Japan's Crisis Of The 1990's | Alberto Forchielli

The intention of this piece is to shed some light on the Japanese crisis of the early 1990s. The economic crisis of the Heisei era began in 1991, with the bankruptcy of businesses and the failure of financial institutions. In the 1980?s, the high level of liquidity available at low interest rates led to speculative investments in properties, a strong currency, and high domestic production costs. The shortage of labour forced Japanese corporations to expand their activities overseas by reallocating their production factories in Malaysia, Indonesia, China and others. The motivated youth in Japan were able to easily advance to university education, which was found as a serious challenge by the manufacturing firms that had mainly recruited male workers directly out of high school. Moreover, large Japanese firms began in 1980?s to officially recruit midcareer specialists and skilled workers from other firms.

By 1989, Japanese direct investments in Asia reached a peak. The economic boom of 1986-1991 ended with a property bubble burst, an overcapacity of the industrial sector, a weak financial sector in already liberalised financial markets, and lost competitiveness. As a result, in 1992 Japan moved back to the 18th place in the list of the top 20 countries by GDP per hour.

Despite the crisis, Japan?s powerful Ministry of International Trade and Investments (MITI) at that time continued its policy of stimulating the industrial expansion, which led to a massive oversupply of industrial production and a lack of demand for it. To meet these challenges, the Japanese corporations increased their exports heavily: by 9.6% in 1991, 8% ? 1992 and 6.3% ? 1993. Big corporations also started a programme, called ?Risutora,? under the guidelines of MITI for cost-reduction, which relied on huge freezing of sub-contractual agreements and undercutting the prices of inputs. Naturally this triggered a domino effect of failures among the Japanese SMEs that were operating on such sub-contracts. In 1996, the production of the industrial sector contracted by 9.3% while the domestic demand decreased by 14-15%. To fill this gap, the Japanese government increased its governmental expenditures, but it was still insufficient. By 1998, the share of industry in the GDP went down from 40% to 36%, whereas the respective share of industry was about 26-27% in the UK and France. Thus there still seemed to be an extra industrial capacity in Japan.

To better understand the causes of the ?90?s crisis in Japan, a short overview of the typical industrial structures, or ?keiretsu,? and the technological policy of MITI will be presented.

Japanese industrial organisation

A major feature of the Japanese industrial organisation is the vertical interdependence between firms (?kaisha?) within one keiretsu group. This is a traditional organisation, representing the oligopoly structures and pricing.? Theoretically, the Japanese economist Hiroyuki Odagiri divides the keiretsu groups into three types: 1) keiretsu with a financial centre; 2) keiretsu without a financial centre and 3) keiretsu with long-term sub-contractual relations.

Keiretsu with a financial centre

These groups were restructured from the pre-WWII family firms ?zaibatsu? with a bank ? Mitsui, Mitsubishi and Sumitomo. Additionally, after WWII a number of non-financial institutions established clusters around the other three banks ? Fuji, Sanyo and Dai-ichi Kangyo. Historically, companies from this keiretsu take independent decisions, they operate independently and they enter any relations only at the level of raising funds. In the 1960s and 1970s, all member companies had access to the funds of their keiretsu-bank and they kept mutual stocks of other members. They also shared information about their products and markets. This was an effective non- market barrier against any takeover that could appear from outside their group. In 1980s, the market power of this type of keiretsu began to vanish due to the liberalisation of the financial markets, and the subsequent availability of international capital. Member ? companies started to raise funds outside the keiretsu at lower rates.

Keiretsu without a financial centre

This type of keiretsu is basically a cluster of firms around a big corporation that developed and expanded during the production cycle, after which the corporation established newly formed businesses ?cloned? from its core activity. The corporation usually entered the international markets during its expansion and derived its competitiveness from there. The new businesses operated as daughter-companies of the main corporation and as such it maintained its control over their assets and information. According to Odagiri, the big corporation gains benefits from the economies of scale and the low level of internal diversification. However, in 1990s the keiretsu-related mergers that aimed to improve the financial balance of the group as a whole and to increase the economies of scale were unsuccessful. The merging was usually done between an efficiently and an inefficiently operating company, which in most of the cases did not improve the accounting results of the merged body. As a consequence, the keiretsu accumulated further losses.

Keiretsu with long-term sub-contractual relations

The last type of keiretsu is typical for the automobile and electronics industries, where there is a big corporation only assembling and selling the final products. All intermediate components are delivered by sub-contractors, based on long-term contractual agreements, mutual ownership of assets, and technology. The Japan-born economist Masahiko Aoki claims that the long-term relations were built on mutual respect and trust, not on market incentives. Thus, all sub-contractors accept the offered price and maintain the high quality of their products. The big corporation meets this loyalty and integrity by protecting all sub-contractors from market risks. The reason for this loyalty is the fact that any failure to deliver high quality products will lead to leaving the keiretsu. Aoki and Odagiri explain that this is the Japanese way of overcoming the market failure ? asymmetry of information ? and efficiency is usually reached when the sub-contractor accumulates a lot of experience in dealing with the big corporation.? According to them, it is a process of learning how to be loyal and during it the sub-contractor benefits from quasi-rents that come from the technological progress and create incentives for the long-term relations. The crisis hit hugely these relations as many sub-contractual agreements were blocked and the competition became severe.

The policy of MITI about the technological development

During the 1960s, MITI had a policy for influencing the import of technology. This was based on administrative mechanisms and decisions. By following these rules, any company that had obtained a license to import a certain technology was in a position to gain monopoly profits until the bureaucrats allowed another import. For instance, in the textile industry MITI had given licenses only to the two main rival companies in order to keep their market shares fixed at the time. The administrators had also controlled the prices of the imported technology paid by the licensed firms due to the lack of competition. By the end of 1960s many of the restrictive tools of this policy started gradually to be deregulated.

In addition, the Ministry of Finance provided tax-reliefs for the importers of technology and tax-incentives for households to increase domestic demand. In the 1970?s and 1980?s, the tax policy direct tools were deregulated too. However, this mechanism was efficient for a couple of decades and laid the foundations for strong relations between the private and public sectors.

By contrast, the R&D policy applied indirect instruments and was facilitated via the activities of Research Associations. Any governmental subsidies were limited, and hence, private firms predominantly sponsored R&D projects. Odagiri and Goto claimed that R&D subsidies hardly existed in Japan as a result of the restricted military expenditures of the Japanese government. Companies usually have their own research laboratories and in the 1990?s over 60% of the research personnel in Japan were paid by the private sector. The rest were representing universities, research institutes or other public institutions.

Japanese economists were generally critical of the lack of effective government R&D policy, which led to the slow adjustment of firms towards new technological development. For comparison, in 1998 in the US, 40% of the investments in equipment were made in IT infrastructure; in Japan the respective share was less than 20%. Hiroshi Yoshikawa describes it as missing out on fully exploiting the potential of information technology in Japan, which points out the weaknesses of the market environment for developing an innovative economy. Also an interesting observation in this respect is that Japanese manufacturers showed relative strength in process innovation, but did not gain any advantage in highly uncertain innovations that involved new concepts of market potential and specialised scientific approaches. Nor have they acquired a competitive edge in industries such as the aerospace.

Conclusion

In the 1980?s, Japanese banks owned about 40% of the total stock outstanding of listed companies. In Japan, banks were allowed to hold stocks of non-financial companies up to the maximum of 5% of the shares of each stock. Also one city bank for each company among its major stockholders, called the ?main bank?, was responsible for closely monitoring the business affairs of the firm. In good times, the main bank usually had no control over the firm?s activities. Well-managed companies that incurred little or no debt from banks appeared to be free from bank?s intervention. However, in bad times the main bank assumed major responsibility for various rescue operations, which included the rescheduling of loan payments, emergency loans, advice for the liquidation of some assets, the supply of management resources, and finally restructuring.

Thus the failure of banks in Japan did not come as a surprise in the 1990?s when companies began to go bankrupt. By 2000, banks had already cleared off 60,000 billion yen of bad loans and had 40,000 ? 80,000 billion yen more.

Profile: Viara G. Bojkova was a Monbusho scholar in Japan from 1999 until 2001. She holds masters in Economics & Philosophy from London School of Economics. She is a research fellow at London?s Global Policy Institute.

This brief overview is based on two published articles in 2002 and 2003 in a produced series of volumes for the Bulgarian government.

Source: http://www.albertoforchielli.com/2012/09/06/japans-crisis-of-the-1990s/

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