The painful restructuring of Japan, Inc.

Author and editor-in-chief of the Economist Bill Emmott advances the notion that Japan’s slow-motion Great Depression of the last fifteen years is just about over. He argues that three problems have dogged Japan for most of a generation have just about been solved: “excess corporate debt, excess capacity and excess labour.” He believes that a stealth restructuring has taken place in Japan to make the country competitive again. Emmott’s thesis is pretty persuasive. Let’s look at the three areas.

Debt: “the gigantic pile of dud corporate debt for which Japan became notorious in the late 1990s is now a lot smaller: from a peak of more than Â¥43 trillion in 2001, non-performing loans held by banks have more than halved to less than Â¥20 trillion (see chart 2). The number is now also thought to be more or less accurate, whereas until 2001 or so official figures for non-performing loans were appallingly and deliberately underestimated.”

Capacity: “the capacity-utilisation rate reported by the Ministry of Economy, Trade and Industry is back up to 1992 levels, and businessmen’s perceptions, as reported in the Bank of Japan’s regular Tankan survey, are that excess capacity has largely disappeared.”

Labor: “helped by changes to employment law, firms found flexibility in another way: by hiring part-timers and others on temporary contracts, both at far lower cost than for regular workers. In 1990 such “non-regular” workers made up 18.8% of the labour force. Earlier this year, that figure reached 30%, which in Japan’s 65m-strong labour force means roughly 20m people. Those workers are predominantly women, the young and the fairly low-skilled. Since 2003, the law has allowed contracts to be counted as temporary, and thus cheap, for up to three years. The use of contract workers remains forbidden in some sectors that employ lots of people, including health care and construction, but has gradually become permitted almost everywhere else. Canon, for example, a successful electronics firm that still firmly maintains a lifetime commitment for its “core” workers, employs fully 70% of its Japanese factory staff on such “non-regular” terms, up from 50% five years ago and 10% a decade ago, according to Fujio Mitarai, Canon’s president.”

You will recall that in 1990 and thereabouts, shock treatment — like the LBO’s of the 1980’s in the US — was recommended for Japan. This was not, however, the Japanese way: “A 15-year gradual work-off of the excesses inherited from the 1980s would not have been what most analysts would have recommended or even expected in 1990, whether they were rude foreign lecturers or polite Japanese. And it has been a more painful period than any visits limited to prosperous Tokyo would suggest. Provincial cities and rural areas have suffered greatly, with shuttered-up streets and rising levels of poverty. Suicides have soared, up more than 50% since 1990 to 34,500 in 2003.” This painful time appears near its end if Emmott’s thesis is correct.

We would note in passing that Japan’s resurgence has been aided by its strong rise in exports to China in recent years. For example, in 2004, Japan completed its sixth straight year of increased exports to China; they rose to $74 billion from $57 billion in 2003. Likewise, Japan has benefitted from low cost imports from China, making their total bilateral trade about $168 billion in 2004, and no doubt approaching $200 billion this year. East Asia co-prosperity is economically helpful to Japan. Thankfully, it is not this idea: 大東亜共栄圏.

Leave a Reply