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No. 20 — May 21, 1999

Feature Article

TRADING PLACES — AGAIN: JAPAN CONFRONTS CORPORATE RESTRUCTURING by Arthur J. Alexander

Summary

Japanese businesses are restructuring at a faster pace than in past economic downturns. Mergers and acquisitions are occurring in numbers unprecedented for Japan, while the frequency and the scale of bankruptcies also have hit new highs. The unemployment rate is at a postwar peak, with more than 1 million jobs lost in the last 18 months alone. Companies are shedding cross-held shares, and the role of private fixed nonresidential investment in the economy has shrank to a level not seen since the beginning of the economic miracle in 1956. Major corporations are shutting down subsidiaries, closing operations and selling off unprofitable businesses.

The liberalization of Japan's financial markets and deregulation in other areas are behind much of today's corporate restructuring. Additional driving forces are the disappearance of the explicit government guarantee that no bank would fail and the end of the implicit commitment that no major bank borrower or creditor would collapse. Before, the financial community essentially was insured against serious loss; consequently, expected profitability was not a great concern. In that environment, loans were made and money was borrowed with little regard to the rate of return on the invested capital.

The government guarantees that insulated corporate Japan from the realities of the bottom line no longer exist. Now, any business seeking to raise money faces a more stringent examination of the profitability of the capital's use.

Deregulation in retailing, transportation, telecommunications and other areas also is creating new competition for previously protected firms. Today, they must consider the moneymaking potential of their activities. Meanwhile, American and European businesses have become bigger players in domestic markets, especially in finance and retailing. Their inroads have reinforced competitive pressures.

The many agents of change notwithstanding, the continuing regulation of the economy along with widely held norms that favor lifetime employment practices by big companies, the traditional disdain of mergers, acquisitions and bankruptcy, and the reluctance to disrupt longtime business relations are slowing the adjustment process. While restructuring at an incremental pace may soften the pain, this approach most likely will prolong the negative fallout. Nonetheless, Japan's economy has embarked on an unprecedented transition. Unless politicians derail the process, the complexion of the world's second-largest economy will be very different in coming years from what became familiar in the postwar era.

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Weekly Review

JAPAN'S ECONOMIC INDICATORS SEND MIXED SIGNALS by Douglas Ostrom

Japan's lengthy recession at least has spawned creative descriptions of its economic condition. This spring, a new word has gained currency: shoko (remission). Recently released statistics reveal how apt the expression is in terms of conveying both hope as well as fear that current signs of improvement may not prove lasting. In fact, even though some recent indicators point upward, not a few analysts now believe that a genuine recovery will be a matter of years. Such a prognosis, in turn, implies a strategy for politicians. They can afford to wait months to face the electorate but not much longer.

 

NEW LAW PROVIDES AX TO FELL BUREAUCRACY'S BAMBOO VEIL by Jon Choy

Information is power, and it generally is agreed that a tradition of secrecy is one reason why Japanese bureaucrats have wielded far more clout than their U.S. counterparts. Government officials are under no compulsion to disclose their internal debates; nor must they explain their rationale for policy and regulatory decisions. The vagueness of Japanese laws and regulations also gives bureaucrats great latitude in terms of interpretation and implementation. Moreover, the conventional respect for authority in Japan has shielded bureaucratic activity from public scrutiny — until now.

 

OBUCHI SEEKS TO BRING NEW KOMEITO INTO GOVERNING ALLIANCE by Barbara Wanner

"It was just a matter of time," said pundits after Prime Minister Keizo Obuchi remarked May 11 that he intended to bring the opposition New Komeito into the Liberal Democratic Party-Liberal Party governing alliance. The LDP and the New Komeito never have been very far apart on domestic issues and, over the years, often have collaborated to gain approval of important legislation. In fact, the second-largest opposition party lined up with the LDP last fall to pass bank reform and recapitalization plans and again in April to win lower house approval of bills to implement the 1997 revised U.S.-Japan defense operational guidelines (see JEI Report No. 45A, December 4, 1998, and No. 17B, April 30, 1999).

 

APEC FINANCE MINISTERS DISCUSS ECONOMIC REFORMS; JAPAN OFFERS CREDIT GUARANTEES by Marc Castellano

Finance ministers from the 21 member countries of the Asia Pacific Economic Cooperation forum met May 15 and May 16 to discuss economic reform and ways to strengthen East Asia's recovery from the nearly two-year-old economic crisis that felled the region. Tokyo's plan to guarantee Asian sovereign bonds shared the spotlight with these subjects and the ongoing controversy over the regulation of short-term international capital flows at the gathering on the Malaysian island of Langkawi. The meeting also provided the first major opportunity for Secretary of the Treasury-designate Lawrence Summers — chosen May 12 to replace retiring Secretary Robert Rubin in early July — to reassure Asia and the global community that a competent decisionmaker, advancing the same policies as his predecessor, would remain at Treasury's helm.

 

NOTES

Finance Minister Kiichi Miyazawa reaffirmed Japan's commitment to include Vietnam in the Miyazawa Plan, the framework Tokyo established last fall to facilitate the recovery of reeling East Asian economies, during a May 15 speech at the meeting of Asia Pacific Economic Cooperation forum finance ministers in Malaysia (see previous article). He also discussed the terms of the package with Vietnamese Prime Minister Phan Van Khai during a May 16 stopover in Hanoi on his way back to Tokyo.

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