Published in Newsweek Japan 21/7/2020
This time, Japan has had a “good” crisis. Not only has it experienced far fewer Covid-19 fatalities than other large developed countries, but the economic damage has been less severe too.
The contrast with the Global Financial Crisis of 2008 is obvious and encouraging. Back then Japan had nothing to do with the sub-prime securities that were at the epicentre of the financial earthquake, but nonetheless suffered a massive 9% contraction in GDP. That was more than twice as bad as the US, where the crisis originated.
What has changed since then? In the corporate world, a lot. The Japanese economy is much better balanced today than it was twelve years ago, when the giant exporters were thriving, but most domestic sectors were still mired in stagnation.
The “three excesses” – of employees, production capacity and debt – have gone for good. Capital investment has risen to the highest proportion of GDP since the collapse of the bubble economy in the early 1990s. The notoriously conservative construction industry has chalked up its best profit margins since the early 1960s.
Interestingly, the crisis has validated some aspects of Japanese corporate culture that have been frequently criticized in the past. After the trauma of the two lost decades, Japanese companies have been piling up cash on their balance sheets, to the extent that activist investors have sought to pressure them into paying higher dividends and buying back shares. But when economic activity comes to a sudden stop, all that idle money suddenly becomes a precious resource.
Likewise, long-term business relationships – a characteristic of large company culture in Japan – can prove their worth in a crisis. For example, a retailer and real estate company are more likely to come to some sort of burden-sharing arrangement over the rent if they are in the same industrial group or have been doing business together for many decades. In many Western countries, that kind of problem would be settled in the courts on a winner-takes-all basis.
A similar contrast is visible in the treatment of employees. While the US unemployment rate rocketed from 4.4% in March to 13.3% in May, Japan’s edged up from 2.5% to 2.9% over the same period. The Japanese approach minimizes social dislocation and prioritizes corporate stability.
In the language of writer Nicholas Nassim Taleb, traditional Japanese corporate practices are “anti-fragile”- meaning they are robust in the face of unexpected, potentially devastating shocks. That is why the majority of the world’s oldest companies – 56% of those over 200 years old, according to a Bank of Korea report – are to be found in Japan.
So corporate Japan can pat itself on the back for its performance during the crisis – but not too many times. Complacency would be dangerous if it led to a backsliding on the governance reforms and new management thinking of the past decade. If companies are to thrive and fulfill a useful role in society, they need to adapt to a rapidly changing business environment. The coronavirus hasn’t eliminated the deeper trends.
The Japanese labour market has temporarily softened, but over time the structural shortage of manpower is sure to reassert itself. That means that Japanese companies will have to compete to attract personnel – in terms of wages and also in terms of working conditions. Hataraki-kaikaku (reform of working practices) will have to go further to accommodate women, foreigners, mid-career entrants and elder employees who might prefer shorter working hours.
The relationship between Japanese managements and shareholders has undergone significant change in recent years, with most listed companies now having specialist Investor Relations departments that keep investors informed. Yet the pressures on professional investors everywhere continue to mount as they are increasingly required to monitor companies from a ESG (Environmental, Social and Governance) viewpoint and act accordingly. Being a passive shareholder is no longer an option.
As “the Whale”, Japan’s enormous Government Pension Investment Fund, is an ESG enthusiast, it is likely that companies are going to have to live with an increasingly “activist” shareholder base – part foreign, part domestic – willing to make its presence felt.
Industrial logic suggests that Japan’s unwieldy conglomerates will need to accelerate the restructuring and reconfiguration of their portfolios of business. Underperforming subsidiaries and product lines will be bought and sold, often across the lines of industrial groupings and sometimes across borders, as companies redefine their competences.
The crisis itself has lessons for managements everywhere. Lean, far-flung supply chains may appear efficient and cheap, but carry hidden risks. A smooth remote-working capability should be essential to risk-management. In Japan, digital hanko (seals) should be commonly available.
However, there is a difference between remote working as a back-up or part-time function and as a standard practice. A full-time transition could be damaging. Learning to work in teams, mentoring juniors, discussing ideas over lunch or coffee, exchanging industry gossip over evening drinks (“nomu-nication” ) – this is the kind of experience that cannot be reproduced on Zoom or Microsoft Teams, yet is vital to organisational cohesion.
Many of these improvements to Japanese corporate performance took place after Shinzo Abe took over as prime minister in 2012. Several specific elements – reversing the over-strong yen, shaking up corporate governance, professionalizing the GPIF, loosening restrictions on foreign workers – were part of his agenda.
As the Abe years come to a close, there is a risk of political stasis as the bureaucracy fills the power vacuum. Troubled but politically powerful firms may be tempted to lobby for government help or protection against the demands of activist shareholders.
Corporate Japan has weathered the coronavirus crisis reasonably well so far, but in order to stay ahead of the game, it needs to keep the momentum going. The companies that do so will be in good shape to face the next global shock when it comes, as it surely will.