Commentary: Japan Inc.'s Grassroots Revolution

Wake me when it's over. That sums up the level of global interest in Japan's glacial economic reforms. With its economy drifting, reformers enter stage right and then plunge through a trap door. A philosophy of "muddle through" rules the day. And year after year, Japan slips further and further into irrelevance.

But wait -- pay attention. There is something quite positive going on in Japan. Set aside for a moment the latest nasty economic data and the disillusionment with Prime Minister Junichiro Koizumi. Investment bankers such as Nomura Holdings Inc., with help from workout artists and savvy financial engineers, are chipping away at Japan's corporate rigidities one deal at a time. In fact, Japan is a major restructuring play in the making. And it's happening from the bottom up.

Selling assets, spinning off subsidiaries, and outright mergers used to be anathema to the typical Japanese chief executive, an admission of weakness and failed strategy. Yet merger activity, albeit from a tiny base, has jumped more than eightfold since 1997, to some 1,881 deals last year, and is projected to jump 50% this year. That bucks the global trend. Last year, global merger deals fell by 20%.

And Japan's blue chips are leading the dance. Rivals such as camera makers Minolta Co. and Konica Corp. and trading companies like Nissho Iwai Corp. and Nichimen Corp. are rushing into each other's arms to slash costs and shut down overlapping business lines. Today, all but two of Japan's 11 auto makers -- Toyota Motor Corp. and Honda Motor Co. -- have foreign alliances or equity tie-ups. High-tech companies such as Toshiba Corp. have exited unprofitable businesses, including dynamic random-access memory chips.

At the same time, Japanese companies are turning to investment bankers for help. The solution to Japan's problems, says Nomura CEO Junichi Ujiie, is "through capital markets such as mergers and acquisitions, selling off nonperforming loans, and slimming down balance sheets through securitization." Last year the value of such "structured finance" deals jumped 75%, to some $30 billion.

This is all unglamorous stuff, but it's dependable income for giants such as Nomura, Western players such as Morgan Stanley, and turnaround specialists such as Ripplewood Holdings LLC and Lone Star Group. Yes, they are in it for the money. But over time the effect will be to free up capital for more productive uses and reduce capacity in crowded industries, which has reduced the pricing power of companies and fed into Japan's deflation scourge.

What about Koizumi & Co., you may ask? Their job is to get out of the way and let the private sector do the job. Unfortunately, their inclination is to meddle, pushing for multibillion-dollar debt forgiveness schemes to save politically connected companies such as retailing giant Daiei Inc. and general contractor Hazama Corp. That sort of thing should be discouraged. Certainly it isn't enlightened policy for Japan's already debt-burdened banks to throw good money after bad by rolling over loans to such zombie companies.

Ultimately, some big companies must be allowed to go under. This will require a revolution in the mindset of Japanese policymakers -- and, unfortunately, a much higher jobless rate than the current 5.5%. But a big chunk of Corporate Japan can be revived by consolidation and smart financial engineering. So let a thousand deals bloom! It is the only sure way out of Japan's mess.

By Brian Bremner

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