----- Forwarded message from Clinton Fairbanks <kuricowboy at isop.ne.jp> -----
http://www.asiaweek.com/asiaweek/ Japan's Dilemma
Kondo Kanji does not want his hometown to die. As head of the local towel industry association, he represents the 220 towel makers in and around the quaint little city of Imabari on the island of Shikoku, Japan. Together, they produce nearly two-thirds of the towels made in the country. But cheap imports from China and elsewhere in Asia are soaking up orders, growing by a third in the past two years to take 60% of the market. Last week, Kondo and his colleagues applied for temporary import restrictions allowed under World Trade Organization rules - called safeguards - to gain time to restructure. Otherwise, they fear, small companies like theirs are doomed. "It is not just the towel industry," says Kondo. "Our action is a warning that all industries in Japan will eventually collapse if no measures are taken."
Hold on. Japan, one of the world's most-advanced economies, home of high-tech icon Sony and giant carmaker Toyota, has a towel industry? And one made up of hundreds of small factories tending looms and packing products by hand? Welcome to the real Japan Inc. This is not the masterfully coordinated effort by bureaucrats, bankers and industrialists to build world-beating exporters. This is the underside of the commercial juggernaut that only a decade ago terrified global competitors. The real Japan Inc. is dominated by small and medium-sized businesses - factories that supply the behemoths or produce goods for the domestic market, construction firms that pave local roads, retailers that serve neighborhood shoppers. They employ 78% of the workforce, and they've never felt the full wrath of market forces - until now.
Today, everybody shakes their head and wonders why, after a decade of economic malaise, Japan continues to resist serious economic restructuring. The sharpest criticism is aimed at the government for supporting the limping economy with huge infusions of public money that allow unprofitable companies to stay afloat and banks to avoid calling in dud loans. A little tough love that wipes out weak companies but lets stronger ones recover will hurt at first but be better in the long run, critics say.
True. But push banks to cut off bad debtors and thousands of small businesses will die. End pork-barrel spending and construction companies throughout the country will go belly-up. Lift trade restrictions that limit domestic competition and mom-and-pop retailers will close up shop. With only a minimal social safety net, the owners and employees of the affected firms would face economic devastation.
And the victims of creative destruction will not suffer in silence. These are the very constituencies which have provided the votes - and the funding - that have kept the Liberal Democratic Party in power for almost all of the past five decades. Tackling the inefficiencies of Japan Inc. would be the equivalent of the LDP signing its own death warrant as the country's dominant political force.
Although they grab the headlines, the heart of Japan's problem lies not in companies like Mitsu-bishi Motors, which last month said it would cut 9,500 jobs, 14% of its workforce, by 2003. The heart is Hashida Hiroshi, a 52-year-old construction worker in suburban Tokyo. "It's difficult for people like us to find new jobs in different industries," he sighs. "We have nowhere to go." It is a problem he worries about a lot. Forget lifetime employment; that was a luxury only blue-chip corporations could offer.
Hashida's employer is a typical small fish in the industry's food chain, accepting sub-sub-contracts from larger firms. About 70% is government-related, mostly digging up streets, installing pipes and paving over the excavation. The owner works at the site, his wife keeps the books. Two decades ago the company had 10 workers. Today it has three. Those let go took jobs in other construction firms. One found factory work. Another directs traffic at a supermarket parking lot.
Construction workers, with their traditional baggy trousers and cloth split-toed shoes, look increasingly anomalous in contemporary Japan. But there are still a lot of them - more than you'd think. The construction industry employs 10% of Japan's workforce, twice the proportion in the U.S. And even though the construction market has shrunk since the peak of the speculative "Bubble Economy" of the late 1980s, the number of construction workers has gone up, to around 6.5 million recently compared with 5.9 million in 1990.
Why? Since the bubble burst, Tokyo's primary weapon to spur the economy has been round after round of public works spending. "After the bubble, Japan should have been scaling down this sector, but because of the stimulus packages, this sector kept growing," says political analyst Okazaki Shigenori of UBS Warburg Securities in Tokyo. "These people had to be kept employed, so they kept pouring money into public works."
They have to be kept employed for two reasons. One, there are a lot of them, and Japan has a skimpy social safety net for the jobless. Two, the construction industry lies at the center of the LDP's political power base. "We have to depend on the power of politicians to win contracts for public works projects," an executive of the Japan Federation of Construc-tion Contractors recently told the Japan Times. "So we have supported [LDP members'] election campaigns."
The support comes in the form of funds, manpower during campaigns, and block votes on election day. And they, not blue-chip car or electronics companies, are the ones with a presence in every town and city in Japan. The situation is similar across the entire range of industries made up of domestically-oriented businesses - agriculture, small manufacturers, distribution, retail and, most problematically, the financial system. They give support to the LDP, and the LDP reciprocates with, if not public works, protective regulation.
This symbiotic relationship carries two major demerits. Since these industries never faced unbridled market forces, they are inefficient - and falling further behind. In the 18 years to 1998, Japanese manufacturers raised their productivity 69%, while cutting costs 3.4%, says economist Murakami Naoki of BNP Paribas in Tokyo. But the construction industry raised its productivity just 7%, with costs rising 61%. "Productivity did not improve much in highly regulated industries such as construction, property and services," Murakami says. And that increases costs for the whole economy.
The other burden on the country of this mutual support system is that Japan's policymakers are left beholden to the least-efficient sectors of the economy - and those least prepared for change. It's two sides of the same coin, says Okazaki. "Because the LDP keeps giving subsidies and protection, the industries don't change," he says. "And those industries are the [LDP's] source of power and money."
It's not just the LDP's fault. Bureau-crats jealously guard the interests of the industries they regulate, even at the cost of overall efficiency. And until recently, banks continued lending to insolvent construction and real estate companies, while often shunning firms in other sectors even if they had better prospects. In a way, they had little choice because the drowning firms were already heavy borrowers, and if they went under, the banks would have had to write off their loans.
That short-sighted credit policy effectively nullified the Bank of Japan's efforts to pump capital into the economy to spur growth. "We needed to move resources - money, equipment and workers - from stagnating industries to growth industries in order to revive the economy," says Murakami, "but the money was spent only to prolong the lives of ailing industries." Banks are trying to reduce bad debts now, forced by their own deteriorating balance sheets, but critics say they are still moving too slowly.
It's all coming to a head. The nascent recovery triggered by the public spending and the government's $70 billion infusion to prop up shaky banks in 1998 has now fizzled out. "No matter what I say, the economy is in critical recession," Finance Minister Miyazawa Kiichi told parliament this week, departing from Tokyo's usual insistence that recovery is around the corner. GDP shrank 0.6% in the July-to-September quarter, and is not expected to have rebounded much - if at all - in the fourth quarter. The jobless rate of 4.9% is the highest since the end of World War II and expected to rise. Scared consumers are refusing to spend. The Nikkei stock average this week fell to its lowest levels since July 1985. The Bank of Japan has cut short-term rates to 0.15%. In return, the government has promised to do more to clean up the shattered banking system and is drawing up yet more emergency measures. But the markets remain dubious.
All of which makes the current push to dump Prime Minister Mori Yoshiro a not very relevant sideshow. The premier's public support is down in the single digits due to his numerous verbal gaffes, his sluggish response to the accidental sinking of a Japanese fishing vessel by a U.S. submarine, an unending stream of government scandals, and the recalcitrant economy.
Mori easily survived an opposition no-confidence motion on March 5 since the ruling coalition holds an absolute majority in parliament. But even fellow LDP members made clear they voted against the motion, not for Mori. With an election for parliament's upper house due in July, the LDP and its partners in the ruling coalition are eager to replace their unpopular leader. Now that the budget for the fiscal year starting April 1 has passed the crucial lower house, Mori could announce his resignation as early as next week.
But that will solve nothing. No one seems eager to take over Mori's job given the drubbing the ruling coalition faces in the July polls. Worse, no one has the obvious ability and stature needed to rally support and get Japan moving forward. The leading candidate is Nonaka Hiromu, the LDP's top behind-the-scenes fixer. The party's dearth of talent is forcing him to step out onto center stage. Nonaka was the major force in the past few administrations and so is not expected to embark on radical change. And with a vote looming, the LDP will be more eager than ever to butter up traditional constituencies.
After the election, however, the stuffy world of Japan Inc. may finally begin to crumble. After all, even towel makers recognize that change is necessary. Mori Takashi of Mori Kiyo Towel Co. in Imabari inherited the family business 22 years ago. For years he focused on the "hard" side of business - improving production. "Now I have to work on more value-added, soft tasks such as design, planning and marketing," he says. Working with outside consultants, his factory now produces bags, table cloths and other goods out of toweling.
Small businesses are also beginning to understand the downside of operating in a protected market. The towel association's Kondo says members are angry about how slow deregulation of electric power and restrictions on using foreign workers have kept their costs high. They want import restrictions (and they promise to use the breathing space to restructure), but they also want the freedom to compete on a more equal footing. And if the LDP doesn't deliver, he warns that the Com-munist Party has been sniffing around.
The LDP faces a difficult time. The triumph of oppositionists and independents in recent elections shows that candidates tied to business interests are no longer shoo-ins. "There is a good chance that the Japanese will reject Nonaka-style politics [in the July election]," says political analyst Morita Minoru. "I truly think it could be a turning point." But even if the LDP suffers a drubbing and has to adopt more of the opposition's reform ideas, that will only begin to unravel the ties that run from inefficient companies through debt-laden banks to politicians and bureaucrats.
The biggest barrier to change in Japan is not the LDP or the construction industry, or the Imabari towel makers. The problem facing the country is simply that the constituency for real root-and-branch economic restructuring is tiny. Though it has done little more than tread water for a decade, Japan's economy is in little danger of collapse, so talk about the necessity of change remains mostly that: talk.
Yet, a sense of urgency is growing as more people realize that the old ways don't work, and see the success of iconoclasts like clothing chain Uniqlo. But mention the need to shut down large numbers of companies on life support, and enthusiasm for restructuring fades. The dilemma facing the country is that the impact on Imabari will be devastating if its towel makers go bust, but Japan may never recover its economic dynamism if they don't.
SPOT THE DIFFERENCE Japan has twice as many people employed in agriculture and construction compared with the U.S. And the LDP's biggest support bases are...
Japan U.S.A.
Agriculture and fishing 4.9 2.6
Construction 10.2 5.0
Manufacturing 21.0 15.0
Wholesale, retail, food/drink 23.0 23.1
Finance and real estate 3.9 5.9
----- End forwarded message -----