Japan Inc. Repeats Its Mistakes
Much of the economic news out of Japan these days is unusually good. Growth has picked up. Joblessness is practically nonexistent. The country even appears to be tackling some of its long-term problems. The government is breaking with its often protectionist past and finalizing a major free-trade pact with the European Union.
Yet there are also troubling signs that government and business leaders still haven’t learned enough from 25 years of economic drift and decay. The latest example is the saga surrounding the sale of Toshiba’s chip unit. Last week, Toshiba Corp. announced it preferred a bid made by a consortium that includes a Japanese state-backed investment fund, the Innovation Network Corp. of Japan, and a state-owned development bank. If it goes through, the deal would hand the Japanese government a major role in Toshiba's chip business.
During Japan’s go-go years, bureaucrats similarly tried to engineer industrial progress by directing finance to favored sectors, protecting nascent businesses and generally ordering around private enterprise for the perceived national good. That system contributed -- somewhat -- to the country’s rapid postwar development. But as the economy advanced, meddlesome bureaucrats became a problem, not a solution. Their continued interference has misallocated financial resources, kept unproductive “zombie” firms alive and dragged down the economy’s potential. There is near-universal agreement among Japan experts that the bureaucracy has to get out of the way for good if the economy is to improve.
The proposed Toshiba deal smacks of this same state-led, efficiency-killing pattern. It's worth questioning why the government is involved in the Toshiba chip sale in the first place, since the company received several perfectly respectable bids from well-regarded private players. As Tim Culpan of Bloomberg Gadfly points out, the other bidders might also be better choices for the business’s future.
The government’s rationale is to keep the chip technology in Japanese hands and preserve jobs. With unemployment at a mere 2.8 percent -- the lowest in more than two decades -- it’s unclear why the latter should be a concern. Once again, bureaucrats seem to be pursuing a national and social, rather than commercial, agenda, one that ultimately may not be the best move for Toshiba, the chip operation or the economy overall.
Japanese bureaucrats have made similar judgment errors before. In 2012, the same state fund involved in the chip deal, Innovation Network, formed Japan Display Inc. by merging the struggling panel-making units of three Japanese electronics companies (including Toshiba); it remains the largest shareholder. The idea was to help keep Japan in the highly competitive LCD panel industry. But, losing money, Japan Display has had trouble fighting off industry heavyweights such as Samsung. And bureaucrats, having helped create Japan Display, have resisted letting it go. In December, Innovation Network agreed to a $640 million bailout for the company.
By contrast, look at what happened to Sharp Corp., another troubled Japanese electronics giant. Once again, Innovation Network bid on Sharp, but on that occasion, the bureaucrats lost: Sharp’s management shocked the nation last year by choosing a better bid from a foreign firm -- Taiwan’s Hon Hai Precision Industry Co. Ltd., which manufactures iPhones for Apple Inc. Hon Hai got to work consolidating manufacturing lines and cutting costs, and there are signs Sharp is turning around. In its last fiscal year, Sharp’s loss narrowed dramatically.
The argument here isn't that Japanese managers aren’t as good as foreigners. Japanese CEOs have proven as capable as anyone else at making bold decisions and reviving troubled firms, as with the successful effort to turn around yet another electronics company, Panasonic Corp. The point is that such corporate dealmaking is best left to the private sector and the market.
With their persistent interference, the bureaucrats are hurting, not helping Japan’s prospects. Their unwillingness to let markets be markets is one factor behind the country’s perennially poor productivity growth. By tying the economy up in regulatory knots and protecting old-line businesses, the government hampers the emergence of new, more productive firms. That’s one reason why Japan has such a pathetic record of fostering entrepreneurship compared to most other economies.
The pursuit of state-determined national goals can have costs that often aren’t recognized. Japan has been paying the price for a quarter-century. Hopefully, this latest episode is an isolated mistake, not a reversal in the country's seemingly more promising course.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the editor responsible for this story:
Nisid Hajari at email@example.com