Japanese Business Restructures, American-Style
A new and different sun may be rising. The Japan that President Clinton visits this week is poised for an economic recovery after five years of recession and for a technology-led transformation of business similar to that experienced by U.S. companies in recent years.
That means the next five years could see a reinvigorated Japanese economy on the world scene and Japanese companies making a reentry into global competition, even in the fields of computing and telecommunications where they have lagged behind the United States and other countries.
To be sure, that outlook is not yet a sure thing. Japan’s government budget deficit is enormous and its banking system remains crippled. Its politicians can’t decide whether to vote on $6 billion to bail out bankrupt housing loan companies, in part because the loans have links to gangsters and political corruption.
And the bull market that has taken Japan’s stock prices up 40% will only rise further if companies continue to “rationalize,” says a Tokyo investment expert--meaning restructure American-style for shareholder value. And that is surely not guaranteed.
Nonetheless, recovery and healthy change are a good bet. Japan has primed the pump. Its budget deficit is close to 8% of gross domestic product, a level higher than the U.S. budget deficit--now 2% of GDP--ever reached.
Japan spent on public works to keep the economy afloat during the recession. Now it needs a recovery to reduce the deficit. And that’s a big reason Prime Minister Ryutaro Hashimoto wants a good meeting with President Clinton, all smiles and agreements, no disruptive arguments.
On economic issues, Hashimoto will probably hand Clinton concessions on air travel and on opening Japan’s insurance market. Semiconductors will be more contentious, but Clinton can get something if he presses.
But away from the spotlight the most revealing changes in Japan are coming in business. By now, most companies have reduced costs by farming out production to countries in Southeast Asia.
That’s why Japan’s trade with Malaysia, Thailand, Indonesia, Singapore et al is now larger than its trade with North America--although some of the goods co-produced in Southeast Asia are destined for the U.S. market.
Japanese company profits will be up 15% on average this year and stock prices are up to 21,700 on the Nikkei average. The market will probably rise “to 23,000 to 24,000 by the end of this year,” predicts Schiato Haganuma, investment strategist for Nomura Research Institute in Tokyo.
“But then the market will fall back,” Haganuma says, “because the yen could weaken to 120 to the U.S. dollar and that would cause interest rates to rise, affecting the stock market.”
Investment managers on this side of the Pacific broadly agree with Haganuma. Lee Thomas, vice president at Pacific Investment Management in Newport Beach, thinks investors are better off playing Japan’s recovery by investing in Southeast Asian countries that benefit from Japanese business.
Bill Wilby, manager of the Oppenheimer Global Fund, acknowledges the currency risk but feels that Japanese companies are starting a strong cycle of rising earnings, mostly because they’re restructuring.
Restructuring was a word never associated with Japanese companies, who were praised from afar--often mistakenly--for never thinking of short-term profit.
They may still not think short term, but the major companies are definitely restructuring, investing heavily in computers and automation.
What’s pushing them is an aging population’s need for shareholder value. One person in six in Japan is now 65 or older. But the country’s pension funds, hurt by recession and weak investment policies, have been earning only 3% a year on average, not enough to meet future obligations.
One reason for poor performance is that Japan’s pension funds invest 75% of their assets in bonds, only 25% in stocks, writes Masaharu Usuki, senior economist of the Long Term Credit Bank, in an essay calling for reform. That compares to 50% in stocks for U.S. and European pension funds, which have profited lustily in recent years.
The upshot: Japan’s pension funds are changing and much more money will be invested in Japan’s stock market. But companies will be judged differently--more by the shareholder value standards used for U.S. and European companies.
Signs of change are already evident. Toyota and the construction equipment maker Komatsu are buying in some of their own stock; Mazda Motor Corp. won’t be subsidized further but taken over by Ford.
Nippon Telegraph and Telephone (NTT) used to be Japan’s bellwether stock. Now there is impatience that NTT, still a regulated monopoly, is holding up progress on telecommunications reform.
Investment managers focus on smaller companies such as Dai-ni-denden, or DDI, a long-distance company, partly owned by Kyocera and Motorola. “DDI does everything better than NTT,” says Michael Lindsell, Tokyo-based manager of GT Global Japan Fund.
Companies that pioneer in restructuring are praised. Hoya Corp., a maker of eyeglasses and magnetic memory disks, is held up as an example of cost reduction, return on investment and vision. “They have an intelligent approach to the market among old people,” says Haganuma.
Hoya is a supplier to the semiconductor industry, which is going to boom as Japan increases its use of personal computers, coming up from less than 25% of the computer usage of Europe or the United States.
Semiconductors will also be needed for telecommunications devices; Asia now has only 40% of the number of telephones per community as the United States and Europe.
So Clinton should make sure U.S. semiconductor makers don’t get frozen out of this growth market. Yes, market efficiency is making a beginning in Japanese business, but old mercantilist ways die hard.
Meanwhile, the principal Clinton-Hashimoto discussions will not be economic but strategic, concerning North Korea, U.S. troops on Okinawa and the U.S.-Japan Security Treaty. All will be amicable, says Mike Mochizuki, foreign policy expert at Washington’s Brookings Institute. “But the U.S. side should think ahead to when fewer U.S. troops will be wanted in Japan--the Japanese side is already thinking seriously about that.”
Japan is fairly certain to impress the world anew in the years ahead. What’s instructive is that it will be thanks in part to--of all things--U.S.-style business values.
