FAR EAST:Can the world's second-largest economy, Japan, innovate its way out of what one minister calls its worst crisis since the second World War?
IN A GLOBAL blizzard of alarming economic news, Japan’s story is among the bleakest of all. The world’s second largest economy has suffered its biggest contraction in 35 years, shrinking at an annualised rate of 12.7 per cent. Japan’s 3.3 per cent decline the last quarter of 2008 was twice as steep as the euro zone (1.5 per cent) and over three times worse than the US (1 per cent).
Exports shrivelled by almost 14 per cent in the same period, as the nation’s manufacturers were “literally battered by the global downturn”, said economy minister Yosano Kaoru, who warned in February that Japan faces its worst crisis since the second World War. “We have to prepare ourselves for very hard times,” he said.
It is clear then that not even Japan’s top global brand is immune. Toyota, which posted its first loss in half a century, will produce nearly two million fewer cars (on a parent-only basis) this year than last. Figures like this from a company which had until recently been confidently predicting it would sell 5 per cent more vehicles are convincing many experts the recession will be exceptionally deep, and long.
“In my opinion, it could take Japan a decade to recover,” says Tetsuro Kato, a professor of political economy at Tokyo’s Hitotsubashi University. “I’m very, very pessimistic.”
The calamitous economic data inevitably has commentators here recalling the last comparable slump during the mid-1970s, after the Arab oil-producing economies quadrupled fuel prices. Known as the “oil shock”, the recession helped terminate Japan’s “miracle” growth years and sparked panic that the nation’s best days were gone.
Yet, while real economic growth halved from the 9 per cent average of 1956-1973, the recessions of the 1970s streamlined what was, by the 1980s, probably the most productive and efficient manufacturing machine the world has ever seen. By the end of the 1980s, Japan was widely expected to overtake the US as the world’s richest industrial power.
After the oil shock, Japan engineered an energy-saving drive that outshone most of the world and reaped huge dividends. Japanese corporations can today make a ton of steel using 20 per cent less electricity than US ones do, and they produce half the world’s solar power. Oil use has fallen by 13 per cent since the 1990s. It was a Japanese company – Toyota – that produced the world’s first hybrid car, beginning mass production in 2002. Toyota already leases hydrogen vehicles, and a string of hydrogen refuelling and battery recharging stations have been installed, mainly in Tokyo, over the last few years.
Most of this was possible because Japanese companies typically out-invest their foreign competitors, says Ryoji Musha, vice-chairman at Deutsche Securities in Tokyo. “They keep investing in plant and RD, and in human resources, even in a recession,” he says. Corporations in Japan can spend more because shareholders are too weak to demand a larger share of the profits. “The investment depresses earnings, but [this] is why Japan was ultimately able to survive the 1970s and the so-called lost decade [the 1990s].”
Japan’s premier business newspaper, the Nikkei, spelt out the lessons of the past in a recent editorial calling on the corporate sector to keep their wallets open, despite the downturn. “Innovation holds the key to survival,” it warned. The $5-trillion question, then, is whether Japan can again spend and innovate its way out of the slump?
Corporate investment as a percentage of Japanese GDP peaked during the 1980s, reaching 25 per cent. But it is still, at 16 per cent last year, about five points higher than the US.
Sharp, for example, is building a $10 billion (€7.8 billion) factory at home that will churn out 13 million LCD TVs a year by the end of the decade. Panasonic is spending $2.9 billion on a complex that will produce 12 million plasma TVs a year. Toyota, while cutting overall capital expenditure by about 5 per cent, will continue to plough money into hybrid vehicles and new technologies, and with a war chest of over €19 billion it has the stamina to easily outpace Ford and other tottering competitors. Unlike their US counterparts, Japan’s car-makers are not looking for a government bailout.
“This recession is a good opportunity for Japanese automakers to re-examine their strategies,” says Yozo Hasegawa, author of Clean Car Wars: How Honda and Toyota are Winning the Battle of the Eco-Friendly Motors. Hasegawa believes post-slump Toyota, Honda and Nissan will shift emphasis from competing directly with mass-produced vehicles from South Korea and up-and-coming China.
Japan’s plan for world domination in the 1980s had famously ended up hitting the skids. Not only did the country fail to become No 1, it ended the decade with a grotesquely inflated land and stock-price bubble not unlike the one now rapidly deflating in Ireland. The collapsing bubble ushered in a wave of bankruptcies and corporate restructurings, and crucially, showed that the world had a limited capacity to absorb Japan’s endless stream of clever gadgets and well-built cars.
Then, as now, the world’s most innovative production powerhouse was impotent in the face of weak demand, explains Kato. “Exports were the motor of recovery in the past, but we live in very different times. Now, the slumping global economy and declining demand is the biggest obstacle to recovery.”
Some argue that the decade postponed root-and-branch reform of Japan’s political and corporate sector, especially at upper levels. Those suspicions have been reignited by Toyota’s decision this year to install Akio Toyoda from the company’s founding family as its new president. When times are tough, Japan falls back on old habits, the appointment seems to say.
Much of that criticism is completely rejected by Musha, who argues that reform since the 1980s has been slow but steady. “There is no comparison with the past. Government bureaucrats have far less influence over the economy than before and companies are very different today.” He says Japanese corporations are no longer laws unto themselves, ignoring shareholders. “Now they are transparent and eager to explain what they’re doing.”
Anne Lanigan, head of Enterprise Ireland in Tokyo, agrees and believes the Toyota appointment was correct. “Mr Toyoda has worked his way up from the bottom and understands the Toyota way. There is nothing wrong with this. It works! Japan is not the most advanced manufacturing country in the world for nothing.” She says the lean years of the 1990s have given Japan another advantage: the banking cleanup means it will largely escape the financial fallout from the subprime crisis. “The problems they have here relate to the global downturn that the subprime problem induced, which has led to a drop in exports.”
Bullish commentators like Lanigan and Musha are also quick to point out that the “lost decade” was nothing of the kind. At average annual growth of 1.5 per cent, it was hardly a recession, but more what US economist Robert J Samuelson calls a “slow, listless prosperity”. Musha says the problems of over-production that emerged in that decade could be solved if the government did more to pump up domestic consumption – unlikely in a country where one third of the workforce is casualised and the rest feel cowed and insecure.
Japan’s problems do not stop at its flat-lining economy, however, which is overshadowed by political paralysis. After over half a century of almost continuous power, the Liberal Democrats are bickering and exhausted. Recent TV pictures of Tokyo’s incoherent finance minister at a February G7 meeting in Rome was the perfect image of a government that seems punch drunk and outclassed by the gathering economic storm. By September, the famously pro-business party will almost certainly be out of office.
But although that would be the equivalent of a political earthquake in Japan, the prospects of radical change are slim. The leading opposition Democratic Party (DPJ) is a motley crew of Liberal Democrat discontents, conservatives and independents, and it is unlikely to prove a radical break with the past. The new government will face the same daunting problems as the LDP: an ageing population, a corporate sector losing its shine and public borrowing running at 180 per cent of GDP, nearly three times the US level.
The solution to Japan’s problems will be similar to the past: if domestic consumption cannot be stoked, can the most efficient and innovative sector of the economy – manufacturing for export – pull the rest of the country out of its death dive? No, says Kato, who argues that Japan no longer enjoys the competitive advantages it once did. Yes, says Musha, who says innovation and investment will turn the economy around “faster than predicted”.
“Japan produces many of the high-tech raw materials and components for the world’s manufacturers, so it is inevitable that it has been hit by the global downturn. It is both a victim and a beneficiary of globalisation. But the fundamentals are strong.” Adds Lanigan: “The only thing Japan needs to worry about is confidence of consumers in their domestic market. I am convinced they will emerge from the current gloom way ahead of the rest of us.”
The message from Japan? Down but not out.
Changes
ONE WAY of taking the economic pulse of the times is to look at its winners and losers. In Japan, Forbes-Asia has just published its annual rich list. At the top with $6.1 billion (¤4.8 billion) is Tadashi Yanai, boss of clothing chain Uniqlo; No 2 is Kunio Busujima, ex-chairman of a firm that makes pachinko pinball machines, and in third place is Hiroshi Yamauchi, the retired head of Nintendo Co. A discount retailer, a gambling kingpin and a game maker – once the list would have been filled with industrialists and manufacturers like Panasonic founder Konosuke Matsushita. How Japan has changed.
