Montreal Forum Report: Will the Sun Rise Again?
Keikichi HONDA (Chairman of the Board of Directors of NCR Japan, Ltd.)
(This is an abridged version of Chairman Honda's presentation at the GLOCOM-UQAM Forum in Montreal on November 24, 2003)
It has been said that Japan is no longer the land of the rising sun, but rather of the setting sun. In fact, many people in Japan are talking about the "lost decade," referring to Japan's poor economic performance for more than 10 years. The question is why the sun set.
In my opinion, what might be called "institutional fatigue" has a lot to do with the economic malfunction in Japan. That means too much conformistic ways of doing business as well as too much government involvement in private affairs in the past. Also continued mistreatment of balance sheet recession as a result of burst bubbles of assets value inflation made the Japanitis worse.
The combination of these negative factors has resulted in the poor economic performance in the real sector and the large amount of non-performing loans in the financial sector. Institutional fatigue has prevented these problems from being resolved for more than a decade.
However, the dawn of a new day has come. That is due to the structural reform adopted by Prime Minister Koizumi, who is trying to deal with excessively traditional and unique Japanese ways of doing business by moving towards global standards, and who is combating too much government involvement by moving towards deregulation and privatization. In fact, there is a successful model for this kind of reform: the movement from government control to private business in the case of JR, NTT, JT, etc. initiated by the Nakasone administration two decades ago.
The Koizumi reform has two primary objectives. The first is to deal with the balance-sheet problem by inducing the direct disposition of non-performing loans in the banking sector, and the second is to facilitate the application of IT in various sectors of the economy.
The first objective is now being achieved, as the ratio of bad loans among major banks has been leveling off for the last year or two. I am sure that the problem of non-performing loans will be resolved and the pressure of deflation will be eliminated within the next couple of years. That would satisfy necessary conditions for the dawn of a new day for the Japanese economy, not to mention improved productivity by the introduction of IT.
More specifically, institutional fatigue is being amended by (1) unfastening cross-shareholding and adopting global accounting standards, (2) recognizing ROA and ROI, as well as shareholders' value, and (3) adopting the attitudes of "differentiate and focus" and "from quantity to quality." Japanese companies would no longer pursue meaningless market share, but rather seek higher rates of return on assets and investments by taking higher risks in management.
In fact, the IT revolution is already under way and impacting Japanese business management. It is changing the Japanese seniority oriented pyramid organization into a flatter organization, changing the employment system, raising the potential growth rate with improved productivity and providing new business opportunities. We are seeing more IPOs and the emergence of a creative community such as Bit Valley in the Shibuya district in Tokyo.
Now that institutional fatigue is close to being amended, the Japanese economy is facing new opportunities and new frontiers in the following fields inter alia; (1) e-business in the "ubiquitous computing" environment, (2) broadband and mobile business, (3) opportunities for electronic devices makers thanks to TRON and Linux after the end of OS wars,(4) environment, energy, and emerging technologies, (5) transportation technologies including mass traffic control system and hybrid engines, (6) IC tags bringing about a revolution in distribution systems, and (7) robotics and so on so forth.
In the long run, Japan should become a more attractive place for foreign visitors as well as investors. Actually, Japan has potential to become a tourist paradise with favorable natural and cultural conditions. Furthermore, by expanding the role of robots and reviewing immigration policies, Japan could provide a model for an aging society with a shrinking population that is nevertheless maintaining a high standard of living forever.