The Hindu Business Line : Japan awakening to new realities

RECOGNISING the country's archetypal resoluteness, creativity and vitality, John Nathan's Japan Unbound makes a convincing case that Japan, now a showpiece of nationalist pride "has a long history of discovery in the darkest days... a source of renewal".

It was difficult for the world to believe that the Asian titan, the scene of the economic miracle of the 1970s and the 1980s, was caught in a steep slowdown. Invincible till just the other day, Japan Inc. suddenly seemed to have developed chinks. It was the late 1980s when Japan invested $650 billion abroad, that such celebrated institutions as Columbia Studios, Pebble Beach, Golf Course, and Rockefeller Centre in New York slipped into Japanese hands.

In 1990, Japan held a position of strength: Twelve of the world's 15 largest financial institutions were Japanese, as were six of the top ten industrial firms. After a decade of no growth, none of the world's top 15 banks was Japanese, and only one of the 10 biggest industrial firms, Toyota, was.

Lester Thurow's diagnosis is that "Japan is a strong economy embedded in a weak economic structure". With the highest ratio of public debt-to-GDP — as high as 160 per cent — Japan averaged annual growth of just about 1 per cent, the worst 10-year performance for any big economy in the past half-century. Characterised by falling exports, collapsing corporate profits, a slump in manufacturing, and an infirm stock market, Japan showed up as a land of sick banks and low productivity.

According to economists Jeffrey Sachs and Paul Krugman, Japan's slow growth over the past decade is not because of low productivity and, hence, insufficient supply, but a result of inadequate demand. The malady has to be seen in the context of history.

Tracing their origins to the Samurai of feudal Japan, the bureaucrats, descended through amakudari — implying descent from heaven — settled into comfortable sinecures in the private sector or special corporations that had mushroomed after the Second World War. The Mandarins, post-retirement in their mid-50s, could serve on public corporations well into their eighties, and garner millions. The government spent huge amounts on these special corporations — an equivalent of $41 billion annually — in subsidies just to keep them afloat.

Japan's financial sector is has been weakened: there are too many banks, chronically weak, and burdened with duff loans, reported to be saddled with 37 trillion yen, about 7 per cent of its GDP. Goldman Sachs puts the debt of all companies either bust or potentially bust at over 170 trillion yen in 2000. Weak companies and wobbly banks clung to one another, creating zombies that were kept on life support system by the banking system.

Most of the zombies were in the services sector, particularly construction, property, and wholesale and retail distribution. Japanese services firms too are inexplicable laggards: as a result, Japan sustains high domestic transport costs; uncompetitive energy and telecommunication services; rigid legal accounting and other professional services; besides healthcare mired in low levels of productivity.

There has also been rampant wastage: Japan is sometimes given the sobriquet of a construction state: the country has several airports which no one uses, bridges that carry no traffic, and roads that go nowhere. The Economist (April 20, 2002) inferred that those who benefit from all this are politicians, not just in Tokyo but in local governments as well, besides the building companies and some individuals.

Wages in Japan being much higher, its manufacturing has been shifting overseas, mostly to China. Sometimes, cheap labour is not the prime motive for moving abroad: car companies as well as construction machinery makers have set up overseas to be able to respond better to customer demand.

A star of Japan's retail industry, Uniglo, a chain of garment stores, now buys its supplies from low-cost China. Some of the strong Japanese companies moved offshore to produce their goods and ship them back to Japan at much lower prices. About 15 per cent of imports from China constituted "reverse imports", Japanese subsidiaries sending China-made PCs, DVD players, and son on, back home.

As Japanese employers have trouble finding labourers to take factory jobs, companies pull out of sunset industries and shift low-end manufacturing offshore. Low-cost mass production remains Japan's weak spot.

Many manufacturers have retained core technologies and highly specialised niche segments such as mould-making, for car components, mobile phones, ball-point pens, and so on. It is increasingly realised that the focus should be on high value-added production, and on what has been Japan's mainstay — "products whose functions require many components to be designed in careful detail and mutually adjusted for optimal performance".

Steady restructuring has helped leading firms such as Toyota and Canon develop integrated manufacturing systems far more sophisticated and complex than their rivals.

Conservative as Japan may be, it is not a stationary society. In fact, almost every aspect of life has been changing during the last decade. The Japanese downturn started in 1993 and persisted for a decade. Certain global trends provided the benign effect: an upswing for intra-Asia trade, for example. In 2003, Japan's two-way trade with China increased more than 30 per cent, to $132.4 billion. In 2003, again, Japanese exports to South-East Asia shot up 10 per cent, to $60 billion. Japan turned in its best performance in 15 years in the final quarter of 2003, growing at an annualised 7 per cent. Profits were up, exports surged, capital spending rose, and competition from China grew.

As Japanese companies regroup in the face of competition from abroad, the advantages of outsourcing are well recognised. Canon outsources over 40 per cent of its worldwide production overseas. Japan's electronic industry itself is characterised by a combination of digital diffusion and Chinese expansion.

Japan's established suppliers command large global market shares in specialised segments, ceramics and other fine materials for semi-conductors, tiny motors for hard drives and other digital equipment, a range of sophisticated machines.

Fujistu, Hitachi and Plasma Display, and Matsushita Electric Industrial together control more than 40 per cent of the global market for plasma-display screens while Sony, Canon, Olympus have garnered half the global market for digital cameras. Japanese machine tool companies are leaders in the specialised machinery used to make microchips.

Restructuring of Japanese behemoths has progressed: Matsushita streamlined several of its plants, reduced the workforce by one-fifth over 2000-2003, and invested about $5.5 billion in R&D. Japan's $4.7-trillion economy looked increasingly solid early last year.

In the 1990s, Japan relied on two factors to keep the engine going: government spending and exports. Faced with a huge budgetary deficit, exports, especially to China, are still a big driver of growth. Now the recovery is also driven by domestic consumption.

Competitive forces have stirred up the somnolent world of distribution. Five of the world's ten biggest retailing mergers in 2003 occurred in Japan. Its $1.3 trillion retail market, the world's second largest — has been quietly changing; the impact of Wal-Mart on the indigenous Seiyu is clearly discernible in terms of shedding flab, improving efficiency through a new supply chain paradigm, and positioning new suppliers who help cut costs.

Another new trend is part-time jobs, in a country known for life-long employment, enabling companies to gain operating flexibility. In 2003 the number of temporary employees went up almost 22 per cent, to 2.13 million workers, or 3.5 per cent of the workforce. Again, the level of non-performing loans in major Japanese banks have been trimmed by almost half in two years 2002-2003, to $124 billion, or about 5 per cent of their loans.

In 2003, Japanese exports to China surged a record 44 per cent, to $60 billion. China is already Japan's top trading partner, and has overtaken the US as Japan's biggest export market.

As for fiscal discipline, Mr Junichiro Koizumi was the first Japanese Prime Minister to take control of the budget; he has dissolved the Parliament and called for fresh elections. Among his targets were the 163 "special corporations" — state-owned businesses, encompassing every activity from home loans to oil exploration.

The Japanese Premier, like the British Prime Minister, Mrs Margaret Thatcher, faced the challenge of turning around his nation's economy.

He major tasks were three: Clearing up the mess in the financial sector, reining in the huge budget deficit; and deregulating the economy. He sought to promote M&As, and privatise the gargantuan Japan Post, splitting it into separate entities for mail, banking, insurance, and property management. Some high-profile M&As have already infused capital into local economies and generated jobs.Meanwhile, politically, an uneasy calm pervades the neighbourhood, particularly Korea and China. Koreans burn Japanese flags over the sovereignty issue in respect of two tiny islands occupied by Japan.

But a mature Japan, duly conscious of the gigantic potential unleashed in the region, is now busy forging new alliances and partnerships, with the confidence that through strong economic partnership will flow great benefits to the region.

(The author is a former Managing Director, Concor.)

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