There's something very familiar about Shinzo Abe's plans for reviving the Japanese economy. For decades, the government could rely on Japan's biggest companies to serve the national good. Bureaucrats and executives worked hand-in-hand to promote key sectors. In the 1980s, with state help and guidance, Japanese corporations scoured the globe for market share, pouring the spoils back into the economy at home.
Now, Abe seems to expect Japan Inc. to follow a similar script. By driving down the yen 30 percent with an ultraloose monetary policy -- the so-called first arrow of Abenomics -- and greasing the economy with huge fiscal stimulus, the prime minister has boosted the stock market and filled corporate coffers. Executives were meant to return the favor by hiking wages and boosting capital investments.
Twenty years ago, that strategy might have worked. But something new is at play. Japan's corporate champions aren't playing ball -- in part because they're no longer very Japanese.
Take Honda, the subject of a recent New York Times piece making waves in Nagatacho, Tokyo’s Capitol Hill. The story explored the rather odd way Honda headquarters in Tokyo has dealt with a record $70 million fine levied on its U.S. subsidiary: as a strictly American problem beyond the purview of CEO Takanobu Ito. Of course, this reflects a bit of the old duck-and-cover routine Japan Inc. performs whenever bad news hits (recent examples include Sony's hacking case and Takata's airbag recall).
At the same time, Honda's attitude makes sense. In 1979, the automaker became the first Japanese giant to open a production base in the U.S. (initially focusing on motorcycles). Soon, others emulated its decision to build products closer to the customer. This mass migration of jobs involving Toyota, Nissan, Sony, Panasonic and others accelerated in the 2000s as deflation deepened and Japan's workforce aged. Later, offshoring expanded because of high labor costs at home, with Japanese companies opening factories in China, Thailand and elsewhere.
Many of Japan's biggest companies, including Honda, now derive most of their revenues and profits from their overseas affiliates. Rather than imagining themselves as national assets, they're thinking like other transnationals and putting profits and efficiency over government priorities. Abenomics, in effect, is premised on an outdated social contract.
The more Honda resembles a foreign company -- North America now generates more than half its revenues -- the fewer incentives it has to invest in Japan and Japanese workers. That money, one could argue, would be better spent building factories in the U.S. and lobbying Congress for tax breaks and other perks. Until demand picks up at home, the company's calculus won't change.
Optimists might point to Panasonic's recent decision to return some manufacturing (home appliances, mostly) to Japan. In fact, the company is simply adjusting to the reality of a weaker yen, which has made it more expensive to re-import goods from Southeast Asia than to make them at home. For ill or good, the Japanese system is simply no longer as responsive to government intervention. As former Economist editor Bill Emmott noted in a Financial Times op-ed, Abe is foolish to rely on this year's "shunto" -- the spring round of wage-bargaining -- to produce higher salaries. Those negotiations now cover less than a fifth of the workforce. The whole thing, Emmott rightly decrees, is a "sideshow."
All this has implications for Abe's "third arrow" structural reforms. Two years on, powerful vested interests continue to block changes to labor, agriculture, energy, tax and corporate regulations. Aside from faster implementation, though, the third arrow needs retooling.
For starters, Tokyo must shift the focus from giants like Honda to small-to-midsize companies. For many of them, the yen's plunge has been a nightmare as import costs rise and a deflationary mindset among households precludes retail price hikes. The government should formulate a package of tax cuts and reductions in red tape to support this end of the labor market. Any such effort should include tax holidays and a government safety net to encourage entrepreneurs and kick off the startup boom Japan needs so badly. Also, lower trade barriers would help companies of all sizes. Abe should move ahead on the stalled Trans-Pacific Partnership and reduce tariffs now.
Japan's secular stagnation has lasted so long that it's easy to forget how much its companies have changed in response to globalization. If Abenomics is going to succeed, Japanese leaders need to harness the strengths of the private sector they have, not the one they remember.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
To contact the author on this story:
Willie Pesek at firstname.lastname@example.org
To contact the editor on this story:
Nisid Hajari at email@example.com