The Japanese economy is said to have hit bottom in October 1993. Since then, there has been some recovery in the manufacturing sector, reflecting strong overseas demand and the modest growth of domestic consumption. Plant and equipment investment, which has shown net decreases in the past three years, is expected to show modest growth of 2.9 percent in 1995. In comparison with manufacturing, recovery in the tertiary sector, such as services and commerce, is lagging behind, both in sales and profit.
While the flow of goods and services is slowly recovering, the economy is beset with the serious effects of asset deflation. Stock prices plunged from 39,000 yen in November 1989 and are now hovering around the 16,000 yen level. Real estate prices have fallen for four consecutive years, and are still falling. Banks are said to have huge amounts of non-performing assets, many of them collateralized by land that lost its value.
Despite the optimistic view of the government, forecasting 2.8 percent growth for 1995, many private economic institutes expect a real growth of around 1.3 percent for 1995. One and a half years after the business cycle bottomed out in October 1993, asset deflation has not stopped, and is slowing the recovery of the economy to a snail's pace.
Considering the fact that the average length of the postwar Japanese business upswing is 26 months, people are now beginning to wonder whether this is a real recovery or something that runs out of steam before anybody feels a real robust recovery of their business.
Reflecting such gloomy economic realities, the Japanese business community is now in the midst of the painful process of re-evaluating corporate capitalism and its management system. Having experienced the bursting of the ``bubble economy,'' having got its fingers burned by the collapse of stock and land prices, and experiencing the endless escalation of the yen, the so-called Japanese management system, which had supported postwar growth, and about which we Japanese became very proud, is now in question. People are asking if this system may have lost its viability under the present economic conditions, and is no longer suitable for the future.
This re-evaluation is taking place in roughly four areas.
First, is the employment relationship. It is felt that lifetime employment, the seniority system, automatic salary raises, intracompany unions, etc., can no longer be sustained. In a period of low growth, companies cannot take care of their employees for life and the system has to be changed to a more fluid market-based employment relationship. This is the prevailing feeling now.
Second, is the fear of the hollowing-out of Japanese industry. If the yen continues to appreciate, automobiles, electronics, the so-called cream of Japanese industry, will have to move overseas in search of cheaper labor. And what's left in Japan will be the tertiary sector suffering from low-level productivity.
Third, is dissatisfaction with the high cost, high price structure of the Japanese economy. It is said that the distribution system in Japan is complicated and multilayered, and heavily controlled by various government regulations. Even cheap imports become expensive by the time they reach consumers. Hence the Japanese do not enjoy the benefits of the strong yen, except perhaps when they are enjoying a vacation in beautiful Canada. There is a strong feeling that the Japanese are penalized by the very success achieved by their hard work, and there is an outcry for the removal of all these government regulations, which tended to preserve inefficiencies.
Fourth, is the call for realignment of the relationship among companies. As you are aware, Japanese companies are formed into various groups called keiretsu. There are vertical keiretsu and horizontal keiretsu. Horizontal keiretsu is a business grouping like Mitsui and Mitsubishi, consisting of sets of companies in such fields as banking, trading, manufacturing and mining. Vertical keiretsu is something that you see under Toyota. Toyota has a few hundreds primary subcontractors, several hundreds secondary contractors and a few thousand tertiary subcontractors. There is this famous custom of mochiai, the mutual holding of shares between companies and between companies and banks. Now there is a strong feeling that such rigid group relationships must be changed into more fluid relationships, reflecting market conditions. And mochiai shareholding cannot be sustained unless a continued rise in share prices is expected. Because, after all, even in the present depressed climate of the Tokyo Stock Exchange, investment yield in the TSE is about 1 percent at best. So companies cannot afford to invest in stocks in Japan, unless there is expectation of a continued price rise.
These are the four areas where this serious reevaluation is taking place. Japanese businesspeople and bureaucrats alike have lost confidence in their established system of corporate capitalism. This change from excessive self-confidence, which had prevailed in the late 1980s when the Japanese were buying Rockefeller Center and many hotels in Waikiki Beach, to very severe self-criticism, is indeed very dramatic.
Why is such a sudden loss of confidence and change of attitude taking place now? I think there are two underlying causes.
One is the realization that the Japanese economy reached a point of maturity. Up until the 1970s, the Japanese economy used to grow at 10 percent per annum. In the 1980s, it grew at 5 percent per annum and in the 1990s, we are struggling to achieve an average growth rate of less than 3 percent. It is felt that the high growth system must be modified to fit an era of low growth.
Another factor is the globalization of the economic system. It is no longer possible to keep the Japanese economy isolated from the rest of the world. It is no longer possible to build a fence high enough to keep out the global movement of goods, money and people. The Japanese system must be aligned with the worldwide system.
I wish to stop here for a moment to examine the central problem in the Japanese economy that has given rise to all these re-evaluations and re-examinations. Everything points to the fact that the Japanese economy suffers from the problem of dual structure. On the one hand, you have the automobile industry and electronics, such as Toyota and Sony, which have grown under global competition. They have relentlessly rationalized their factories and improved operations, with the result that they probably enjoy the highest level of productivity in the world. They continue to improve operations under the everlasting appreciation of the yen. They were very alarmed when the yen started to appreciate from 250 to the dollar in 1985, and they struggled to stay competitive by rationalizing and cost-cutting. Today, at 90 yen, or even 86 yen to the dollar, many of them are still competitive. And Japan is still earning $120 billion of trade surplus. And that drives the yen still further. While I have great admiration for these rationalization efforts by these industries, from the standpoint of the national economy, this is indeed a vicious circle.
On the other hand, there is a huge economic sector in Japan that, under government protection, has never been exposed to international competition, and remained at a very low productivity level. A typical example is agriculture. The cost of rice production in Japan is said to be several times higher than the world market price. There are hundreds of thousands of small companies in manufacturing in non-exporting industries, and in retail, wholesale and service industries. Since the domestic price level tends to be determined by the productivity of these domestic-oriented enterprises, the purchasing power of the yen is not 90 to the dollar as indicated by international markets, but much weaker. Various studies have been made in so-called PPP _ purchasing power parity _ and it is expected that on PPP basis, the yen may be 150 to the dollar, or 180, or even 200. By making use of some tables produced by the World Bank and Mackenzie, I wish to demonstrate to you the magnitude of this dual structure problem.
Table I by the World Bank shows income comparison in 1993 in dollars. At the end of 1993, the market rate between the Japanese yen and dollar was 113, and on that basis Japan had per-capita GNP of $31,000, as against $25,000 for the United States. But on a PPP basis, in the second column, Japan's per-capita GNP was $21,000, meaning that on a PPP basis, $1 was 1.5 times the parity in the exchange market. And it is indeed noteworthy that on this basis Japan's per-capita GNP is much lower than it was in the U.S., and was at about the same level as Singapore and Hong Kong.
Table II is a 1990 case study by Mackenzie to compare the productivity level and employment share of nine industries in Japan with their U.S. counterparts. The horizontal line is the United States as 100. You'll notice that the steel industry shown on the extreme left has a very high level of productivity in Japan, 145 against 100 of the U.S., and automotive parts has a productivity of 124 as against 100 of the U.S., and so on. (Metalworking, car manufacturing, consumer electronics.) Then in computers, Japanese productivity is slightly below that of the U.S. with 95, and soap and detergent was 94, and beer 69. But my point here is that we have a huge sector like the food industry that is suffering from low-level productivity; about one-third of that of the U.S. An important fact here is that this sector is a very large employer in Japan, so many people are working in an industry with a very low-level of productivity, thus displaying the seriousness of the problem of dual economic structure.
| Country | GNP/Cap. | GNP/Cap. PPP* |
|---|---|---|
| Japan | 31,450 | 21,090 |
| Singapore | 19,310 | 20,470 |
| Hong Kong | 17,860 | 21,670 |
| Taiwan ** | 11,220 | 16,500 |
| South Korea | 7,670 | 9,810 |
| Malaysia | 3,160 | 8,630 |
| Thailand | 2,040 | 6,390 |
| Philippines | 830 | 2,660 |
| Indonesia | 730 | 3,140 |
| China | 490 | 2,120 |
| In comparison: | ||
| Switzerland | 36,410 | 23,620 |
| USA | 24,750 | 24,750 |
| UK | 17,970 | 17,750 |
| India | 290 | 1,250 |
Some weeks ago I was invited to make a presentation on NHK television, and I spoke about white-collar productivity. It is my belief that the gap between the productivity of blue-collar jobs in a very highly competitive export-oriented industry, and white-collar jobs in offices or service shops, is just as great as the productivity gap between export and domestic industries. Even the most competitive Japanese companies, which achieved the highest level of productivity on the factory floor, are burdened with huge and very unproductive central offices and service organizations.
I talked about the culture shock that I experienced when I joined an American company by talking about voice mail and electronic mail. Voice mail is an intracompany telephone system that enables you to send a message to anybody in the organization, whether they are in New York, London or Hong Kong. Theoretically, this system enables a first-year clerk to leave a message for the president, if he feels that the piece of information he has is useful to the president.
But what would happen in a multilayered, seniority-oriented Japanese organization if you introduced voice mail? A first-year clerk may want to send a message to the president, but if he is prudent, he might wonder what his subsection chief, the section chief, the assistant manager of the department, and so on, would think about him if he short-circuited them by sending a message to the president? And for that reason, I don't think voice mail will really work in a Japanese corporation, at least in the prevailing conditions and atmosphere. I think voice mail works only in a very flattened and simplified organization without hierarchy, where it helps speed up communication and the decision-making process.
We Japanese are all impressed by the dramatic recovery of great American companies through radical restructuring and re-engineering since 1991. It is my feeling that the net increase of productivity was even greater in offices and white-collar jobs than in factories. Japan will have a long way to go in improving white-collar productivity. This change will have a profound effect upon Japanese corporate culture and more specifically, corporate governance and employment practices.
Let us first consider for a moment, corporate governance. Americans have a very clear idea that shareholders are the single most important stakeholders, and, therefore, companies must be managed to realize the greatest value for the shareholders. In Japan, partly because of mutual shareholding, which tends to neutralize the power of shareholders, because this is a kind of ``I own you, you own me relationship,'' and partly because of lifetime employment, shareholders have never enjoyed a predominant position in corporate governance. Corporations tended to be managed by professional managers selected from senior employees in a rather self-perpetuating manner. The question is very often asked in Japan, who is the more important stakeholder, the shareholder who buys today and sells tomorrow, or an employee who dedicates his entire working life to a company? With the continuing stagnation of the TSE and growing demand from corporate stockholders, however, Japanese management is now finally coming to the realization that it must give more attention to shareholders' rights.
Second, let us consider the employment relationship. Earlier, I indicated to you that lifetime employment and the seniority system is now being re-examined. Japanese employees call their company uchi, which means ``our house'' or ``our home.'' Japanese workers made all the efforts to make their companies nice places to live. The management also cooperated by creating more positions and more layers of management in order to accommodate the need of face-saving for older employees. To them, corporations are gemeinschaft rather than gesellschaft, as Germans call them.
Now, unlike in the high growth era, many Japanese companies are not expanding their workforce and organization. Companies are finding it difficult to find proper positions for all their employees, let alone keep them on the payroll. There is a famous word, madogiwazoku, or window-side employees, meaning older employees who have no work, but who are kept on the payroll and, therefore, spend their time looking out of a window.
There is a strong feeling that lifetime employment is depriving Japanese companies of their ability to restructure and re-engineer. Take, for instance, the Japanese banking system. You will all recall that in the 1980s the American banking system was in trouble, but banks sold off their bad loans, closed branches and laid off employees, and, in a few years, they came back as very healthy organizations. Currently, Japanese banks are plagued by large amounts of bad loans. Just because they are unable to reduce the workforce, however, they cannot resort to any surgical operation, but must depend upon internal medicine. Therefore, Japanese banks will need a fairly long time to recover.
In my opinion, the present system of lifetime employment will soon be modified or eroded. Restructuring through workforce reduction is on every CEO's mind in Japan, but nobody wants to be the first to make a move.
All through the postwar years, we Japanese have been accustomed to comparing Japan with the U.S. When Japanese spoke about the outside world, we always had the U.S. in mind. We always tried to decide the position of Japan in its relationship to the U.S. More recently, however, it is my strong feeling that, in considering systemic differences in countries, we should not only compare Japan with the U.S., but should also include other areas, particularly Europe.
Consider, for instance, the comparison of capitalistic systems of Japan with other major economies. If you place the American market economy on the extreme right of the spectrum, you will probably agree that Japanese corporate capitalism should be on the extreme left. Americans have the firm belief that the market is the best provider of efficiency, while the Japanese system is based more on a consensus among management, labor and the government. In this spectrum, Britain is probably very close to the U.S., on the right-hand side. But where is continental Europe? In France and Italy, you have a mixed economy, where the government owns and controls large banks and corporations, and where bureaucrats parachute into chairmanships of all leading companies, although with a very strong thrust for privatization recently. In Germany, you see large banks owning shares in leading companies, and bankers sitting on their Aussichtrat, or the supervisory board. Probably you'd want to place the continental European system on the left-hand side of the spectrum, very close to Japan.
In the U.S., there is a group called revisionists who maintain that Japan is very eccentric and very special, and, therefore, must be dealt with in a very special way. My point, however, is that in this worldwide spectrum, including continental Europe, Japan is not that special, at least not Japan alone. Even more, if you include the system of the newly industrializing economies in Asia, you will probably agree with my argument that Japan is not that special.
Broadly speaking, the changes that are taking place in Japan are bringing the Japanese economy closer to a market-based or market-driven economy. In my illustration of the world spectrum, this means that the Japanese economy moves a step toward the U.S. This will involve more respect for shareholders' rights, changing lifetime employment into a more fluid and purpose-oriented employment relationship, and making corporate hierarchies simpler and flatter. However, my emphasis here is that the effort to change the Japanese system should not be dominated by a single-minded approach to copy the American system, but rather be pursued with a well-balanced global perspective, including Europe and Asia. On the national economic level, this means the removal of government regulations and the creation of a more open and transparent market. Keidanren is making an all-out effort to remove half of all existing regulations in five years. Deregulation will be a difficult and painful process of sorting out the intricate vested interests of different ministries, industries and companies. But, for the first time in history, there is a national consensus that deregulation is the No. 1 priority.
I said earlier that the Japanese are concerned about the hollowing-out of the economy. The manufacturing industry is moving to Southeast Asia and investing more abroad than in Japan. But as a matter of fact, the ratio of Japanese manufacturing activities abroad is only 6.3 percent of the total. In the case of the U.S., it is 30 percent; in the case of Germany, 20 percent. The difficulty or problem for Japan, is not that Japanese companies are moving abroad, but rather that foreign companies are not investing in Japan. The ratio of foreign direct investment by Japanese industry to the ratio of foreign industry investing directly in Japan is 15:1. That is to say, if Japanese invest $15 million abroad, foreign companies invest only $1 million in Japan. In the case of the U.S., this balance is roughly 1:1, and in the case of Germany, the balance is roughly 2.5:1.
To sum up, our problem is that the Japanese market is an extremely difficult one for newcomers to enter, be it Japanese or foreigner. Our task is to transform it into a more open and more accessible market. Having said that, I am not advocating an outright change to an American practice of corporate raids and hiring and firing. We still attach great value to the traditional Japanese management style of long-term perspective and stable employment. We believe that only with stable employment were Japanese companies able to accumulate technology and skill, and attain the highest level of quality control, thereby achieving their present global positions.
We are now going through an agonizing process of re-evaluation to create a new Japanese system, a system that would retain certain important values from our traditional system and still be able to withstand the waves of globalization that are engulfing Japan.
Ladies and gentlemen, thank you very much for your attention.
