Japan Needs More Corporate Funerals
Big changes are happening in Japan. Prime Minister Shinzo Abe is pushing hard for deep, important structural reforms. The biggest is Abe’s attempt to improve the flexibility of the dysfunctional Japanese labor market. He has created a new corporate governance code, designed to make companies more focused on profit. At the same time, cultural change is occurring rapidly with respect to women in the workplace. These are much-needed. But there is one big piece of the puzzle that is missing. The missing piece is creative destruction -- Japan needs to learn to let companies die.
On the surface, it might look like a good thing when fewer companies die. After all, a strong economy means fewer bankruptcies. That’s why it was widely heralded as a good thing that not a single listed company went bankrupt in Japan in 2014. And the idea that a wave of bankruptcies in a recession creates a “cleansing effect” has not received much support from the data.
But when you strip out the cyclical effect of booms and busts, the underlying rate of creative destruction has a big effect on productivity. Surveying the literature in 2008, Philadelphia Federal Reserve researcher Shigeru Fujita concluded:
Recent empirical studies indeed find that creative destruction plays a significant role in shaping the evolution of aggregate productivity: The evidence shows that new and relatively more productive establishments displace older and relatively less productive ones.
Productivity is exactly what Japan needs. Recently, Labor Minister Yasuhisa Shiozaki said that Japan’s wages have fallen because of lack of competitiveness. But competitiveness is based on unit labor cost, and unit labor cost is just productivity divided by wages. That means if you want to compete, you have to raise productivity.
One way to do that is to let old, unproductive companies die. But Japan doesn't like to let companies die.
The most glaring example is the Enterprise Turnaround Initiative Corp. of Japan, or ETIC. The company, which is 50 percent owned by the Japanese government, was created in 2009 to buy the debt of companies that were in financial distress due to the global financial crisis. But the crisis passed, and ETIC remained. Recently it was rolled into a larger organization called the Regional Economy Vitalization Corp. (REVIC). And before that, in 2003 through 2007 when there was no crisis at all, the Industrial Revitalization Corp. of Japan served a similar purpose.
What this parade of government-sponsored enterprises do is bail out failing companies. Unlike in the U.S., where the government propped up a few lucky giants such as General Motors and American International Group, Japan’s ETIC offers support to even tiny businesses. In doing so, it has basically pushed private-equity firms out of the market.
For example, in 2011, REVIC bailed out auto prototype-maker Arrk Corp. after that company’s “aggressive M&A strategy backfired,” Reuters reported. In other words, the managers of a Japanese business made a bunch of bad decisions, and the government stepped in and saved the company. No wonder productivity is low!
When bigger companies must be bailed out, other government agencies step in. The Innovation Network Corp. of Japan (INCJ), another government-sponsored enterprise charged with carrying out industrial policy, recently bailed out failing semiconductor giant Renesas, in a much-publicized deal.
In De Beers commercials, they say that “a diamond is forever.” Well, in Japan, a company is forever.
Corporate longevity is a deep-seated part of Japanese business culture. A big reason is that companies are seen as extensions of families. Even huge, globalized companies such as Toyota are often run by the descendants of the founders . Thhe president and chief executive officer is Akio Toyoda, for example, is the great-grandson of the founder, Sakichi Toyoda. This raises the question of how many of Japan’s corporate families see publicly owned companies as their personal family businesses rather than as going concerns operated on behalf of the shareholders.
Indeed, Japanese business families will go to great lengths to preserve their control over their businesses. A common practice in Japan is for a family to leave a company to a daughter, then adopt her husband (who then changes his name) in order to preserve the connection of company and family name.
What Japan needs in order to truly revitalize its economy isn't an alphabet soup of bailout funds with “revitalize” in their name. What it needs is to let failing companies die. And for that, it will have to discard the notion that a company should be immortal.
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:
Noah Smith at email@example.com
To contact the editor on this story:
James Greiff at firstname.lastname@example.org