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Japan Diary

June 18, 2022

Some Basics for the Revival of Japanese Companies

(this is a translation of my article published in Newsweek Japan on June 21)
 Japanese companies are the backbone of Japan. Sometimes I even have a feeling that every Japanese person is either a president or a company employee. However, in these years many of company workers look rather depressed. They are losing out in global competition, foreign vulture funds are sucking away their profits, the management of their own companies lack the ability to foresee the future, and the employees have to spend most of their time filling out unnecessary paperwork.

Yet Japan is able to feed its 120 million population and maintain the world's third largest GDP because of the power of corporations, and corporate tax revenues are growing even though Covid-19 has supposedly curtailed economic activity. In fact Japanese companies are doing rather well. The current rush to raise prices on goods in Japan should help companies do even better.

Still, many Japanese companies are facing problems. Let us consider the trends and countermeasures.

Some people often compare Japanese companies with Western companies and say that Japanese companies are lacking in some areas and not good enough in others. Comparisons are fine, but it is important to keep in mind that Japanese companies operate based on different principles than their Western counterparts.

In Western corporations, perhaps in the vein of the slave economy that has existed since ancient Greece, companies are owned by shareholders and managers, and employees can be disposed of as they wish. In Japan, however, corporations exist for the well-being of all employees and their families, as if corporations were medieval villages.

Therefore, Japanese companies survive by retaining customers and selling large quantities of obsolete products such as washing machines and refrigerators, even if the profit margins are low. In the West, unprofitable divisions would have been sold off to others along with the employees there. Japanese companies, therefore, have a socialist aspect, which should not be easily discarded.

Second, in many Japanese companies, factions are formed by field, such as sales, general affairs/finance, and technology, and the post of president is often rotated among them every few years. If he or she fails to handle an innovation during his or her term as president, he or she is forced to resign in the middle of his or her term, upsetting the rotation of factions. Thus, many Japanese companies avoid taking risks.
This would put them on the back foot in a world where things are changing as rapidly as they are now. There is no cure for this malaise. Unless the employees rise up and make changes themselves, the company will either go under or sell itself to foreigners.

The executives who publish their biography in Nikkei newspaper are extraordinary people. Even so, the number of people who can keep up in today's rapidly changing world is limited. We need to increase this number. We need to consciously and systematically educate and train young people to analyze the world and Japan's politics, economy, and society on their own.

And we must create an environment in which young people can study abroad more often. Currently, they do not have time to study abroad because they have to start looking for companies for employment after graduation in their third year of college. In order to destroy this malady, we should create a separate quota for hiring those who have returned from studying abroad.
Young people need to study abroad. Not only to learn a foreign language, but more importantly, to learn that foreigners operate on different principles than Japanese people, and to acquire the habit of instantly responding to these principles. You will never know this until you live in a foreign country.

Finally, Japanese companies these days are too much beholden to foreign shareholders in order to raise their stock prices (The Japanese are not eager to buy stocks). Foreign shareholders demand higher dividends rather than higher wages and other distributions to employees. As a result, if wages do not rise, national consumption will not increase, and corporate performance will be in a doldrums.
Japanese companies are not so dependent on stocks for financing. Nevertheless, the reason why Japanese companies want to raise their stock prices is that stock prices are too important as an indicator for evaluating the performance of the company and its president. This practice should be changed. Performance should be evaluated using indicators other than stock prices.
In the past, such a rule change might have been squashed by pressure from foreign countries. However, we are now in the era of the new Cold War between the U.S., Russia, and China. Western countries need Japan's cooperation. Moreover, Japan's economy is not as much of a threat to the West as it used to be. Tolerance for what Japan does should be growing.

If Japan can successfully combine its scattered strengths and streamline its rules, progress is possible. All that remains is the ability to execute.