Big cover story in Businessweek on how Japan is in Net infancy, and is poised to explode. Pay special attention to the bolded parts for quips from our man.
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A New Japan? (int'l edition)
The collapse of the bubble economy, increased foreign influence, and the Internet may finally bring about real change
It was a chilling moment, a throwback to the days before the crisis. On Oct. 5, Hakuo Yanagisawa, Japan's point man for financial reform, was abruptly removed. In his place: Michio Ochi, a 70-year-old ex-bureaucrat from the Ministry of Finance (MOF). Yanagisawa, in his brief tenure, had actually acted like a regulator, calling Japan's wayward banks to task, forcing mergers, and opening the sector to foreign investment. Now the markets fear that Ochi, an insider, will lead the forces of reaction to undo Yanagisawa's work.
The government insists that Ochi is every bit the reformer Yanagisawa was. Yet Yanagisawa's sudden exit bolsters the skeptics who contend that the Japanese Establishment, despite the battering it has taken, will still find a way to preserve its cloistered economy--and remove anyone who seeks to open it. Reform? Yes, but just enough to prevent another real crisis. As for the painful change that will produce a more open society and economy--well, that can wait.
Still, in unexpected places, glimmers of a quiet revolution can be discerned: in the foreign brokerages sprouting in Japan, where more and more investors are discovering online trading and affordable investments; at the Mazda Motor Corp. engine plant in Hiroshima, where women are finally allowed to work the higher-paying night shift; or in Tokyo's hip Shibuya district, where Internet startups are beginning to hum. Hiroshi Mikitani, 34, for example, feels at home in Shibuya: He's running Japan's hottest online shopping mall, Rakuten, in offices not far from the neighborhood. He used to hold a prestigious job at the conservative Industrial Bank of Japan. Now he's a full-fledged citizen of the Net who has chucked his salaryman's suit in favor of blue jeans. Says Mikitani: ''There will be a tremendous [jump] this year and next for the Internet economy.''
POPULAR WILL. Naysayers would say these trends aren't enough to transform Japan Inc. After all, over the decades, plenty of pundits have waited in vain for Japan to change itself. And revolutions don't always succeed. Yet this time there's something different about the forces at work. Some of the advocates for reform come from within the government. But much change is now inspired by foreigners, executives, entrepreneurs, and ordinary Japanese--rather than orchestrated by the ministries. That wasn't the case in the other big periods of reform in Japan, such as the Meiji Restoration or the occupation years, when change was more a matter of government fiat than popular will. If the ministries cannot dictate all the change, they cannot control it, either.
There's also a profound shift in mood in Japan. Anthropologist and author Noriyuki Ueda thinks the flip side of Japan's economic slide this decade ''is the collapse of our cultural and spiritual values'' rooted in Confucian deference to authority and the postwar fixation on the economic advancement of Corporate Japan. That fixation on growth, in the minds of Japanese, led directly to the bitter aftermath of the bubble economy.
Clearly, many Japanese want something different, as recent surveys prove (page 61). Even among some of Japan's mandarins and executives, there's a grudging recognition that something has to give now that every old strategy to break out of stagnation has been exhausted. Says Shosaku Yasui, chief executive of textile giant Teijin Ltd.: ''The Japanese system of doing business has hit a wall.'' Executives at the banks, long the most protected of all industries, fear the fail-safe guarantees are gone. ''We aren't restructuring because MOF is telling us to,'' says Kaneo Muromachi, the new president of Sanwa Bank Ltd. ''We are doing it because we need to survive.''
This dislocation is giving opportunities to outsiders they never had. Sometimes the outsiders are foreigners. Sometimes they are Japanese who have decided to check out of the traditional ways of corporate work to strike out on their own.
Foreign capital, especially, is exerting an influence it never did before. Consider that every Saturday morning, Japanese tune into a hit program called Money Angels, a dramatic series focused on financial advice. Its sponsor: Goldman, Sachs & Co. (GS) The U.S. investment bank is making a killing selling mutual funds, raising money for cash-starved Japanese companies, and managing pension funds for the likes of Mitsubishi and Matsushita--all sectors foreign firms were essentially excluded from until recently. U.S. players such as E*Trade Group Inc. (EGRP) and Charles Schwab Corp. (SCH) are setting up online trading services now that stock commissions are fully deregulated.
There's a corresponding pickup in foreign acquisitions in Japan. Britain's Cable & Wireless PLC (CWP), for example, acquired control of Japanese overseas phone carrier International Digital Communications earlier this year--and even offered 10% of its workforce stock options, a big innovation in Japan. In late September, diversified French holding company Artemis picked off the remnants of bankrupt Nissan Mutual for about $240 million. Now Ripplewood Holdings, a consortium of western financial firms, is acquiring Long-Term Credit Bank of Japan. It's not stopping there, either: Ripplewood may be angling to acquire Nippon Credit as well.
Such incursions would have been unthinkable a decade ago. Yet now, ten years after the bursting of the bubble economy, the Japanese are reacting calmly: ''There isn't any sense of [economic] nationalism in this regard,'' says Kaoru Yosano, Minister of International Trade & Industry. ''That's a huge change in Japanese society.''
All told, foreign investment is running at an annualized rate of $125 billion, some three times last year's pace. The huge influx of overseas portfolio investment since last fall has put some 15% of the Tokyo Stock Exchange's $3.7 trillion market capitalization in foreign hands. That compares with 5% a decade ago--and now surpasses the holdings even of Japanese banks.
The presence of more foreign companies is casting an even more unfavorable light on Japan's banks and domestic manufacturers. Foreign companies operating in Japan boast an average return on equity of about 11%, three times the average of local companies. With banks unable to lend fresh money to corporate borrowers, companies will need to compete in global capital markets, where credit ratings, corporate governance, and capital efficiency matter. So they'll have to raise their return on equity fast.
''EMERGING MARKET.'' The pressure from capital markets is already being felt at trading company Kanematsu Corp., which lost $400 million in the latest fiscal year and saw its credit rating slashed to junk-bond status. Now it's announcing plans to cut 40% of its workforce and shut down or sell off some 160 of its 230-odd businesses. Such cases convince Western investment bankers that Japan is the next big restructuring play. ''Japan is like the biggest emerging market in the world,'' figures Tracy R. Wolstencroft, a Goldman Sachs Japan managing director.
The embodiment of foreign influence today is Carlos Ghosn. A top Renault executive, he has been dispatched by the French auto maker to turn around Nissan Motor Co., now almost 37% owned by Renault. He has been grilling managers, from 7 a.m. power breakfasts to late-night strategy sessions, over every facet of operations--product design, brand management, and finances, to name a few. ''Everybody is looking at him as a savior,'' says Hisayuki Sakamizu, executive director of Tokyo Nissan Auto Sales Co. Above all, Ghosn is trying to instill a sense of crisis. ''There is no sense of urgency,'' he says. ''You should come to the headquarters, and the walls should be on fire.''
But some Japanese do have a sense of urgency about their business. They're the entrepreneurs of the Internet, and their restless energies are already causing a stir in official Japan. Former Finance Ministry diplomat Eisuke Sakakibara, now at Keio University, thinks the Net could have an explosive impact on Japan's closed society. ''This is a different kind of world, where individuals and small groups really count,'' he says.
PARADIGM SHIFT. Japan's silent majority is using the Internet to speak out. In July, an embarrassed Toshiba Corp. issued a public apology to an irate customer who assailed the electronics giant on the Net because of a shoddy Toshiba videocassette recorder he had purchased. A citizens' group opposed to a new airport in Kobe was ignored by the local government--until it aroused a furor over the Net. Tokyo officialdom, says Joichi Ito, chairman of Internet portal Infoseek Japan, now confronts a ''paradigm shift from the concept of 'money equals power' to 'information equals power.'''
Perhaps that's why Prime Minister Keizo Obuchi is getting tutorials on the explosive growth potential of the Internet and e-commerce from Softbank Corp. founder and cybermogul Masayoshi Son. Not only does the Net give voice to the silent majority, but it creates jobs, too. Japan's information and technology sectors have been outstripping Japan's nontech industrial output by a factor of three since 1995. Demand for information service jobs has been growing 3% annually, while sinking just about everywhere else. Shipments of all sorts of PCs, including new and sub-$1,000 models with one-click Internet access, soared a record 80% in the first quarter.
New corporate stars are emerging from this ferment. Thanks to a low-cost strategy and nimble manufacturing, Sotec Co. is now Japan's sixth-largest PC maker. Cyber Agent is Japan's biggest online ad network, producing ads each month for 200 Japanese corporate clients. And Masayoshi Son's brother Taizo has founded Indigo, a leading provider of e-commerce services to Japanese retailers.
These high-tech startups are drawing even more foreign capital into Japan. Seiji Sanda launched Japan Communications Inc. back in 1996 to sell wireless telecommunication services to big corporate users. He now has 300 corporate customers, including NEC Corp. and Takeda Chemical Industries, and $25 million in revenues. Trouble is, he has no profits. So he's weighing a listing on Nasdaq and has tapped venture capital from Prudential Asset Management and Taiwanese computer maker Acer. To list on the Tokyo Stock Exchange, he would need three consecutive years of earnings. ''In these times, you can't run a business like that,'' says Sanda. Mindful of new players like Sanda, Masayoshi Son plans an online version of Nasdaq, which could trigger an inflow of billions in new investments.
Some Japanese companies don't need a foreign investor or a tutorial from Masayoshi Son to get moving. In the loss-plagued auto-parts industry, a few companies are finally realizing they must change. One of them is Tachi-S Co., which supplies seat assemblies to eight auto makers, though 30% of its $1 billion revenues come from Nissan. In the early 1970s, the company asked Nissan to take a 20% stake in the company and become an affiliate, thus putting Tachi-S firmly in the orbit of Nissan's keiretsu. ''That was a kind of insurance,'' says Tohru Segawa, a managing director. During the boom times, Nissan threw a lot of business to Tachi-S.
That pretty much ended three years ago, when losses started piling up and Nissan and other auto makers demanded annual cost cuts of 10% just about every year. Tachi-S heard Nissan planned to sell its shares in some parts suppliers to raise cash. Figuring that investment ties would no longer dictate Nissan's purchasing decisions, Tachi-S bought back its shares from Nissan and pulled free of the group to pursue its own independent strategy. ''We started to ask whether it was wise to stay and whether we could survive,'' says Segawa. His is the kind of ''disloyal'' action that no card-carrying member of Japan Inc. would have even considered a few years ago. But as Teijin chief Yasui puts it: ''The system of cross-shareholdings is coming to an end.''
INDIVIDUAL INVESTORS. As change starts to swirl around them, many ordinary Japanese are frightened. But many are also becoming agents of change themselves. The newest players in the stock markets, for example, are individual Japanese. A recent Bank of Japan survey found that the portion of household savings put to work in equities has risen to 7%, the first increase in three years.
What's more, some $430 billion worth of 10-year postal savings deposits, offering yields of 6%, are expiring next year and in 2001. But now the postal bank, run by the Ministry of Finance, cannot afford to offer much more than zero returns. So that money will flow to the equity markets. ''It's every investment strategist's dream,'' says Merrill Lynch & Co. economist Jesper Koll. These new investors will demand better performance from their stocks as they seek to prepare for their retirement.
No wonder that bookstores are brimming with titles on financial advice and that seminars hosted by domestic and foreign investment houses are jam-packed. The Japanese are also starting to flock to online trading. Shin Tamura, 32, a consultant at Bain & Co. Japan Inc. in Tokyo, now trades online regularly with Nomura Securities, which drastically cut its online trading fees several months ago. Tamura figures online trading will take off: ''My generation is accustomed to the Internet and e-mail and to doing things on the PC.''
It's not just the world of investment that's changing. Consider the rebellion that's taking place inside Japanese homes. Divorce filings among older couples have doubled this decade. Younger women are putting off marriage to Japanese men or marrying foreigners. That's because life with a partner willing to skip their kids' ballet recitals to bond with superiors in the drinking parlors of Ginza has become intolerable. ''I'm not looking for an economic supporter but an emotional partner,'' says Yumiko Nakamura, a 29-year-old working woman.
Japan's workforce will start shrinking early next century. But it has a deep labor reserve to turn to: well-educated women. In most rich countries, some 70% of women with at least a high school diploma work. In Japan, it's only 50%. If more Japanese women entered the workforce, reckons Goldman Sachs economist Kathy Mitsui, their presence could boost potential growth over the next decade by 0.3% to 2.5%.
These acts by individual Japanese indicate a greater appetite for risk--and more acceptance of the free market--than many had imagined was possible. One indicator is the public's attitude toward taxes. When Japan decided last year to cut its top personal income-tax rate for wealthy Japanese from 65% to 50%, the cornerstone of the nation's egalitarian tax policies, Trade Minister Yosano figured his Liberal Democratic Party would face ''a major social outcry.'' There wasn't even a murmur. ''This is quite a revolutionary change for a society that has always valued equal wealth distribution,'' says Yosano. Now the government may even attempt to cut the onerous inheritance taxes that have long weighed so heavily on family-owned businesses.
DELAYED PAYOFF. Such shifts in attitude, investment, family life, and work could eventually have a big impact. They could lead to a very different society--one where big companies drop their fixation on top-line growth and focus on profits and share performance; where smaller companies and startups have access to the kind of capital they need to flourish; and where individuals may face more economic insecurity but also have more freedom to map out their careers and their own financial futures.
These changes will not translate into fast economic growth immediately. Indeed, Japan's much-hoped-for recovery is likely to be a slow, halting affair for some time to come. ''The restructurings are just beginning,'' says Daniel Fineman, chief Asian regional strategist for Jardine Fleming Securities Ltd. ''Japan won't see the payoff for two years or more.''
And many factors are still weighing Japan down. The culture is still remarkably inward-looking for an economy of its size, and the government is still too obsessed with exports. Japan's huge budget deficit, now 10% of gross domestic product, is proof that officialdom will pay virtually any price to keep the state machinery in place. Huge swaths of the economy--banks, construction companies, and small businesses--remain on government life support.
But Japan is also running out of maneuvering room to forestall change, now that national debt is heading for a level of around 140% of GDP. Nobody in Japan is quite ready to embrace the winner-take-all U.S. model of capitalism. But there is a growing recognition that the task confronting Japan has less to do with a particular culture or economic model--and everything to do with what works best at delivering prosperity. What's new is that broad sections of society, government, and academe are realizing that Japan's insularity must come to an end. And from such realizations do big transformations spring.
By Brian Bremner, with Emily Thornton, Irene M. Kunii, and Miki Tanikawa, in Tokyo |
