitive and complacent, Japan’s ranks of the corporate undead have expanded under Abenomics. Massive corporate welfare via a weak yen and surging equities are killing what’s left of the animal spirits Tokyo claims it’s trying to resurrect. And here, 104-year-old Sharp could easily be considered Patient Zero.
Efforts by Taiwan’s Foxconn Technology to pump life into the Osaka-based giant (via a $6 billion injection) are seen as a fresh start. Foxconn Chairman Terry Gou, it’s hoped, will cut away at dead limbs and business lines and restore a brand that once inspired Japanese pride. But count Tadashi Nakamae among those rooting for Sharp’s demise.
The economist isn’t a masochist or libertarian ideologue. But after decades in the market trenches watching a secession of governments make the same mistakes — first as Daiwa’s chief economist in the 1970s and now at his own research center — one of Japan’s most interesting economic thinkers is growing increasingly exasperated
“When I look at efforts to save Sharp, I wonder why we make the same mistakes, over and over again,” Nakamae says, bringing to mind Albert Einstein’s definition of insanity.
Letting Sharp die is actually step one of Nakamae’s three-point Japan revival plan — the others being higher short-term rates and a stronger yen.
According to studies by Nakamae International Economic Research, founded in 1986, Japan has about 10 million hard-core manufacturing workers.
Sharp is emblematic of overcapacity plaguing both the sector and the national economy as China grabs global market share. For years now, analysts urged President Kozo Takahashi and his predecessors to diversify away from the loss-plagued LCD panel business and others. Year after year, Sharp delayed restructuring, living bailout to bailout and Bank of Japan rate cut to rate cut. Now, it’s too late for Sharp, but not for Japan Inc.
Letting Sharp and similarly troubled corporate names die is a necessary part of reanimating Japan. The key, Nakamae argues, is for roughly 3 million of those 10 million workers to lose their jobs. Again, Nakamae isn’t some revolutionary gunning for Japan Inc.’s demise. He’s merely raising an uncomfortable truth: Tokyo must accept it’s too manufacturing-heavy for a wealthy, aging, immigration-averse economy. Things will only get worse as China, India and other developing upstarts rise up the innovative ladder.
Those 3 million workers could be retrained for other industries facing labor shortages, principally services. Japan’s population shrank by nearly 1 million since 2010. If the country won’t import more labor, it must ramp up efforts to create that expertise within its ranks.
Step two: The BOJ should start raising rates toward 2 percent or even 3 percent to alter incentives. Sure, that sounds like lunacy at a time when Gov. Haruhiko Kuroda is going negative on rates — and under pressure to ease much further. But, as Einstein might point out, Japan has been trying this with zero success since the late 1990s. Time for another approach? Hiking rates would precipitate the zombie purge Nakamae seeks, forcing corporate flatliners to fail, and Tokyo should let it happen. That, of course, would require new safety nets to support and train those thrown out of work.
The trouble with zero rates is businesses and households expect zero returns and act accordingly. Quantitative easing averts financial apocalypse, but it stifles economic energy, risk taking and forward planning. That, Nakamae explains, is why companies aren’t paying workers more, households are hoarding ¥10,000 bills and investors are realizing Abenomics was an elaborate head fake. The lower Kuroda pushes rates, the more he’s ensuring another Japanese lost decade.
Step three: Admitting yen devaluation does far more harm than good. Since 2012, Prime Minister Shinzo Abe has been betting it all on a virtuous cycle: a weak currency generates record profits so executives can fatten paychecks and invest in Japan’s revival. Instead, anxious executives are hoarding that $2 trillion windfall. On the one hand, this most craven form of corporate welfare dulls incentives to innovate. Sony, anyone? On the other, it ignores that many Japanese giants aren’t very Japanese anymore.
Take Honda, which in 1979 was a pioneer in opening a production base in America. As deflation deepened and the population aged, Nissan, Panasonic, Toyota and others increasingly made products where they’re sold. Because Japan Inc.’s crown jewels make most revenues overseas, Abenomics is targeting the wrong companies. Rather than listed, multinational names, Tokyo should be aiding genuinely Japan-based ones that derive profits domestically.
A rising currency would serve Japan well in global energy markets. No country, arguably, should’ve benefited more from the collapse in oil prices than Japan; the yen devaluation ameliorated it. That might be fine if Japan Inc. were using the window afforded by currency shifts since 2012 to good effect. But Sharp received yet another bank bailout that year, only to lose $8 billion over the next two years as it fought Foxconn’s acquisition attempts.
Now that Gou appears to be fulfilling his quest for a Japan Inc. icon, what does Sharp have to offer? It’s hard to find a space in which the company can thrive. Display panels, smartphones and robots are as rabidly competitive as they come, while Sharp has rarely been prized for nimbleness. Ironically, it rose to fame a century ago making pencil sharpeners — hence the name. Now it’s emblematic of how Japan is missing the point about the need to restructure and relocate the edge that once propelled it to global success.
Japan likes its change to be incremental, so all of these prescriptions are, admittedly, a reach. But Japan needs a number of big reform bangs, not the tiny pops Abenomics is serving up. Sharp’s death could’ve been the first step back to economic life. Sounds crazy? Einstein may also beg to differ.
William Pesek, executive editor of Barron’s Asia, writes on Asian economics, markets and politics. www.barronsasia.com