Introduction
Japan was once the second largest economy in the world, with its economic presence so well established by the 1980s that some people anticipated it to become the next global economic powerhouse. However, Japanese society as a whole had several cultural and structural issues that were left unaddressed, which significantly impeded its ability to truly become the economic hegemon that they expected it to be. Now, coming into modern day, we examine how Japanese corporations have shaped the Japanese economy and how the country could propel itself back into an era of prosperity through its changing corporate landscape.
History & Context
After the Second World War and before the advent of the Cold War, Japan saw tremendous economic growth, with its GDP rapidly increasing from $44.31B in 1960 to $3.13T in 1990. Dubbed the Japanese Economic Miracle, this period was brought about mainly due to technological changes and investment in various industries, along with economic reforms and heavy lending that led to the rapid industrialization of the Japanese economy.
Following this rapid growth, Japan faced a decade-long economic crisis, commonly known as “The Lost Decade”. This crisis originated due to excessive monetary easing that led to massive valuations in real estate and stocks, only for it to come crashing down in the early 1990s when the Bank of Japan tightened its monetary policy.
In the years after The Lost Decade, Japan’s economy remained stagnant. This was due to a multitude of external and underlying structural issues that impacted the country. Firstly, there was a rapidly aging population and decreasing birth rates. This meant that the proportion of people who were in the workforce and contributing to the economy was steadily being outnumbered by the retired population that needed to be provided for. Secondly, there were extremely high savings rates in the population and a declining trend in private investment. Finally, the corporate structure of Japan worked to culturally disincentivize foreign investment and the growth of shareholder profits. These structural issues, coupled with external shocks like the Tohoku disaster and The Great Recession, meant that the quantitative easing policies implemented in the 2000s forced the Japanese government to take on an incredible amount of debt. Consequently, Japan held more public debt as a proportion of GDP than any other fully developed nation, further undermining their ability to become an economic powerhouse.
The Role of Corporations in the Japanese Economy
To explore how corporations play a role in the Japanese Economy and why it declined so heavily from the 1990s, we first need to understand their corporate structure.
The Japanese corporate structure varies quite significantly from Western economies like the US. Firms in Japan tend to be more stakeholder-oriented than shareholder-oriented, and they are often interlinked with other firms in a system known as Keiretsu, which encourages partnership and cross-shareholding that limits the influence of external shareholders. In addition, they tend to have a board of directors dominated by insiders rather than the external BOD system that the US relies on to protect shareholder interests. Japanese employment culture further exemplifies firms’ stakeholder orientation. Firms encourage long-term employment through seniority-based pay instead of merit-based pay, and the average employee is fiercely loyal, with service firms existing for the sole purpose of quitting jobs on behalf of an individual. These characteristics are fatal flaws as they mean that foreign investors, innovators and entrepreneurs have little incentive to invest in these corporations. In fact, despite it being the third-largest economy, Japan ranks low in all international reports on entrepreneurship. For example, in the 2023 IMD World Competitiveness Yearbook, Japan ranks 35th among 64 countries, well behind other developed economies such as the US, UK, Germany, and China, all found in the top 20.
Over time, the Japanese government has made several reforms that aim to encourage a more shareholder-oriented focus in Japanese corporations. In 2014, stewardship codes were introduced to aid institutional investors in setting goals and disclosure for the firms that they invest in. Over 300 institutions in Japan participated in this disclosure as of 2023, driving profitability through active voting in the investee firms.
More recently, Japanese Prime Minister Fumio Kishida has set certain policy goals surrounding wage growth in the country with an aim to encourage the growth of the economy. While these are just targets, it is important to consider that in a nation like Japan that is heavy on collectivist culture, merely setting these targets means that there will be a very active push from the government and corporations to meet these targets.
The culture in Japan is very adequately summarized by the phrase, “The nail that sticks out is the one that is hammered down”. Japanese society has evolved in such a way that conformity and collectivism is expected and encouraged, which is precisely why in order for Japan to grow meaningfully, the government and institutions need to start incentivizing companies to bring about the changes they want to see. A recent example of this is the Japanese Exchange Group highlighting companies that succeed in improving shareholder value by bringing their price-to-book ratio above one. This added an underlying pressure to the 45% of companies that have not accomplished this task and would encourage them to prioritize value.
These corporations that have long stood as bastions of stability and long-term employment in Japan are now increasingly recognized as vehicles for the country's economic growth. Firms are seeing more foreign investment, furthering their transition into a shareholder-oriented structure. In fact, a goal was set to double inward FDI (Foreign Direct Investment) by the Japanese government in 2013 and they achieved this by 2020, with inward FDI stock at about 8.4% of Japan’s GDP. Recognizing the importance of attracting FDI, the government announced in April 2023 that they plan to have their inward FDI stock reach 20% of their GDP by 2030.
This cultural and structural transition is evident through cases like that of Sharp Corporation, a major player in Japan’s technology sector that was plagued by financial distress despite receiving two bank bailouts. Instead of turning to the banks again, Sharp Corporation ended up being acquired by the Taiwanese company Foxconn in 2016. The impact of this decision was evident in the market’s reaction to the news, fueling a 29% increase in the company’s share price over just two days. This decision essentially indicated to foreign investors that Japan was open to foreign involvement, with Sharp prioritizing market-driven decisions over state-backed alternatives. More recently, Warren Buffet himself has shown increased interest in the country by increasing Berkshire Hathaway’s stake in the top 5 trading companies in Japan to an average of more than 8.5%. This increased pressure from the government and increased attention to shareholders from corporations have resulted in the Nikkei 225, a major Japanese stock exchange, reaching a 33-year high in 2023. The exchange index appreciated nearly 30% over the year, indicating the positive outlook that global investors have for their economy.
Conclusion
In researching this article, we had the opportunity to get in touch with the former president of the Japan Studies Association of Canada, Dr. Ken Coates, who provided incredible insight into how Japan tends to operate, with government and corporations working together for the sake of the country, rather than how it tends to work in the west where policies and reforms are imposed on the corporations and there isn’t a collectivist culture for the sake of the nation.
This collectivist culture and cooperation between corporations and government will play a key role in the prosperity of the nation. Since Japan’s economic situation is challenging and multi-faceted, it will require several changes from the corporations, the people of the country and government action to bring about the changes required for their economy to truly prosper.
From a societal point of view, there needs to be an active effort from the government, corporations and the people of Japan to encourage foreign investment and drive the growth of SMEs. Recent efforts like Beyond Japan, a program aimed at encouraging Japanese startup culture and wage hikes for SMEs at three-decade-long highs are steps in the right direction. It is easy to forget, but even massive corporations like Sony, Panasonic and Toyota who have contributed significantly to the Japanese economy were once startups.
From a corporation's point of view, there needs to be a substantial shift from lifetime employment practices and seniority-based wage systems into a merit-based approach. These changes will encourage employee excellence and promote the growth of young entrepreneurs. There are already indications of a shift towards this mindset as evidenced by Toyota’s new CEO Koji Sato’s commentary that the firm will embrace a more flexible and merit-based approach to rewarding and promoting employees. As we see more companies adopting this approach, it slowly chips away at the residuals of a bygone era of stakeholder prioritization, leading to more growth for the Japanese Economy.
Additionally, by further aligning themselves with the government’s targets for wage growth, putting more money in the hands of the Japanese population and spurring consumer spending, and overhauling outdated systems like seniority-based pay, the corporations of Japan have an incredible role to play in shaping the country’s economy for years to come.
Japanese corporations, which are at a nexus of age-old practices and modern reforms, now have the opportunity to become a true catalyst for a new era of Japanese prosperity. This opportunity, when fueled by change, may finally put an end to the economic stagnation that has become synonymous with their economy.
