Japan's Alternative Economics
Sanford Jacoby (University of California at Los Angles, USA)
© Copyright: Sanford Jacoby 2006
Japan is back. Its economy has been growing faster than at any time since the late 1980s. Consumer spending is strong; employment conditions are good. Toyota recently announced a plan to hire more than three thousand new employees, the first time in fifteen years that it has hired that many workers. Toyota is poised to overtake General Motors as the world’s largest automotive manufacturer. Not only manufacturers but also financial and service companies are booming.
Although Japan’s recovery started four years ago, there are still many outside Japan who have not acknowledged it. One reason might be that we prefer hearing about Japan’s misfortunes, a case of schadenfreude. Another reason is that Japan’s recovery is controversial and seemingly a chimera because it goes against conventional wisdom.
From 1990 to 2001, when Japan was in the doldrums, pundits attributed Japan’s problems to its distinctive form of capitalism. Markets were said to be excessively regulated and protected by government; the business community was faulted for its lack of entrepreneurial spirit; and corporations were criticized for being averse to downsizing and insufficiently focused on shareholder value. With the American economy riding high during those years, it seemed obvious to the pundits what Japan ought to do: become more like the Americans. Indeed, the prescriptions offered for reviving the Japanese economy contained precisely the same ingredients that, allegedly, had restored the U.S. economy to health in the 1990s: deregulation, new ventures, and a focus on shareholder value.
Some Japanese took the message to heart, despite the hubris of the messengers. The Koizumi government and its predecessors modestly deregulated and privatized industries such as telecommunications, transportation, energy and finance. But Japan’s approach to deregulation was different from America’s: it was more akin to what political scientist Steven Vogel terms “re-regulation,” that is, it maintained a role for government to stabilize new market configurations.
Private and public efforts were made to spur the creation of new high-tech businesses and to launch a venture capital market in Japan. Newspaper articles lionized young entrepreneurs, like Masayoshi Son of Softbank and Takefumi Horie of Livedoor. In other ways, too, the door was opened to a more rugged style of capitalism in Japan. For years, it was considered socially inappropriate for Japanese companies to engage in hostile takeovers. But in the late 1990s, corporate raiders appeared on the scene, such as Yoshiaki Murakami, who several times acquired stock in underperforming companies in efforts to get more cash returned to shareholders.
Finally, the government revamped commercial law to permit -- but not require -- American-style corporate governance, which puts shareholders at the center of the corporation. New rules allowed companies to repurchase shares, to issue stock options, and to adopt a U.S.-style system of independent corporate directors.
Many large Japanese corporations were reluctant to change, however. They placed the blame for Japan's slow growth on policy mistakes by government, such as sluggish resolution of Japan’s banking mess and a policy of excessive monetary stringency pursued by the Bank of Japan. Until recently, these doubts were expressed quietly. But dissenting voices grew louder after 2001 when the U.S. economy was hit by corporate scandals (Enron et al.) and the collapse of its own bubble economy. It was around this time, too, that the Japanese economy finally began to recover.
Business leaders like Fujio Mitarai of Canon and Hiroshi Okuda of Toyota refuse to accept the idea that there is one best way--the American way-- of organizing an economy. Instead, companies like Canon and Toyota continue to staff corporate boards with insiders, pay executives modestly, and minimize employee layoffs. As Mitarai says, “The advantage of lifetime employment is that employees absorb the the company’s culture through their careers. As a result, team spirit grows among them--a willingness to protect the corporate brand and stick together to pull through crises. I believe that such an employment practice conforms to Japanese culture and is our core competency to help survive global competition.”
Mitarai’s point is that Canon derives an advantage from the difference between it and its global competitors--that is, from the distinctiveness (the “brand”) of its products and from the underlying business structure that helps to produce them. While a measure of skepticism is warranted here, so is recognition that big companies like Canon and Toyota are sensitive to social norms and seek to make the best of them. Large Japanese companies view themselves more as ongoing communities than as the property of shareholders. The community includes shareholders, to be sure, but it also comprises employees, customers, suppliers, and creditors. Rather than maximize shareholder value, which is the American mantra, managers seek to balance the community’s interests to foster long-term corporate success.
It is an imperfect corporate model. During the 1990s, when growth was slow, large Japanese companies adjusted to slack demand by reducing new hires, which, as in Europe, shifted the burden of unemployment to the young. Nor is it a model that encourages high levels of entrepreneurial risk taking. But Japanese firms have instead focused on products and industries where they can make the kind of incremental improvements that are facilitated by highly-trained employees and a long-term perspective.
Also, instead of relying on venture capital to fund new firms, Japanese corporations reinvest their profits in corporate spinoffs--essentially new firms spawned by old ones--and in research. According to the OECD, Japan in 2005 had the highest R&D intensity (as a percent of GDP) of all advanced industrial nations. While it ranked second to the U.S. in the number of triadic (EU, US, and Japanese) patents, Japan’s population is less than half of America’s. Its inventive productivity would easily exceed that of the U.S. or the EU if the comparison were based on number of inventions per capita. While Japan has not produced a viable challenge to Ipod, few realize that 70 percent of the Ipod’s semiconductor material comes from Japan. Japan does not have a prominent cell phone brand, but cell phones from Finland, the United States, and South Korea are packed with Japanese components. Meanwhile, Silicon Valley is still struggling to recover from its 2001 implosion.
It’s true that some Japanese companies have sought to emulate American practices. The bellwether in this group is Sony, whose recent performance trails that of traditional companies like Canon and Toyota. This is not good advertising for the shareholder-value model in Japan. Similarly, the arrest this January of Takefumi Horie for alleged financial improprieties has hurt those who portrayed Horie as the kind of brash, aggressive entrepreneur that was needed to restore vitality to Japan. One of Horie’s main promoters was Prime Minister Koizumi, whose reputation has been tarnished along with Horie’s.
Japan today is not the same as it was in 1990. Its economy is less regulated and more open than before. Yet its core economic institutions--both in business and in government--have changed only modestly. The reluctance to embrace change is not only found in places of privilege, such as corporate boardrooms and government offices. The average Japanese citizen is wary of reforms that will lead to higher levels of risk and inequality. Japan prides itself on its social cohesion which, although weaker than in the immediate postwar decades, is still stronger than what is found in the Anglo-American world, as evidenced by measures of income inequality.
If institutional change is not responsible for Japan’s recovery, what is? An important factor is China, which has surpassed the United State as Japan’s biggest trading partner. There is, however, more to the recovery than China. Japanese companies have been investing throughout Asia, including major new ties with India. Other factors are rising consumer confidence and investor optimism (what Keynes once called "animal spirits") that feed on themselves and generate growth. Also important are government-sponsored bank mergers, which have brought the financial sector back to health, and a looser monetary policy under the guidance of the Bank of Japan's governor, Toshihiko Fukui, who until recently pursued a zero-interest policy.
What are the lessons to be learned here? One is that pundits tend to underestimate the contribution to growth of appropriate macroeconomic policies, whether fiscal policy in the United States in the 1990s or monetary policy in Japan today. Conversely, there has been a misguided tendency in recent years to seek an optimal set of “micro” economic institutions to foster economic growth. Because the U.S. was the fastest-growing economy in the 1990s, the unfortunate inference was made that its approach to capitalism was the single-best solution to the problems globalization posed for advanced industrial economies. Hopefully we are now past the point when one or another model--whether Japanese, European or American-- is touted as the royal road. Instead, we should accept the fact that nations can and do pursue diverse paths to prosperity in today’s global economy.