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Remade in Japan
Richard Katz
02/01/2005
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Prime Minister Junichiro Koizumi has made significant changes on a few fronts. Koizumi built a consensus that economic recovery requires reform, even if there remains much disagreement on the substance of that reform. He has diminished antireform factions within the LDP. The government, under his leadership, has also taken firm steps to stabilize the nation’s large, scandal-plagued banks.
While financial stabilization is an indispensable first step toward more level economic performance, it will not, by itself, lead to a revolution in productivity. That requires much deeper change. Productivity grows fastest when new firms can easily enter an industry and supplant older, inferior firms. On this score, Japan’s performance is the worst among the major industrial nations; improvement under Koizumi has been minimal.
One of the most common measures of corporate efficiency is return on assets. For the 5,000 biggest Japanese firms, the ratio of operating profits to total assets has risen from an average of 3 percent in the 1990s to around 4 percent today. However, that is still below the 5 percent level of the 1980s and still only half of U.S. levels. Worse yet, most of the improvement is limited to those big firms of interest to investors, which employ only 10 percent of Japan’s workers and produce only 17 to 18 percent of its GDP. At the smaller firms, return on assets still lingers at its low 1990s average.
Japanese companies have failed to shed wasteful assets; instead, they prop up profits by squeezing wages. Companies are shedding full-time workers who get health and pension benefits, not to mention substantial twice-yearly bonuses, and are rapidly replacing them with part-time and temporary workers who are not entitled to benefits. As part-timers rose to 25 percent of the workforce, company expenses per worker fell by almost 10 percent. As a result, half of the entire increase in corporate operating profits from the 2002 trough came from wage cuts rather than increases in genuine efficiency.
With so many firms cutting wages, household income is fairly flat, as is consumer spending. Consequently, the economy is heavily dependent on exports. While exports account for only 12 percent of GDP, these exports—particularly exports to China—have provided almost half of all GDP growth since early 2002. Business investments oriented toward exports provide much of the rest. That lopsided pattern cannot last indefinitely.
Though many of Japan’s most troubled sectors do show hopeful signs of change, improvements may be slow in coming. For example, retail firms have reduced their debt load by 10 percent; old, inefficient “mom and pop” stores have been dropping out in droves, and some of the largest zombie retailers have either gone bankrupt, been radically downsized or have been absorbed by other firms. Nonetheless, efficiency keeps falling. Sales per employee have tumbled 16 percent since 1997, but payrolls have barely budged. Even worse, sales per square meter have plunged 25 percent since 1991—and, still, retailers keep expanding floor space. In each year from 1999 to 2002, retailers added 5 percent to total floor space. This sector is clearly not yet subject to the kind of financial discipline needed to ensure efficiency.
A more positive example comes in one of the traditionally most inefficient sectors: retail apparel. Between 1995 and 2001, output per textile employee grew 40 percent, or 5.5 percent a year. This improvement was due in part to competition forced by trade. As Japanese retailers and manufacturers began outsourcing production to China, imports of textiles and apparel doubled as a share of household consumption, to 37 percent. In response, the weakest firms dropped out. The industry shed half its labor force and eliminated 30 percent of its capacity. Meanwhile, plunging apparel prices liberated consumers’ purchasing power, allowing them to acquire cell phones and other new products.NIKKEI JASDAQ INDEX
Japanese stocks' bumby ride since their March 2003 nadir.
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In Japan, like the rest of the world’s major economies, globalization and increased competition are playing critical roles in reform. Fortunately, Japan is more open to manufactured imports and foreign direct investment (FDI) than ever before. The takeover of Long-Term Credit Bank, one of Japan’s biggest failed banks, in 1999 by a U.S. investment consortium played a catalytic roll in getting domestic banks to stop lending to zombies. Renault’s takeover of Nissan in 1999 turned a firm on the verge of bankruptcy into one with record profits, making the executive sent by Renault a folk hero throughout Japan. The success of Toys“R”Us prompted other retailers to start offering discount prices.
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