Business in Japan: JapAnglo-Saxon capitalism

JapAnglo-Saxon capitalism

Nov 29th 2007
From The Economist print edition

Have Japanese business practices changed enough?

TO AN observer watching a Toyota Prius drive by, the car's hybrid propulsion system is invisible, but its improved performance shows up clearly in its fuel-consumption figures. The same applies to Japan's new hybrid industrial model. Outsiders cannot always tell how much a particular company has changed the way it does things. But the improvement in Japan's economic performance is clear, and at least some of it is due to the adoption of the hybrid model.

“Japan has both embraced and rejected American capitalism,” observes Mr Vogel of the University of California, Berkeley. Having identified the American style of capitalism as a possible model, Japan's business leaders were highly selective about which aspects of it to adopt, he says. Under the resulting hybrid model, Japanese companies may well maintain close co-operation with employees yet at the same time profess support for shareholder value; remain committed to lifetime employment but also offer merit-based pay and share options; and engage more fully with the global economy yet keep certain activities in Japan and replicate some Japanese practices even in foreign markets.

How prevalent is the hybrid model? Gregory Jackson, an expert on international comparisons of corporate governance at King's College London, and Hideaki Miyajima of Waseda University analysed data on 723 Japanese companies gathered by the finance ministry and identified three clusters: 24% had adopted hybrid models; 42% were traditional Japanese firms; and the other 34% were somewhere in-between.

Of the firms with hybrid models, 94% offered lifetime employment, 45% merit-based pay and 39% employee stock options. These companies were more likely to have outsiders on the boards than traditional firms, made more use of corporate bonds as a source of finance and less use of banks, and had a high level of foreign or institutional share ownership. This group included many large, internationally oriented firms, such as Toyota, Canon, Yamaha, NTT DoCoMo, Hitachi and Mitsubishi. Toyota, regarded as an archetype of corporate Japan in many respects, is a typical example: it has switched from bank financing to bonds, has a high level of foreign ownership and has introduced stock options. But it remains committed to lifetime employment and has resisted putting outsiders on the board.

All of the traditional Japanese firms offered lifetime employment and none merit-based pay; 19% awarded employee share options. They generally had boards consisting entirely of insiders, relied on bank finance rather than bonds and had few foreigners and institutional investors holding their shares. They were typically involved in industries such as construction, chemicals, textiles, machinery and food. Companies in the third cluster retained traditional ownership and finance structures, but some firms had adopted more market-oriented employment policies. Firms in this group included retailers, technology firms and family-controlled companies in a variety of industries.

Illustration by JacOn average, notes Mr Jackson, hybrid companies performed significantly better (measured by return on assets) than traditional Japanese firms or those in the intermediate group. Evidently the hybrid model allows firms to bring their distinctive competitive strengths to the wider world. And although they accounted for only 24% of Japanese firms, this included a disproportionate number of Japan's industrial giants, so the hybrid cluster accounted for 67% of the workforce.

This raises the question of how stable the hybrid model is, and whether it is just a step on the way to a total embrace of the Anglo-Saxon model. Mr Jackson points out that the number of companies introducing the American-style committee system has begun to slow and the debate on corporate-board reform has cooled. Now that the economy has started to recover, the decline in cross-shareholdings has halted and even gone into reverse. All of this, he suggests, implies that the hybrid model is stable, and will not prove to be just a halfway house on the way to an American model.

Halfway to America
“We don't have to go all the way to America,” says Yukio Yanase, deputy president of Orix, a financial-services firm whose founder, Yoshihiko Miyauchi, is a strong proponent of more American-style corporate governance. “At Orix we often say: ‘Let's go to Hawaii.' It lies in the middle,” explains Mr Yanase. Appropriately enough, Orix is listed in both Tokyo and New York, and half of its board members are outsiders.

The idea of a middle way that can act as a model for other countries is seductive. “A lot of Asian countries are saying: ‘We hope Japan will succeed, so we have a new model that combines capitalism with social values',” says Hirotaka Takeuchi of Hitotsubashi University. Does that mean it is something like the European model? Yes, but not identical, because taxes are lower and the state is smaller in Japan—and unlike in France, Germany or Scandinavia, companies provide a lot of social support.

Another difference with many parts of Europe is that in Japan business is regarded as a respectable pursuit that provides social goods rather than a necessary evil, notes Mr Marra of A.T. Kearney. But he thinks taking the middle way would be a mistake. Unless it becomes more like America, he argues, Japan risks ending up like Switzerland: comfortable and complacent, but irrelevant. Japan is undoubtedly changing, he argues, but not fast enough.

Other Japan-watchers express similar concerns. Japan may be the world's second-biggest economy and may represent around half the entire Asian economy, but it could yet become an economic backwater as America and Europe focus instead on China, says Mr Jones of the OECD. The danger is that having bypassed Japan since the early 1990s, foreign companies might not even notice that the Japanese economy is recovering. Mr Porté of Shinsei Bank says faster reform is needed because Japan is changing more slowly than the rest of the world. “China and India are changing very rapidly, so we need to be concerned about keeping up with all of that,” he says. “The job is not finished, but we risk being stuck.”

Kuniko Inoguchi, a member of parliament and a former minister in the Koizumi government, does not think that the pace of reform has slowed. Instead, she says, the focus has shifted to fine-tuning the impact of the reforms. There is no question of backsliding, she insists: “companies now see there is no way to go back” and are continuing with their own programmes of internal reform.

Mr Vogel goes further, arguing that Mr Koizumi's influence has been overstated and that his departure does not mean that change has halted. “The most important reforms are technocratic things that just plod along, so that process will continue,” he says. He even argues that it is dangerous to reform too fast, and that Japan has been sensible to adopt reforms in a selective, incremental way.

Where will corporate Japan be in a decade's time? The optimistic scenario, says Mr Chhor of McKinsey, is that Japan's hybrid model will enable it to re-emerge as global leader, driving progress in electronics and environmental technology in particular. “That would provide the country with the vitality to address the two-Japans challenge,” he says, referring to the divergence between rich and poor, global and local companies, pensioners versus workers, regular and non-regular employees, and rural and urban communities.

The pessimistic scenario is that the slow grind of reform will continue, but without providing enough growth to enable the government to tackle the country's huge debt as the population ages and the tax base shrinks. “I am concerned that we'll have slower growth and weak consumption, and that Japan's problems will simply become exacerbated,” says Mr Porté. He is particularly concerned that Japan's brightest youngsters may leave the country in search of better opportunities.

The actual outcome will probably be somewhere in-between: a slow muddling-through, suggests Gerald Curtis of Columbia University. But there are two things that could change the picture dramatically. The first is that the demographic shift and the resulting labour shortage might actually help to spur faster reform and new technological developments. “Rather than being the biggest threat, the retirement of the boomers is the biggest opportunity,” says Mr Takeuchi.

Out of misfortune
When Japan is faced with a crisis, it often responds by devising new technologies, he notes. “So this will be a big impetus for Japan to move into robotics, nanotech and so forth to replace manpower. I'm really looking forward to it.” Atsushi Seike of Keio University recalls that Japan has successfully adapted to big changes in the past. And he points out that China and South Korea also have ageing populations, though they are further behind—so if Japan can solve the problem, it could provide a model for those countries.

The second intriguing possibility is that the pace and nature of technological change might shift in Japan's favour. It is clearly less successful than America in producing internet start-ups and software companies. But if the next big technological wave involves clean-energy technology, as seems likely, Japan could have an advantage. Once it is a matter of incrementally refining new energy technologies and manufacturing them in vast quantities, Japan will be very well placed. After all, it is already the leading manufacturer of hybrid cars and solar panels.

Inevitably, Japanese observers tend to stress how far their country has come over the past decade, while foreigners emphasise how far it still has to go. Yet there is general agreement that reform will continue; that the hybrid model will be developed further and refined as more companies adopt it; but that this does not mean Japan will drop its way of doing things in favour of an all-American approach.

Look at the Toyota Prius again. Its hybrid design is also being refined. The next version, due in 2010, will be a “plug-in” hybrid with a better battery pack that will be able to make short trips entirely on electric power. Toyota's Mr Cho says he has recently ridden in a prototype, “and believe me, it's wonderful.” The hybrid design will also form the basis of cars powered by fuel cells. To be sure, some people think cars should simply go all-electric, just as some people think that Japan should go all-American. But there are plenty, too, who believe that the future is hybrid.