Sleepwalking into stagnation: Japan’s outdated supply side

What is happening to Japan’s leading firms? In April, Toshiba, one of the biggest names in consumer electronics, delayed their earnings report in anticipation of record losses. This is the latest in a series of disappointing performances from major Japanese corporations. The likes of Sanyo, Olympus, and Mitsubishi all used to be household names. Today, they are bleeding red ink, kept alive only by bank lifelines and the selling-off of key assets. This reflects the performance of Japan’s wider economy, which has been in a similar state of stagnation since the 1990s.

Prime Minister Shinzo Abe’s vision for Japan’s economic revitalisation is a three pronged approach; fiscal stimulus, loose monetary policy, and structural reform. In practice, he has mostly focused on the first two, aimed at boosting demand, and left the supply side somewhat overlooked. Currently there are two supply side phenomena strangling the Japanese economy; lifetime employment and zombie corporations.

Lifetime employment

Lifetime employment has been a cornerstone of Japanese corporate management since the early 20th century. It is often attributed to the founder of Panasonic, Konosuke Matsushita, with the famous company quote that ‘Panasonic employees do not have to worry about losing their job until retirement’. All manner of firms, from mega corporations to small family businesses, hire young graduates who are expected to stay at the same firm for the duration of their working life. To get employees to stay, firms influence them in two ways: financially and culturally.

Salary is increased on a yearly basis, and reflects the amount of time an employee has spent at the company in question. So, if you switch firms, your pay can be set back to that of a recent graduate, even if you have decades of experience. According to Asahi Life, a Japanese insurance company, when a 25 year old worker switches between firms, their annual income can decrease by up to 800,000 Yen (around £5000), and for a 35 year old worker this amount can rise to 2 million Yen (or £13,000).

Culturally, it is deeply frowned upon in Japanese society for firms to fire employees, and for employees to switch between firms. This has been traced back to Confucian moral teachings, and to the Bushido code which requires Samurai warriors to be utterly devoted to their daimyos. The relationship between Japanese workers and employers is more akin to a family clan than the typical relationship recognised in Western work culture. When employees jump ship, they can be seen as disloyal and selfish, both by society and a potential new firm. And the code of conduct works both ways; companies that fire employees who have not committed a serious misdemeanor should be prepared for a public relations backlash.

Lifetime employment played a large role in helping the Japanese economy rebuild after WWII. At the time, there was a widespread labour shortage, particularly among technicians and engineers. Being able to keep workers around for long periods of time allowed firms to be less secretive about new production methods, which meant young graduates could quickly learn techniques from their older, more experienced, coworkers. With guaranteed income and promotions according to their duration of employment, workers felt indebted to their firms and worked harder, contributing to the extreme overtime work culture observed in Japan. All of this combined helped foster Japan’s global forerunner status in quality and robust manufacturing in the post-war era.

However, in the modern information era, this permanent employment structure is no longer as useful.

Firstly, global manufacturing has been steadily flowing to other southeast Asian countries, and to China, since the 90s. Combined with the emergence of factory automation, there is no longer as much to be gained from keeping around more experienced workers. Fresh college graduates are also far better trained than they were in the 1950s, and require less training input from companies to bring them up to speed.

Secondly, IT and web based industries change rapidly. New products and services can go viral and die all within a couple of months or years. Productivity is no longer the main metric for success, rather it is creativity. Thus, millions of Japanese workers are trapped in their current job by the permanent employment culture, when their skills may be better put to use, and enhanced, by moving to another firm. ‘Trapped’ workers also lose motivation over time, which can make them even less productive.

Lifetime employment has extended into Japanese politics, and low unemployment takes priority over all other macroeconomic objectives. This has been backed up by law; according to a 1975 Supreme Court ruling, employers cannot fire employees whenever they please. If mainstream attitude is against the sacking, then it cannot take place.

Zombie corporations

By extension, this prioritisation of employment makes large Japanese corporations too big to fail, and refusing to grant government bailouts is political suicide. The government also pressures financial institutions to loosen their rules on refinancing and loan guarantees. In 2009, Financial Services minister Shizuka Kamei pushed through a bill requiring financial institutions to expend all possible efforts to supply credit to small-medium enterprises and housing loan borrowers struggling with loan repayment.

Three statistics reflect the resulting stale state of the Japanese economy:

  1. According to credit research company Teikoku Databank, there are as many as 35,000 nonviable enterprises in Japan. Most survive solely through continually deferring loan payments to the next period.

  2. There are roughly 22,000 Japanese firms founded more than 150 years ago (in comparison there are just 5 in China). Most of these centenarian companies are family owned and their heritage places additional pressures on financial institutions to provide financial backing. Such a high number of ancient businesses also reflects the low turnover rate of companies.

  3. In 2016, Japan’s national business start-up and closure rate was about 5% (roughly one-third of that of other advanced nations) and the bankruptcy rate was an unhealthy 0%.

Room for improvement

When firms cannot die and workers cannot leave, the entire supply side of the economy becomes stagnant, and unable to adapt to new problems or welcome new opportunities. Excluding heavy industry, oil, and financial institutions, the largest American firms in the 80s were car manufacturers like GM and Ford. In the 90s, Intel and Microsoft topped the list. In the 2000s, the big names became Google, Apple, and Amazon. In comparison, the largest Japanese firms in the 80s were companies like Toyota, Sony, and Canon, and 30 years on the list remains largely unchanged.

Schumpeterian economics emphasises ‘creative destruction’ as a vehicle for the growth of capitalist economies. New businesses create new products, or find ways to produce existing goods and services more cheaply. If incumbent firms are unable to adapt they close down. This frees up capital and labour for more innovative firms, leading to wider economic progress. However, this crucial element to free market capitalism is stifled in Japan.

This was highlighted in a 2016 OECD report, which argued that the state’s support of struggling firms ‘distorts resource allocation and limits access to finance by viable companies, thereby reducing Japan’s potential growth’. Yet the third prong of structural reform in Shinzo Abe’s economic plan continues to be by far the weakest; Abe actually touted the low rate of bankruptcies as evidence for economic success. Perhaps it will take another economic crisis for Japan to realise that addressing demand is nothing but a weak band aid over the growing wound of its supply side.

Bowen Zhu


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