Japan is facing a crisis of historical proportions. The dramatic fall in the value of the yen and the long-term decline in the value of the companies which make up the Nikkei stock market index are simply symptoms of far-reaching changes taking place in the way in which the country does business. In the medium term this transformation, which is just beginning, will change the whole structure of the economy and the basis on which business is done in Japan.
As the changes take place, there may be a once in a lifetime opportunity for investors and companies from the other advanced industrial countries to make inroads into an economy which has been so closed to overseas commerce.
The most obvious manifestations of the changing nature of the Japanese system of economic governance are the breakdown of the power of the traditional dominant bureaucracies, notably the Ministry of Finance, and the difficulties facing the banking system.
In the case of the civil service, the loss of authority of the Ministry of Finance as a result of corruption and nearly seven years of economic stagnation has led to the formation of alternative power structures. Members of the Diet, the Japanese Parliament, suddenly find themselves able to make the changes which their predecessors never dared venture. Thus, for instance, the Prime Minister's office is now supported by its own increasingly independent source of economic policy making, through the Economic Planning Agency, which is able to operate out of the shadow of the Ministry of Finance. In this new role it is able to look at long-term structural changes in the economy including changes in an income and corporate taxation system which is the most intrusive among the richest industrial nations.
Much has been made in the press of the problems of the Japanese banking system. These difficulties are every bit as bad as portrayed. The latest estimates put the level of bad debts in the financial system at US$560 billion, a figure equivalent to the total gross domestic product of Canada. Much of the bad debt was accumulated in the so-called 'bubble years' of 1986-91, when the Japanese banks went on a lending spree to the speculative property and construction sectors.
The collapse of city banks such as Hokkaido, broking houses like Yamaichi and industrial lenders like the Long Term Credit Bank of Japan has been the trigger for a restructuring of the financial system.
The banks have been integral parts of the keiretsu, the families of companies, which held shares in each other and offered refuge and assistance to parts of the empire which might be hurting as a result of an economic shock, like a higher oil price or a change in the value of the currency.
But that has rapidly changed. As the financial system has become unhinged, inter-company shareholdings are being dismantled and every company must stand on its own feet. This is forcing the kind of restructuring and downsizing which took place in the Anglo-Saxon economies a decade or so ago. Some of the manufacturing giants which have come to be associated with Japan's culture of engineering excellence, ranging from Nissan in the car industry to Toshiba in laptop computers, are being forced to restructure.
But even more fundamental shifts may be underway. The whole Japanese economy has been based around the 'convoy system', under which young people join a corporation direct from university and move up the company by means of seniority over the years, almost irrespective of ability. The system guaranteed jobs for life and a generous pension for almost all those who were direct participants. But it is also a system which has flattened ambition and stifled service. The qualitative differences which have made the US and European airlines successful long distance operators out of Tokyo/Narita have left Japan Airlines at a commercial disadvantage. In the case of the manufacturing behemoths which dominate Japanese industrial life, the focus on improving the product through better engineering has meant that industrial attention has been on engineering rather than high technology, innovation and creativity.
Overcoming the rigid structures built up since 1945 may be the most difficult task facing Japan's ruling elite. Dismantling the jobs for life structure could take a generation, although there are signs that some industrial companies, beset by short-term losses, are starting to contemplate downsizing and reorganisation for the first time.
However, if these changes are to become entrenched Japan will have to start thinking about the supply-side reforms which have driven growth in the Anglo-Saxon economies over most of this decade. This means changing the tax system, for both corporations and individuals, so that it is less of a burden, thus encouraging consumption, and less progressive, thus providing greater incentives. The current tax system, with its high tax take and progressivity, provides little incentive for wage earners to spend or stand out from the crowd by being more creative than the next person. Differences are not rewarded.
At present, change is being forced by market forces from the outside. The weakness of the yen has given the US the opportunity to dictate reforms in the financial and taxation systems. It also has provided an unusual opportunity for western investment in Japan. This is already being seen in the finance sector, with Travellers and the American Insurance Group (AIG) among the interlopers. Even the large manufacturing companies, like Nissan, are now ready to contemplate the possibility of major strategic partnerships with overseas enterprises.
The transition will be difficult for Japan, its corporations and its consumers. But as the country sheds its old inhibitions, under market pressure, the possibility of a more open economy which gives better opportunities for overseas businesses will present itself for the first time in decades.
Source: Airline Business
