Amid Turmoil, Change Is Real This Time in Japan

Japan’s economy, once a model of modern development but an example of bewildering recession for the last decade, is now engaged in headlong change that will give the world fireworks and turmoil in the next few years.

Transformation is occurring on all fronts. Japan’s big companies are laying off employees. And Japan’s stock market is going up because investors, many from the U.S. and Europe, are convinced that real cost-cutting has begun.

More stock market investment is anticipated from Japanese savers, who will be transferring funds into the market from postal savings accounts next year. The country even has an Internet craze going, with a stock market for start-up companies and spiraling prices for any firm in communications.

Yet nothing is without hidden problems. Many companies that are pushing employees into early retirement lack the funds to make the lump-sum pension payments that are customary in Japan.

The government, which has pumped billions into public works projects for a decade, has run up such a budget deficit that high interest rates and inflation loom for next year, financial experts say. There will be unsettling fluctuations in the values of the yen and the dollar, predicts Kenneth Courtis, chief economist for Asia of Deutsche Bank.

All that confusion looks decidedly un-Japanese. But Japan, a country with a tremendous industrial tradition, is not losing its legendary stability.

To see how that tradition is coping with restructuring and the demands of the global economy, look to Toyota Motor Corp., a firm emblematic of the nation’s industry.

Toyota is expanding outside Japan and investing in change inside it. The company, which estimates that in the fiscal year ending next March 31 it will have roughly $70 billion in revenue from selling 4.9 million vehicles worldwide, produces almost as many cars outside Japan as it sells in the home country.

Production and sales overseas will rise further as Toyota expands its efforts in Europe, with a new factory in France, and in North America, where it’s increasing production at a new plant in Princeton, Ind. The company is rich, with roughly $30 billion in ready cash and marketable securities to back its aggressive push in world markets.

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But Toyota won’t be increasing auto production in Japan, where sales and profit have been falling in the last year, and where costs are high.

In Japan, Toyota is contemplating a new kind of corporate structure to reduce costs and streamline operations with its parts suppliers.

And it is investing in telecommunications, forming the second-largest cellular telephone company in Japan through acquisitions and mergers of several firms.

“We must think in terms of transportation systems, not merely of cars and trucks,” says Shoichiro Toyoda, 74, now honorary chairman of the company that his family founded in the 1930s as an outgrowth of a century-old maker of textile looms.

Toyota is thinking of satellite-guided automatic motor vehicles for urban settings, of mobile Internet access and of communications-heavy production systems that will allow the company to make cars to customers’ specific orders in five days.

Such a system demands a flexible but demanding parts supply system of the kind that Dell Computer made famous in recent years but that presents difficulties for most Japanese companies, which have close relationships with their suppliers.

Toyota, however, has a history of production innovation. One of its engineers, Taiichi Ohno, invented the modern lean manufacturing system in the 1950s that allowed Toyota to become the world’s lowest-cost producer of automobiles--a distinction it holds to this day.

“It’s the premier automotive company in the world,” declares Maryann Keller, a former auto industry analyst who is now president of Priceline.com’s auto operations in Stamford, Conn.

The Toyota example serves notice that Japan’s formidable economy is awakening and its industry will be a competitive force once more.

However, today’s story is not a simple one of Japanese comeback. Toyota may be rich, but most of Japan’s companies face problems trying to restructure.

Changes may face social resistance because now layoffs are for real, as they haven’t been before. For example, until now Japan’s life insurance companies would place redundant employees in lesser-paying jobs managing buildings rather than laying them off outright.

But in the last two years, institutional investors from the U.S. and Europe have been buying those office buildings just because they can reduce overstaffing and make the properties profitable, explains Mark Sullivan of PriceWaterhouse Global, who represents foreign investors in Japan.

Also, much of Japan’s industry today is trailing technologically. In the new technologies of Internet systems and of mobile telecommunication, “the standards are set in the U.S. and Europe, and no standards are held by Japanese companies,” John Zysman, a UC Berkeley professor, pointed out at a Japan-California business forum in Los Angeles on Thursday.

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The country has fallen behind technologically because “it lacks graduate schools” and encouragement for entrepreneurial companies, suggested Frank Gibney, head of the Pacific Basin Institute at the Claremont Colleges and a longtime businessman in Japan.

To overcome such a technological lag, Japan must change its financial system and create capital markets such as those in the U.S., says Harald Malmgren of Malmgren Group, a Washington-based firm that counsels Japanese companies.

And that is what Malmgren sees occurring in the liquidation of old industrial plants and the enthusiasm for high-tech and Internet companies.

The auto plants that Japan has in oversupply, and those of manufacturers of glass, rubber, steel and chemicals, are being scrapped. And the capital freed up from the old plants is being invested in new industry. That is one source of the funds now boosting Japan’s stock market.

Internet companies are arousing enthusiasm, particularly Softbank, the company of entrepreneur Masayoshi Son, which owns 28% of the U.S.’ Yahoo and many other Web companies.

Investors cheer new moves in Internet commerce, such as Sony’s announcement last week that it plans to start an online banking service in 2001. The reason for the delay is that financial deregulation still must go through, allowing a Sony or a Softbank--which is bidding to buy Nippon Credit Bank--to engage in banking.

Yet that deregulation is going to come, Japanese businesspeople say. And stock market investing is going to grow exponentially starting in 2000, when roughly $250 billion of savings deposits will be withdrawn from the Japanese Post Office system and reinvested for the most part in Japan’s stock market. Another $250 billion is scheduled to follow in 2001. Mutual funds are being set up and 401(k)-type plans go into operation next fall.

The story of change in Japan is not a simple one. But with such money going to work, entrepreneurs, technological innovation and a very different Japan are sure to follow.

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James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.