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Home > Debates Last Updated: 14:30 03/09/2007
Online Debate

Japanese Corporate Reform: Global Convergence or Path-Dependent Evolution?

Online Full Debate


  • Ronald DORE (Professor, University of London)
  • Masahiro OKUNO (Professor, Tokyo University)
  • James Masaakira KONDO (Consultant, Mckinsey Global Institute)
  • Tatsuya TERAZAWA (Director for Policy Planning, MITI)

Moderator: Takahiro MIYAO (Professor, GLOCOM)


MIYAO: It is now in the morning of August the 29th (Tuesday) here in Tokyo. Before starting our full debate with our panelists, let me post some of the comments received from our audience.
Specifically, Prof. Kinoshita of Waseda University, Prof, Masuzoe of GLOCOM and Prof. Mera of the University of Southern California have sent us the following comments.
These comments are more or less directed to Prof. Dore and, therefore, I asked Prof. Dore to respond to these comments, and luckily received his response a few hours ago (before he went to bed, due to the time difference). So I will also post his response below.

KINOSHITA (Prof. Toshihiko Kinoshita, Waseda University): I can understand the arguments of Prof. Okuno, Mr. Terazawa and Mr. Kondo well. But I disagree with Prof. Dore's analysis of the Japanese economy.
Prof. Dore seems to have given many Japanese courage for years by saying that the Japanese economy would pick up or it was not bad. He has stressed mental sickness of the Japanese, which, according to him, is hazardous to a quicker recovery or upsurge of the Japanese economy. Such recognition seems to be poisonous rather than merely being meaingless. Sure, Japan keeps a high level (vis-a-vis GDP) of the current account and Sony, Toshiba, NEC, Sharp and Toyota continue to supply attractive goods to the world, but that does not guarantee that Japan's economy will revive and sustain itself. As Mr.Kondo pointed out, 90% is dependent on the best 10% firms which are rapidly growing as MNCs. They think globally and invest overseas. But our domestic markets are not really open to outsiders and, therefore, we are not getting as much FDI as the U.S., EU or other Asian countries.
One thing we should not forget is that the recent advance of IT as well as a huge supply of workers in the market economy from the socialist block after the end of the cold war has brought us to a rather different world. Prof. Dore seems to overlook it. "Capitalists" in this new world would not hesitate to take any measures to get higher profit (they can now claim "is there any other model?") by making international strategic alliances, by using M&As, by spending more in R&D to fight other rivals, domestic or foreign. Nobody can stop it unless you are protected by one reason or another (at the sacrifice of the general public or 10% good firms.)
In conclusion, what drives Japanese firms is not the consciencious behavior of employers or employees nor their desires, but is such severe reality which forces Japanese top management and firms to improve themselves. If the 90% begins to change a bit faster than expected, Japan's economy can move along, but if not, our future will be dim.

MASUZOE (Prof. Yoichi Masuzoe at GLOCOM, IUJ): Japanese companies today are laboring under the triple burden of excess plant and equipment, workers, and debts. Unless all three are reduced, management cannot be overhauled. For instance, Nissan's Carlos Ghosn is faithfully following this scenario, which represents the kind of structural reform many other business need to carry out. Such reform will spell the end of so-called Japanese-style management.
Japanese style management has three major components: lifetime employment, seniority-based wages, and enterprise (in-house) unions. Actually, the events leading up to the collapse of Yamaichi Securities and the restructuring of Nissan make it crystal clear the Japanese-style management is already a thing of the past.
People can no longer be sure of keeping their jobs indefinitely, and the good old days when wages rose automatically with age are well and truly over.
Seniority-based wages are sort of security blanket; since workers are underpaid when young and reimbursed in effect when they reached middle age, from management's viewpoint, this was a way of keeping employees in the company.
Just as the myth of ever-rising real estate prices is now history, so too are lifetime employment and seniority-based wages. The age of the "company man" is over.
What is needed is an institutional framework that allows enterprising, free-spiritual individuals to spread their wings-in other words, one that enables the emergence of new enterprises and venture capital.

MERA (Professor Koichi Mera, University of Southern California): I agree with the observation that Japanese firms have lost some of the past luster. It may be the employment security as Prof. Okuno observes, or the volume orientation as Mr. Terazawa observes. The atmosphere of gloom (as stated by Prof. Dore) is a result of the failing, and not the cause of it.
In my view, the corporate failing in Japan is not due to any particular actions made by corporations, but is a reflection of the Japanese system itself. The so-called Japanese system worked well during the catch-up stage. The country has increased its GNP and corporations gained confidence.
But the situation changed drastically in the 1980s. I cannot pinpoint the turning point. But, this is related to the economic success of the country. As GNP per capita of Japan exceeded that of the U. S. and most other European countries, the country lost its purpose. There was a sense of complacent and also over-confidence. The ministerial officials lost the sense of mission and started to pursue self-interest. Mismanagement of the economy from the late 1980s to the 1990s is a result of their changed attitude. In addition, they could not respond well to the global trend of business globalization that started in the beginning of the 1980s. Observing shortcomings of the government and ministerial officials, corporations' trust on the government leadership deteriorated.
The business custom that had been built up during the past decades is now creating problems. For example, corporations do not disclose critical information. Bridgestone/Firestone did not disclose defects in tires for a long time. Mitsubishi Automobile did not disclose recalls. These issues could be handled internally (the government and the companies) in the previous regime. But, such handling is not approved in the globalized economy. Corporate managers cannot live with trasparency yet. Similarly, employees cannot live with layoffs and job hunting yet. Remedies for this problem, however, should not come from the government as many may expect. If the government provides guidance to rectify some of corporate behavioral failures, then this may prolong the disease because the government through this measure may want to rebuild the old hiearchical system, which cannot be rebuilt. Corporations must learn from experience and active learning.

DORE: Regarding my poisonous attempts to "give the Japanese people courage", may I ask Professor Kinoshita whether it is or is not true that the major indicator which everybody watches as the key to whether the Japanese recovery has or has not begun are consumer expenditure and investment in plant and equpiment -- particularly by chusho-kigyo. And is it not reasonable to suggest that the low level of consumer expenditure and the high level of savings -- as well as risk-aversion on the part of the chusho-kigyo -- reflects popular anxiety -- a mood very different from that of confident, high-spending, bubble Japan? The American economy bounds along at a great rate, and one of the reasons is because exuberant American consumers consume about 4 percent more per annum than they produce. The trade gap is balanced by capital imports. The rest of the world sends the US its savings which finance its growing cosnsumer debt -- including the Japanese who persist in spending 2-3 percent less than they produce.
Professor Kinoshita complains that Japan is not getting FDI. Does it need it, except as a means, when licensing is not possible. of technology import? With all that excess saving? America gets FDI (though much more portfolio investment) because it is booming. It is not booming because it gets FDI.
I'd be interested to know whether Professor Masuzoe thinks that Japan is now full of "enterprising free-spirited individuals" who would be happy working in organisations where they are directly competing for promotion not just with a narrow age group of people of their own age or three or four years younger or older, but with everybody else in the organisation, irrespective of age? Would he be happy if the IUJ were to appoint 26-year-olds as full professors, and let the muno-joshu remain joshu until retirement?
I agree with Professor Mera about the complacency and over-confidence of the late 1980s being the beginning of Japan's problems, and that the loss of confidence and sense of purpose on the part of bureaucrats could in the long run be very serious. I wonder, though, whether globalisation really does change the effects of failing to give customers honest treatment (Bridgestone, Mitshubishi Autos are the examples quoted). It is true that the Wall Street Journal and the Financial Times have a much more thorough coverage of Japanese business than in the 1960s and 1970s. But I would have thought that it has always been true, even then, that a cover-up loses business. And, as you say, corporations do learn from experience -- as Toshiba is learning in China over its defective disks -- that cover-ups in the end do not pay -- even if with "community-like" firms you try to get every employee to support the cover-up -- as Showa Denko eventually discovered in Minomata.

MIYAO: Profs. Kinoshita, Masuzoe and Mera, you can respond to Prof. Dore's comments, and debate with him, after he wakes up this morning in Italy. In the meantime, let me start our full debate with our panelists.


MIYAO: Let me begin by posting Prof. Dore's comment on Mr. Kondo's opinion in our preliminary discussion.

DORE: I am surprised that Mr. Kondo offers as certain fact that the Japanese non-tradeables sector has only 63% of the efficiency of its US counterpart.
I know that there was a McKinsey Global Institute study recently which claimed something like that. They said, for instance, that the Japanese health care system was outmoded and inefficient and offered as evidence the fact that the average hospital stay in Japan was 24 days compared with only 6 in the US.
But if the Japanese system is so inefficient how is it that whereas the Japanese spend only 7% of GNP on health care and the Americans over 13%, the average Japanese - both men and women - live 4 years longer than the average American? I believe the recent WHO calculation of "years of healthy active life" rather than straight life expectancy, shows an even larger difference. Economists' measures of "efficiency" solely in terms of labour input/market-valued output tell one little about quality of service. Unproductive because of lack of competition, says Mr. Kondo. When I see the vans of 5 different takkyubin companies within five minutes on the same Tokyo street, I find it difficult to believe Mr. Kondo's charge that there is no competition in non-tradeables. And is competition essential for good service? Railways are pretty much monopolies. Not much competition. But show me another industrial country whose railways can beat Japan's for punctuality and cleanliness.

KONDO: As detailed in our recent research ("Why the Japanese economy is not growing: micro barriers to productivity growth" McKinsey Global Institute, July 2000., long life expectancy and low cost of healthcare in Japan are not the results of high healthcare productivity. First of all, the burden on the healthcare system (measured by Disease Adjusted Life Years or DALYs) is 22% lighter in Japan compared to the US. Much of the gap is due to life-style and diet causes that are unrelated to the quality of the healthcare system - with majority of the gap occuring because of ischemic heart disease (diet), injuries (homocide, violence, motor vihicle accidents etc), HIV, lung cancer (history of smoking), drug and alcohol usage. So this explains why the Japanese healthcare system would be about 20% cheaper. About the same magnitude of the cost gap can be explained by different wage levels of healthcare workers in the two countries. The rest of the gap can be explained by less services in Japan (nurse/patient ratio etc) which is half offset by lower productivity in Japan (3 times more drug prescription per disease per capita, 3 times more bed per capita stemming from longer length of stay for the same disease etc).
As for the importance of competition in services, Prof. Dore's takkyubin example is a wonderful example of a rare innovation that has pushed competition in Japanese services. Mr. Ogura who started takkyubin is a folk-hero in the deregulation circles because of his success in fighting the Ministry of Posts and Telecommunication to have that service approved. Unfortunately, much of the service industry - best exemplified by the retail industry where 55% of employment is still mom-and-pops protected by entry barriers against large retailers in different guises - is still highly regulated and not subject to productivity improvements.

MIYAO: The following is Prof. Dore's response to Mr. Kondo's reply above.

DORE: Mr.Kondo obviously prefers "high health-care productivity", as measured by McKinsey's indices, to the substantive objective of keeping the population healthy. I prefer the latter, and especially if it can be done by spending only 7 percent of GNP, as in Japan, rather than 13 percent plus as in the US.
As for these mon-and-pop stores, I'm delighted that somebody is protecting them. I live part of the time in Italy where fishmongers and grocers and ironmongers are still protected by the same sort of regulations as in Japan, and part of the time in Britain which, with the US, is a leader in the diffusion of the efficient supermarket. As long as I can drive a car, I certainly benefit from the British supermarket's convenience and sometimes cheaper prices, (though in a few years when I can no longer drive there will be no shops I can walk to), but I am enraged by the way in which -- having wiped out the mon-and-pop stores -- the supermarket oligopolists profit at my expense by their technique of selling things only in large packages and limiting my choice. It is a relief to get back to Italy where the baker will cut a loaf in half for me, where the ironmonger will sell me 5 screws if that is what I want instead of a package of 50, where I can buy a single nasubi not a package of three -- and where the moms and pops who run these stores are interesting characters whom it is pleasant to deal with. There is, Mr. Kondo, such a thing as the quality of life.

MIYAO: Mr. Kondo, I know you wish to continue your dialogue with Prof. Dore. But after sending the above message, he went to bed. So we might resume this part of our debate later, and in the meantime I will turn to Prof. Dore's comment on Mr. Terazawa's opinion.

DORE: I was particularly interested by Mr. Terazawa's remarks about volume production being OK in the 60s and 70s but inappropriate now. Is volume really not important any longer? Ask Sony and Nintendo about Playstation and whatever the rival Nintendo machine is called. Or ask Nissan and Toyota. What does seem to be clear though is that, there has been a change in talk about targets and achievements. There used to be much more talk about market share than there is now. I wonder why that is? One hypothesis is as follows: when the economy is growing the competition for market share is competition for the increment in sales. A firm can gain in market share even though all its competitors are also growing in output, albeit at a lesser rate. When demand is stagnant, however, you can only increase your market share at the expense of your competitors' sales. A market share objective thus becomes more aggressive. And aggressive competition is considered rather bad form? A breach of gyokai no jingi? Is that the answer? I don't know. But a second question is whether less talk about market share actually means a change in the targets and measures of achievement that firms use in reality
Mr. Terazawa says: "To enhance the profitability of firms, unprofitable businesses should be spun off." This is what is taught in business schools. Business schools are devoted to teaching their pupils how to maximise shareholder value in the companies they will later run. But surely an economist or a bureaucrat should be concerned, not just with the profitability of particular firms but with the welfare of the whole economy - i.e., he should be concerned, also, about the unprofitable businesses which are "spun off". Since Mr. Nishimuro has written us a paper, let me ask Mr. Terazawa what he thinks should happen to Toshiba's elevator business, which I gather is one of the least profitable product lines in Toshiba's portfolio. Should Toshiba spin it off? If it did so, perhaps Toshiba would raise its RoE, but would the Japanese economy as a whole - the welfare of Japanese citizens as a whole -- benefit if Toshiba sold the business to, say, Hitachi? Or to Otis? Or if the present managers of the business were willing and able to do a management buy-out?

MIYAO: Mr. Terazawa, what would you say to Prof. Dore?

TERAZAWA: Volume is still important for a growing market, especially when controlling the de facto standard is vital. However, in a slow growth environment, realizing profit out of smaller volume becomes necessary. The shift to capital market based financing makes enhancement of profitability and strengthening of balance sheets even more important. I believe that many Japanese companies are in fact changing their management goals to ROA or reduction of debts.
Spinning off does not necessarily mean unemployment. The employees may be better off working for a stronger business. In fact, Toshiba spun off its ATM business to Oki without cutting its workforce. The consolidation can make the ATM business under Oki competitive. Toshiba, after the spin off, can strengthen its competitiveness. Thus a win-win situation can be established.
As for Prof.Dore's original observation, is it just the "atmosphere" that is causing all the apparent problems in our economy and corporations? A large number of once "strong" firms, much larger than the number of failing companies that are usually expected, are now struggling with eroding competitiveness, low profitability and weak balance sheets.

MIYAO: The following is the last message from Prof. Dore, responding to Mr. Terazawa's reply.

DORE: A propos "spinning off" I have no problem believing Mr. Terazawa's assertion that there can be win-win situations. It may well be that both Oki and Toshiba had enhanced profits as a result of the spin-off of the ATM business. It may be that there were increases in productivity which improved the general welfare. Without knowing anything about this case, though, I would guess that probably the Toshiba employees in the ATM business were the losers in shifting from higher Toshiba wage scales to somewhat lower Oki ones? And whether that had an effect on the union's attitude to the sale of the ATM business and the morale of the Toshiba workforce only somebody closely acquainted with the company can know.
But I would draw a distinction between spin-offs which involve selling parts of a business to somebody who can synergistically make them better, >from (a) the sort of Jack Welch strategy of getting out of any line of business in which you cannot be among the top two or three, (b) doctrinaire pursuit of "stick to core competence" business shibboleths (conglomerates can be quite effective and Aoki-sensei's notions about holding companies as a way of organizing them can be relevant here) and (c) getting rid of less profitable divisions whose lesser profitability depends on shifts in market forces ---because they are fushin-sangyo --instead of taking on the responsibility of running production down "humanely" -- i.e., by finding the surplus people other jobs, as far as possible within the firm.
I am sure that Mr. Terazawa is right that many companies are changing mangement goals to some measure like ROA, but is it really the case that they are forced to do so because of the shift to capital-market-based finance? Is a generational shift in ideology not more important? One certainly hears far more about rating agency rating than one used to, but is this because of a real shift in the exigencies of financing? How far has the ginko-banare really gone? Do fluctuations in a company's share price correlate with their ROA, and do such fluctuations decisively determine the cost of a company's new capital? These are genuine, not rhetorical questions because I do not know the answers.
Too sleepy for any more, I'm afraid. RD

MIYAO: Thank you very much, Prof. Dore, for staying up so late over there. Have a good night sleep, and please send us more comments when you wake up tomorrow (this?) morning.
Mr. Terazawa, in the meantime, do you have any comments on the other two panelists?

TERAZAWA: My question to Mr. Kondo is as follows. It is true that we have a number of unproductive sectors. But those sectors have always existed in Japan. Why could the Japanese companies have dominated the global markets in the past in spite of these weak sectors?
I would like to pose a similar question to Prof. Okuno. Why could the Japanese companies be so competitive in the past when they were also emphasizing employment security?

MIYAO: Any response, Mr. Kondo or Prof. Okuno?

OKUNO: I would like to respond to Mr. Terazawa by saying that regarding the effect of the Japanese rigity of the labor (and sub-contractor) the relationship was positive against the first oil crisis, the second oil crisis, and the economic problem created by the Plaza aggreement and the accompanied yen appreciation. It was negative, however, against the problems the "bubble burst" created. I think the Japanese economic system changed around 1975 (as I said in the preliminary discussion) and both the nation itself and each company started to emphasize job security too much. Within companies, unions and workers start to help management to secure jobs. Against foreign competition (against which productivity increase is efffective), Japanese exporting firms managed to deal with this harsh competition by yet another productivity increase with the help of those stakeholders who already invested very much in the relation-specific investment. However, those sectors which are not faced with the foreign competition (especially, firmst belonging in Mr. Kondo's 90%) lost management/working descipline and even those exporting firms lost the ability to react flexibly against IT revolution.
By the way, I have a comment on Mr. Terazawa's opinions on volume orientation. I don't understand what caused volume orientation. It must be the result of something, not the cause of the problem.

MIYAO: Mr. Terazawa, would you respond?

TERAZAWA: Certainly the description of the Japanese corporate management as "volume oriented" is an abbrieviation. It does not necessarily capture all the attributes of the Japanese management. As Pro.Okuno points out, volume orientation does result from the emphasis of job security, which is another important attribute of the Japanese management.
However at the same time, volume and size orientation enabled life time employment and seniority. Volume and size orientation, especially after the bubble years when companies believed in the illusion the high growth era was back, resulted in over-sized firms, which were slow in decision making and over-burdened with low-performing assets and substantial debts they hade accumulated during the bubble years.

OKUNO: For the latter half of the Mr. Terazawa's reply, I think the real problem of Japanese export industry is that the top mangers stuck to old products and job security too much. They should have (as an afterthought) restructured the corporate system, laid off old employees, shifted to more IT oriented products, and changed the business style more speedy decision making. By the way, I would also like to comment on Mr. Kondo's comment. I agree most of what he said. Deregulation (relegulation) is very important not only distrubution industry but other industries, such as electricity generation, construction industry, agriculture and finance, not only eliminating entry barriers is important but relaxing regulations about labor relations and introducing price system on such areas as introducing auctions on frequency band for cellurar phones and brodcasting. However, I believe deregulation (and structural reform) is not enough for contemporary Japan if the reform is only about our economy. Much wider social reform is important. An example is the back-scratching alliance of politicians, bureacrats and those with vested interests. In short, I think what Mr. Kondo is correct but not covering every problem Japan currently faces.

MIYAO: Mr. Terazawa or Mr. Kondo, you may reply.

TERAZAWA: I agree with Prof.Okuno's "after thought" recommendation, with the reservation about laying off old employees. ( I believe that before laying off, there is much room left for reducing the level of compensation in line with the performance of the company and particular individual.) But the question stil remains. Why couldn't the managers come up with such a decision? Why did the managers stick to the old products. Emphasis of job secutiry is one answer. But I also believe that the relative lack of profit orientation led to the delay in scrapping old product lines. The weakness in corporate governance might have contributed to the reluctance to scrap old businesses which some influential "Senpai = Ex-CEO etc." might have started. Speedy decision making was difficult for an over-sized companies which have grown through the era of volume and size orientation.

KONDO: I wish to respond to Mr. Terazawa first, and then to Prof. Okuno next. First, to Mr. Terazawa, 10% of the economy that is global and productive have had not choice but to be efficient. Auto, electronics, steel and machine tools are globally traded and managers understand that they have to increase productivity in order to survive. However, domestic manufacturing (such as processed food which is largely non-traded) and domestic services (which face negligible trade competition) do not face external pressures. The question for Japan is: how do we increase competitive dynamics in domestic sectors?
Now, I will respond to Prof. Okuno's last email, I believe that political/social reform that Prof. Okuno discusses are prerequisites for the structural reform of the economy. Sweeping reforms that enhance fluid entry, competition and exit will only be possible through changes in wider political/social environment.

MIYAO: Let me turn to the question: What kind of "reform" is needed for Japanese corporations to regain competitiveness in the 21st Century? Prof. Dore has sent us his comment on Prof. Okuno's point about the "flexible boundaries" in our preliminary discussion, so let me post his comment and have Prof. Okuno's reaction.

DORE: Prof. Okuno's discussion of the "flexible boundaries" of the firm is interesting. In one sense they surely are quite flexible - the option of out-sourcing, sub-contracting is much more frequently resorted to than in other economies, though it maybe that sub-contracting relations have become more rigid (in the 1965 recession firms took previously out-sourced work into their own establishments at the expense of sub-contractors much more readily than later). But the trade-off for greater rigidity is that your secure sub-contractors will be much more enthusiastically and even sacrificially cooperative - in new product development, for example. Similarly the rigidity of lifetime employment is the price you pay for having dedicated workers. On holding companies, I thought that the main advantage was not so much in any improvement in information flows but rather in employment arrangements. It makes it easier when companies are formally separated rather than divisions of the same company to have different pay scales - negotiated with different unions - higher for the more complex and skill-intensive businesses, and lower for those which are less skill-intensive, brain-intensive and can make do with workers who are not so bright, conscientious, energetic or whatever. Major firms (NEC, for instance) have been making this sort of differentiation for years even without holding companies (honsha-saiyo and shisha-sayo), but I suppose reorganising into a holding company system provides an occasion for doing it more thoroughly.

OKUNO: About "flexible boundaries of the firm"; flexibility and rigidity of the boundary should depend the type of employees (and supplying companies and distributors), kind of jobs they engage in (kind of outputs the company produces and that of production process it uses), in addition to the social environment (such as the level of IT). For example, bounday should be more flexible for those relation specific investment is less improtant; for managers/executives and R&D related personnel, companies producing modularized products (such as Desktops), and potentially relevant people use more IT (such as in the Scillicon Valley). On the other hand, it should be more rigid for those where relation specific investment is more important; in order to provide security and company loyalty for those workers who are in production process and distributing (where firm specific skills are important), for those supplying companies where firm specific investment are more important (such as notbook PC's).

TERAZAWA: I agree with Pof.Okuno's observation that the felexibility and the rigidity of the boundaries depend on the type of employees and kind of jobs, businesses. Ultimately, it is the decision of the top managers to decide which corporate model the company should adopt.
The role for the policy makers is to ensure that the managers can actually implement his or her decision as smoothly as possible. It is also important to ensure that the managers are under the right kind of "pressure" to come up with optimal conslusions. For the former, reform of the commercial code and the tax code to make reorganization and M&A's is essential. Introduction of holding companies and consolidated taxation is important to faciliate the process of "downsizing" the over-sized organization to speed up decision making. Further reform of the bankruptcy procedures are vital for firms to restructure their balance sheets. Enhancement of labor mobility is essential for firms to attract talented people to support the shift to IT related business. Rigid labor laws must be relaxed. Reduction in the compensation level should be realized more easily reflecting the changes in the business environment. "Portability" of pension fund must be ensured. For workers not prepared for IT, effective retraining must be designed.
For the latter, reestablishment of corporate governance is necessary. With the erosion of the influence of the banks, the shareholders should not continue to be silent. In the pension reform, the trustee of the funds should be obliged to exercise their voting rigths for the interest of the recipients. Introduction of independent directors can prevent "Nareai = relationship based" decision making among internal directors who in many cases are mere "yes men" to the President.
I am cautiously optimistic about the possibility that the Japanese companies can reform themselves.
Although the speed at which institutional frameworks are reformed by the government is still slow, I believe that it is fair to say that there has been significant changes made in areas such as tax codes, commercial codes, reform of the financial sector, reform of the accounting system, ecpecially in the late 90's.
While the government still has a lot of homework to finish, there is much rooom opened for the managers to make changes happen. The managers can now capitalize on the changes provide by the government.
We have already seen examples of visionary and reformist leaders in some Japanese companies, including SONY, and to some extent TOSHIBA. While it is true that changes in Japan start very slow at the initial stage, once the recognition of the need to change is shared by the majority of people, the changes can occur very rapidly. I believe that we are getting closer to that turning point.

OKUNO: The reform we need, I believe, should consist of at least four levels. At individual level, we need to educate future generations more independent (from government protenction umbrellla) and more vocal. Young generation Japanese are fed up with the ways political decisions are made and how terrible the social security scheme is designed for them. Yet, they do not vote for a change.
At corporate level, we should be careful what type of jobs and what type of employees are better fitted to traditional security-oriented employment relationship. The same is true for parts suppliers and distribution network. Even if security-oriented employment is better, still question remains whether the relation specific investment is important with the firm itself or with a group of employees. If it is the former, firms must offer the job security. If it is the latter, firms can buy and sell the group of people. Here the holding company scheme is also important.
Let me add on more remark. Blue collar workers and white collar workers are different in terms of the degree of firm specific investment. One of the problems of Japan in 90's was excessive employment of white collar investment. At the market level, we need to de- or re-regulate many markets (especially those 90% of what Mr. Kondo described.) We also should be careful to maitain (or create) safety nets, as simple elimination of entire regulation might jeopardize many poor family and/or cause lack of convenience (as Prof. Dore explains).
At the political/social level, we need more transparency and accountability (of politicians and bureaucrats.) This has become more important than a decade ago, as the IT revolution lowered the processing and transmission cost for information. This worked as the lowering the supply curve of information market. Consequently, the volume of information increased. With limitted capacity of human being, each individual has very small amount of informationo available in the world. Also, the content of information held by each individual has become completely different. In short, the degree of asymmetry of information has increased. One area this is important is between people and government. We must resign the governent so that the information they have should be more easily availabe for citizens and any misuse of public fund and power (by politicians and bureaucrats) be held accountable.

KONDO: There are three pillars of reform that are needed to increase the productivity of 90% of the Japanese economy that is domestic and unproductive. First, one needs to remove entry barriers - for example, large scale retail location law and urban redevelopment law for retail, tariffs for food processing, zoning for residential construction and reimbursement system for healthcare. This is the much talked about deregulation of the Japanese economy. Second, one needs to increase the information transparency of domestic sectors - particularly residential construction and (secondary housing). Price and quality information is critically lacking, and the government needs to force information disclosure. Third, one needs to enhance exit of unproductive enterprises. A key characteristic of the 90s has been the strengthening of the exit barriers - whether they be government loan guarantees or tax codes that provide incentives for mom-and-pops to keep their land as opposed to selling. For domestic markets to be competitive and efficient, all three reforms need to be undertaken simultaneously. This will increase competition and thus productivity of the unproductive domestic sectors that are hampering overall growth in Japan.
The success of export-driven sectors shows that, given the right competitive dynamics, Japanese industries are worldclass at improvements in productivity. Structural reform to create these competitive dynamics (stimulated by political/social reforms that Prof. Okuno mentioned) will push the Japanese economy towards recovery.

MIYAO: Thank you, Prof. Okuno, Mr. Terazawa, and Mr. Kondo for your insightful opinions and comments.
I am afraid our time is up for now.
I would like to resume our discussion after Prof. Dore joins us again. In the meantime, I would like to express my thanks again to all the panelists for your active participation and contribution.

MIYAO'S MESSAGE TO PROF. DORE: If you wish to make any comment on the discussion which took place while you were asleep, you can send it to me anytime.

TERAZAWA'S RESPONSE TO PROF. DORE: I believe that the shift to capital market based financing has had a significant impact on the Japanese management. It is true that the degree to which ginko-banare has gone, has not reached the level of the disintermidiation in the U.S. But the share price reflects the difference in profitability, albeit not necessarily correlating with the ROA. In the good old days, the stock prices of the major banks, trading companies, steal companies were at comparable levels in the respective industry. Now, there are significant differences in the stock prices, among the firms in the same industry, reflecting the profitability of companies.
As equity financing is not so widely used these days, the drop in the stock price does not yet affect the cost of new capital right away. But significant drop in the stock price can make the lenders and suppliers worried enough to cause a serious negative impact on the business. In a market in which M&A is seriously considered as a means to reorganize the industry, the level of the stock price is very important in determining the cost of M&A using its stocks as "currencies" These are the reasons why the managers in Japanese companies are more concerned about the level of their stock prices and the profitability that affects the prices.
As for Prof. Dore's distinction between spin-offs, I believe that focusing only on the motivation of the seller is not appropriate. You need to look at the buyers as well. When a company puts one of its businesses for sale, who would come up with the highest bid? I believe that it is only the buyer who can add value to the business, especially through synergy, that can bid the highest price. Hence, as long as the seller looks around for the highest bidder, regardless of the motivation of the seller, the chances that the busines would be made better, and the spin off being a good one according to Prof. Dore, is reasonably high.

KONDO'S RESPONSE TO PROF. DORE: I would like to respond to Prof. Dore's comments about healthcare and mom-and-pops.
I would like to start by saying that I am all for "quality of life" (smile).
The issue of the quality of healthcare is critical as Japanese population ages. Japanese have the option to remain equally healthy (mainly the consequence of diet and lifestyle choices) while increasing the efficiency of the healthcare system. On a per capita basis, the Japanese get three times more drugs and stay in bed five times longer than American or European patients because of incentives associated with fee-for-service incentives. These inputs are wasteful and even harmful and should be removed. What is saved in terms of healthcare costs can help the budget and/or be utilized to provide much-needed services and new treatments that are lacking in Japan. This would be a much healthier outcome for the Japanese population.
As for mom-and-pops in Japan, their productivity is only a fifth of modern retail formats. Since retail accounts for 12% of overall Japanese employment, and mom-and-pops account for 55% of retail employment, this is a serious drag on the overall Japanese productivity and thus GDP per capita. Seven-Eleven Japan shows that small stores can be extremely productive (140% of US retail average) while providing just the kind of convenience (small packaging, proximity, late hours) that Prof. Dore likes. For those who like stand-alone traditional stores, speciality retailers (eg. high value added food stores) are also very productive in Japan and France, offering local touch and selection. Then, there are large-scale stores for those who appreciate low cost. All these are productive alternatives to unproductive mom-and-pops that by no means has to be oligopolistic. The problem in Japan is the opposite of possible oligopoly but rather complete lack of large chains whereby top ten retailers account for only 2% of retail employment. The balance is obviously skewed.

COMMENT FROM OUR AUDIENCE (Masaaki Horiguchi, Tokyo): I have been impressed very much by the debate among the panelists and also by Mr.Nishimuro's paper. My comments are as follows;
(1) It seems that there is some confusion on the perception of "Japanese competitiveness". Many people think that Japanese auto sectors and electronics sectors are leading ones in the world. It is true at this moment but we are afraid of their future in the high-cost economy if the reform is not done. Those sectors may keep their strength to the some extent. But we have many weak sectors in mega-competition in the overseas markets and in the domestic markets in the future. One of them is the infrastructure/plant manufacturers' sector like generating power suppliers, transportation equipment manufacturers, and telecommunication system suppliers. Now they are keeping the dominant power in the domestic market with high barriers but in the future, their market-share may be eroded very much in the liberalized economy. The quality of Japan's infrastructure is well known as the first class in the world but their competitiveness is very weak with high cost, overspecification and lack of soft-services. The "competitiveness" discussion should pay more attention to such differences between strong and weak sectors.
(2) How to strenghthen such weak sectors is the next question. Their internal management changes should be done as debated in the forum. In addition to internal changes, Japanese corporate strategies should be scrutinized and new strategies must be tried. For example, the "hard" oriented business-style should be transformed to a "soft" oriented business-style. Consulting, engineering and O&M are to be included in their business scope. Out-sourcing may be one of the strategies. In order to strenghthen them, M&A may be considered. "Management changes" should be better to include business style changes as mentioned above.
Nishimuro's strategy is right and his expectation, I hope, will be met with the results of good business.
Thank you very much for your kind attention. The debate is very useful and interesting.

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