Japan’s economy is the largest in Asia, and second only to the United States in terms of national GNP. It is by far the dominant economy in East Asia, despite the phenomenal growth rates of the Chinese economy in recent years. The Japanese not only have the largest home economy, they are also the biggest foreign investor in almost every other East Asian economy, and their ships, insurance companies and freight agents dominate the actual transportation of goods around the region.

A MAJOR GLOBAL ECONOMY

Japan is by no means merely a regional power. Japanese companies have subsidiaries and joint ventures all over the globe, and it is hard to think of an industry, with the possible exception of the Yorkshire pudding industry or Dutch clog manufacturing, in which the Japanese are not significant players, either as suppliers, customers or competitors. If you are involved in anything but the most parochial of businesses, you need to be aware of what the Japanese are up to.

THE POST-WAR YEARS

In the years immediately after the Second World War, the Japanese economy grew at an unprecedented rate. This was caused by a variety of events all coming together at the same time. For a start, the economy could hardly have been at a lower level than it was in 1945. Japan’s people had been sucked dry economically by over a decade of war, which had not only involved high taxation to pay for the war effort, but had also taken out of the productive economy hundreds of thousands of young men who would normally have been the driving force of the economy. Then, in the latter years of the war, the country had been ravaged by bombing that had laid waste the main cities, destroying factories, homes and good agricultural land. In August 1945, there was no Japanese economy to speak of.

American aid

However, for the Americans in the immediate post-war period, it was essential that Japan was a strong and loyal bastion against the Communist threat which was especially active in East Asia. From China, the Soviet Union and Korea, Communism was threatening to take over most of South and East Asia. Japan, occupied and defeated though she was, had to stand up against this threat. So the American occupation pursued a very enlightened and liberal series of policies to help the Japanese climb out of the economic pit they had created. They encouraged free trade, they helped them build their industries and – most importantly – they gave their struggling economy business to carry out.

QUALITY CIRCLES

Perhaps the decision that most shaped the Japanese economy in the post-war years was not made by the Americans, nor even by the Japanese authorities. In the first years of reconstruction, the Japanese went back to the methods they had employed to make their first great leap into western ways in the 1870s. They sought advice from the foreign experts. One man who was invited to speak initially at a trades union meeting in the late 1940s (as second or third choice, so legend has it), was the American quality control expert W E Deming. His talk was scarcely publicised and was not expected to mean much to the Japanese, but he was an expert and they wanted to hear what the experts thought.

Had they but known it, Deming at the time was hardly known in his native land. His radical ideas about putting quality first went against the grain in 1940s mass-production America, but in Japan he struck a powerful chord. His first series of lectures were a sensation, and the Japanese took up his ideas at once. He went on to give hundreds of lectures and seminars throughout Japan, often in sweltering factories in the heat of summer, on the necessity of statistical quality control. His ideas appealed exactly to the factual and numerate Japanese, and they put them quickly into action. As Deming himself said, ‘I think I was the only man in Japan who believed my prediction in 1950 that within five years manufacturers all over the world would be screaming for protection. I think it took four years!’

Factory managers in Japan spent practically all their working days on the factory floor, not cocooned in some comfortable office like their western counterparts. They also encouraged the workforce to create teams dedicated to improving quality, a process which worked well in Japan where the group takes responsibility for everything, good and bad, and does not seek out individuals to praise or blame. Within a few years, the Japanese reputation for quality won them new customers, which in turn meant that with more orders to fulfil they could reduce prices. The post-war manufacturing boom in Japan was under way.

KEIRETSU AND ZAIBATSU

The other post-war decision that had the most effect on Japanese economic growth in the 1950s and 1960s was more a matter of luck than good judgement. The Americans had been impressed by the ability of Japan to build such a close knit economy that it was able to create the industrial and military machine that enabled it to go to war in the first place. In order to stop this happening again, they first of all wrote into the new Japanese constitution a clause stating that Japan would henceforth renounce war and would never even muster a standing army, navy or air force.

To make sure that this new peace constitution would stay in place, they also took a decision that they imagined would break up the financial and industrial powerhouses of the pre-war economy – the so-called zaibatsu () – without whom Japan would never again have the economic muscle to be tempted into war again. These zaibatsu were giants, like Mitsubishi, Mitsui, Sumitomo and Yasuda, vast conglomerates with interests in everything from shipbuilding to hotels and from insurance to banking.

The banning of holding companies

The American edict was a simple one: from now on, holding companies would be made illegal. A holding company is a company that exists purely to own another company or companies, and this type of structure is common enough in the West, as it was in pre-war Japan. By banning holding companies, the Americans thought they would break up the zaibatsu at a stroke, and the individual companies formerly owned by the holding company at the top would float free and flourish as independent units.

The success of this policy can be attested by the fact that the names of Mitsubishi, Mitsui and so on are as familiar and powerful, or indeed more familiar and powerful, as they were 60 years ago. The American policy was followed precisely, to the extent that holding companies were only made legal entities once again in Japan at the turn of the twenty-first century (when the economy slowed to a standstill and drastic measures were required to try to start it again). But the Americans reckoned without the Japanese primal urge for relationship building and mutual security. In place of the zaibatsu grew the keiretsu () groups that were even better adapted to the economic realities of the post-war period than the old-fashioned zaibatsu. By the mid-1970s and through to the end of the 1980s, the keiretsu groups between them controlled about one quarter of Japan’s economy, very much the same proportion as the old zaibatsu controlled before the war.

A way round the problem

Zaibatsu means, roughly ‘financial group’. Keiretsu means, roughly, ‘financial group’. The main difference between the two is that while the zaibatsu were a hierarchical group with a chairman at the top and a regular cascade of directors and managers, all in their right places on the rungs below, the keiretsu are groups of companies, each with interconnecting shareholdings and often with a common name, who do not have a main board at the top to direct policy. Obviously not – that would be illegal.

So the Mitsubishi group, for example, in its glory years from the mid-fifties to the mid-nineties, was a tightly woven spider’s web of interconnecting companies, each of whom owned a small percentage of the other. There was no overall board running the whole group, but because they each owned a little bit of each other (including the Mitsubishi Bank), they all naturally helped each other and kept internal competition to a minimum. Of course, it would have been against the law to set up price fixing cartels or to purchase on the basis of special pricing for companies within the group, but the power of the relationship should not be underestimated.

Each keiretsu had an informal group of chief executives of the leading companies in the group (such as the Mitsubishi group’s Kinyokai, literally, ‘the Friday Club’) who would meet regularly to play golf or drink sake but not, heaven forbid, ever discuss business matters unless they happened to crop up purely by chance as they topped up their glasses at the 19th hole. This way the leading players in any keiretsu could keep an eye on the direction the group was heading, which new products and new markets were looking likely to succeed and which to fail. They could also watch for unnecessary internal competition, and look at ways of co-operating on major projects. Because there was no edict from above ordering them to work together, the voluntary nature of the relationship was all the stronger.

Group identity

This system worked very well as the economy grew relentlessly for three decades and more. Group loyalty was established, a strong sense of group identity and of ‘the Mitsubishi way of doing things’ or ‘the Sumitomo style’ was engendered, and the keiretsu prospered. However, the system also relied to a great extent on continuing favourable world market conditions and a close and mutually supportive relationship with the government, most notably with the bureaucrats at MITI, the old Ministry of International Trade and Industry, which wielded a huge power to direct the economy, or at least the manufacturing and trading parts of it.

The disadvantages of the Keiretsu system

When things began to go wrong in the late 1980s, the flaws in the keiretsu system were quickly revealed. Because the cross-hatching of shareholdings had meant that it was almost impossible to tell who actually owned what percentage of which keiretsu company, they were in effect immune from takeover. It is a fact that until the very end of the twentieth century, no hostile takeover bid had succeeded in Japan, and even now they are virtually unheard of.

Being immune from takeover is good in many ways – it allows you the luxury of looking further ahead, of investing for the future and not worrying too much about short term returns – but it also meant that too many companies had not had their real worth tested in the financial markets for too long. Companies had over the years been supporting each other with little thought about the real worth of the business. When the banks, which were of course part of the same keiretsu and shareholders in the companies they were lending to, gave virtually unsecured loans on the basis of future business prospects rather than on real corporate worth, the potential was there for disaster if markets took a downturn.

And markets did take a downturn. The banks found they had made loans on the basis of unsecured future business, or vastly overvalued real estate, which now the borrowers could not repay. One economist even calculated at the end of the 1980s that the total book value of real estate in Tokyo alone, as shown in the annual reports of the top Nikkei-quoted firms in Japan, was greater than the total book value of all real estate in the United States, from New York to Los Angeles and all points in between. Clearly something was dangerously out of kilter.

A vicious circle

The banks were caught in a vicious circle: either they could bankrupt the companies they had lent to, and thereby give up all hope of getting their money back, or they could carry on lending even more in the hope that business conditions would turn around. Too many banks, knowing that their clients were also friends with whom they had enjoyed a long and profitable business relationship, chose the second option, and merely increased the bad debt potential. By the mid-1990s, Japan’s indebtedness had grown way out of hand, and there was not the business to service the debts, let alone pay back the principal. The only way out was a huge reorganisation of the economy, with enforced mergers, bankruptcies and significant personal misery.

THE GOLDEN RECESSION

Japan in the early 1990s slipped into what has become known as ‘The Golden Recession’. It was a recession in statistical terms, in that the economy shrank, or at least failed to grow, over a significant number of quarters, and as soon as it looked as though the corner might be being turned, another poor set of statistics were produced which knocked any talk of revival on the head.

The key to the solution, it seemed to all outside observers, was a reform of the banking system so that these huge unsecured loans would be a thing of the past. The trouble with that policy was that it would inevitably cause bankruptcies and job losses as the economy was shaken and reshaped to take into account the realities of fin de siècle world economics. Job losses were anathema to Japan’s way of doing business: the economy had been growing for the entire working lives of everybody now facing up to the problems, and nobody had ever had to be laid off involuntarily within the heart of Japan’s huge business engines, the keiretsu.

A challenge to the LDP government

The Japanese government was not really up to the task. For all but a few months of the post-war period, the ruling party has been the Liberal Democratic Party (known as the LDP, or Jiminto, in Japanese). To be strictly accurate, until 1955 they were two different parties, the Liberal Party and the Democratic Party, who then merged, but between them they have held the reins of power for practically all the post-war period. The Liberal Democratic Party is, nominally at least, like the Holy Roman Empire, which was described as perfectly named except that it was not Holy, nor Roman, nor an Empire. The LDP is not Liberal (it is right-wing conservative), it is not Democratic (most of the key decisions are still taken behind closed doors in smoked filled rooms) and it is not a Party, but a loose collaboration of rival factions who disagree on almost everything except the need to cling on to power.

The LDP is the party of big business. The government has for many years worked hand in hand with big business, guiding the direction that industries took, protecting their home markets from foreign competition but encouraging ruthless internal competition among Japanese companies, and creating an environment that rewarded business endeavour. Japan thrived on this type of government, even though foreign competitors complained.

A closed market?

It has to be admitted that many of the complaints against Japan, certainly on the subject of the difficulty of selling into Japan, tended to be misguided. Japan was not, from the late 1960s on, a closed market at all. In fact, it was probably through the final quarter of the last century one of the most open markets in the world, more open than Europe or the United States.

The problem was that the rest of the world expected that their standard products would do for the Japanese market, and became upset when Japanese consumers rejected them. Whether we are talking about left-hand drive American cars or jars of British marmalade measured in pounds and ounces, foreign exporters were slow to grasp the particular needs of the Japanese market, and tended to expend their efforts elsewhere, while keeping up the complaints as a matter of routine. Sometimes they were justified, as when the Japanese attempted to keep Rossignol skis out of Japan on the basis that Japan had its own unique type of snow, but most of the time the problem was a failure to adapt to the local market. There were many success stories during this period, from IBM to Coca-Cola to Johnnie Walker whisky and Beatrix Potter branded tableware, but there were also a lot of failures.

You scratch my back...

Japan certainly did not help her own cause by allowing the intensely close relationships between government and industry to prosper. Civil servants, on reaching retirement age, were frequently appointed to the boards of corporations they had helped to regulate just a week or two earlier, a process known in Japan as amakudari () or ‘descending from heaven’. The ex-bureaucrats appointed as directors or advisers would hold meetings with the men who had taken their place in the Ministry, and because the ex-bureaucrat had been senior to the people he was now dealing with from the other side, he would always tend to get his way. His new employers benefited, he benefited and even the people working their way up the ministry benefited, because they could see what enticements would be coming their way in a few years’ time. It was a very cosy system and it worked.

Changes and a long recovery

When circumstances changed, however, the relationship between the government and industry was one of the first casualties. Due largely to external pressure which, being soto, is not something the Japanese have ever willingly given way to, the major players in Japan’s economy began changing. The opening of the Japanese stock market to electronic dealing – Tokyo’s Big Bang – in the early 90s brought a result that had not been expected locally. Instead of an influx of foreign investors eager to get on board the Japanese miracle train, a large number of passengers promptly disembarked and invested their money elsewhere, in Europe and America. Japan was clearly seen as a place not to invest, and the government had to find ways to get the economy running again.

The long recovery is another symptom of Japan’s determination to stick with a plan until long after the whole thing has been shown not to work. There was from the beginning an extreme reluctance within Japan to do anything but tinker slightly with conditions. Big corporations were repeatedly saved from bankruptcy in order to safeguard jobs and reputations (not necessarily in that order) and a succession of prime ministers and finance ministers all promised radical action, which even if actually proposed was soon knocked down by the powerful vested interests in banking, finance and industry.

Of course, throughout this decade of economic stagnation, Japan has not looked like a country in an economic pit. Or at least, Tokyo has not looked like it. Unemployment, according to official figures, barely climbed above 5%, although official figures in Japan should never be believed except as an indicator of the direction the economy is going. Japan’s positive trade balance rarely dipped below $100 billion, and the yen did not weaken to any significant extent. The stock market collapsed, certainly, to the extent that even after a 20% gain for the Nikkei index in 2003, the market was still at barely one quarter of its record high. To suggest that the value of Japanese business has been cut in four in the past decade is obviously wrong: the record high was massively overvalued, the present conditions are somewhat undervalued.

INVEST IN JAPAN

Many people have argued since the mid-1990s that Japan is a place to invest in, and quick. One of the problems during the boom years was that Japan became an incredibly expensive place. Rents went into orbit, and salaries were higher than the norm in the West. The result was that foreign firms were reluctant to set up offices and factories in Japan, and many who had tried joint ventures in the past had come away with horror stories about the different approach to a joint venture between East and West. (One might have thought that would be self-evident even before going into a joint venture, but to many Western businessmen it came as an unpleasant shock. It did to their Japanese partners too.)

Japan is still a very expensive country, but comparatively, it is much cheaper than it was in the 1980s. Rents and real estate prices have tumbled, but most significantly there is a skilled workforce available to any new company setting up, and this is the first time we can say that with confidence.

Recruitment problems

In the 1970s and 1980s, any foreign business coming to Japan faced a huge problem of recruitment. The Japanese system of lifetime employment, although it is exaggerated in western eyes, is nevertheless the stated aim of every white collar worker, and of every management in Japan. The result of this used to be that recruiting good Japanese staff at middle management level was almost impossible. It was always possible to find young people fresh from university to join a new company (although even then the big corporations and the civil service always got the pick of the graduates) and it was always possible to recruit senior ‘advisers’, semi-retired men who could build new business relationships for the new company. But it was always very difficult to find good people aged between about 30 and 45, who would be the driving force behind the new company, the people who actually formed the plans and did the work of the new business. The only people on the job market in that age group used to be people who were so incompetent that even under the lifetime employment system they had been let go. That was not a great encouragement for businesses hoping to come to Japan.

The only viable alternative was to establish a joint venture, and recruit key people from the staff of the joint venture partner. This was not a particularly satisfactory solution either, as all too often the Japanese partners’ staff were transferred to the new venture in name only, retaining their true loyalty to the parent company and working towards the day when they would be transferred back from the semi-foreign limbo in which they found themselves. If this sounds a little harsh, it only reflects the realities of very many joint ventures in the latter part of the last century: the Japanese do not transfer loyalty on demand.

A new career pattern

However, the Golden Recession has changed all this. For the first time, good middle managers have been laid off and find themselves on the labour market again, through no fault of their own. There are plenty of good people who feel that the Japanese industrial/political complex has failed them, and they want to create their own career paths, much on the western model. While it would be an exaggeration to suggest that the ideal of lifetime employment is dying in Japan, there is a change being seen. We can certainly expect that over the next decade or so, the Japanese career pattern will begin more closely to resemble the western pattern.

THE JAPANESE WORKING WOMAN

One of the other advantages of this prolonged period of recession is the opportunity it has offered women. Japan is, as we have seen, a man’s country, and women have struggled to gain for themselves any sort of valued place in the workforce. However, with their husbands often finding themselves out of work, Japanese women have been forced to find ways of bringing income to the family, while at the same time not shaming their husbands by being obviously the only breadwinner.

Female entrepreneurs

The result is that women are increasingly turning their backs on any hope of a career in a big corporation – which has in any case rejected their husbands – and are finding entrepreneurial ways of earning money. Increasingly we are noticing women setting up businesses, often with a man as the nominal chairman or chief executive to cater to Japanese sensitivities. Many of the brightest new companies in Japan, especially in those areas of the economy most obviously associated with women’s interests, are run by women. The only raw material that Japan has is its people, and for too long they have been ignoring the 50 per cent who have been encouraged to find husbands, become housewives and raise children – and stay out of the mainstream economy. The Golden Recession is helping to change that. This may be good news for companies wanting to invest in Japan, but it must be bad news for Japan’s competitors as this vast untapped resource comes onto the market.

Traditional values

The Japanese woman has long been ignored, especially by Japanese man. As one distinguished Japanese economist, and incidentally a woman, Noriko Hama has noted, ‘Gender discrimination, male chauvinism and sexual harassment are accepted and tolerated.’ The moral code is traditional: wives are expected to be subservient, quiet, modest and unflappable. Husbands can do as they please. In truth, this state of affairs is changing, but it is still the custom for everybody to wish to get married, and still the vast majority of people do.

Pressure to get married

This is in part as a result of family pressure. There is a sense that a person has ‘failed’ if they are not married by the age of 30, and families will do all they can to seek out a suitable partner for their son or daughter. Even in twenty-first century Japan, there are many arranged marriages where the bride and groom hardly know each other before they marry. People whose equivalents in the West would look upon a lifetime union with somebody of the opposite sex as their definition of hell, will nevertheless get married and produce the regulation two children, to satisfy social pressures. In their spare time they may act as they please: sexual fidelity has never been a definition of Japanese marriage as it is in Christian cultures.

Divorce

Divorce is becoming more common, but the rates are still well below those in the West. Young people are forgiven if they make one ‘mistake’ in the marriage stakes. For many, one divorce bestows an aura of sophistication. There is even the phenomenon of the Narikon as it is called: a couple who go off on honeymoon after a big ceremony, but before the legal registration of their union, discover they are incompatible after two weeks in each other’s company. So they call it a day as their flight returns to Narita. Rikon is the Japanese for ‘divorce’. A Narikon is a Narita divorce.

Marriage and children – a population problem

It is still very rare for a couple to live together before marriage, and only the bravest few would announce this fact to family or friends. Illegitimacy remains a stigma, and fewer than 2% of registered births in Japan are to unmarried parents. The family is still very much seen as the rock around which Japanese society is built, and the lack of immigrants bringing alternative marriage habits to the country means that the pace of change is not rapid.

The biggest problem facing Japan is the fact that the younger generation are not producing children at the rate their parents did. By 2007, it is estimated that the population will start shrinking, and in the second decade of the century, it is expected that Japan will have as many pensioners as workers, imposing a huge strain on the tax and welfare systems. It is this ageing of the population which is probably the biggest economic and social hurdle to overcome, and the one that must be addressed even before the Golden Recession is a thing of the past.