That stocks in Japan were wildly overvalued and due for a fall is hardly news. Nor are projections that the Japanese economy will grow anemically this year, if at all. Of central concern now is the feeling that the Nikkei’s fall may represent a watershed in Japan’s business history. Increasingly, analysts believe the market decline could trigger profound changes in the way Japan does business, changes that could undermine the cornerstones of the country’s economic miracle: stable shareholding arrangements that secure “patient” capital for companies to invest; strategic emphasis on market share and not profits; lifetime employment for employees, and complete disdain for “shareholder rights.” Japan, some analysts argue, has actually started down the slippery slope toward the kind of short-term, run-and-gun capitalism that defined American business in the 1980s.
At the same time, the Japanese work culture is being transformed. The corporate establishment is under pressure from government and unions to let Japan’s overworked “salarymen” relax more and earn more, and that pressure is being compounded by an acute labor shortage. Earlier this year, Japan’s largest labor union made shorter work hours a central bargaining position in its annual negotiations with the employers’ federation. The stance is in tune with a government campaign to cut hours from more than 2,000 to 1,800 a year by the end of 1993. Says Akio Mikuni, president of a Tokyo bond-rating agency: a case can be made “that the entire system is starting to unravel.”
At bottom, the change stems from Japanese stockholders’ new expectations. For them, the drop of ‘92 has altered the rules of the game. “People always say, when the stock market’s down, it’s your turn [to buy],” Nippon Life’s Itoh told a Japanese reporter recently. “But it’s not so simple anymore.” Institutional investors, in fact, can no longer count on steady 10 percent increases in stock prices. They are starting to demand that companies increase dividend payouts, and they are doing so for a simple reason. Dividend yields in Japan are typically below 1 percent of share prices (chart)-far skimpier than in most major industrialized countries. At the same time, life insurers, who own trillions of yen worth of equity in Japan, must pay out interest of, on average, 5 percent on the annuities they issue. That gap, if it persists, could force Japanese companies to pay more attention to increasing profitability and dividend payouts. That, in turn, could temper their relentless pursuit of market share. Since the second world war, institutional share ownership-the stocks owned by banks, insurance companies and other financial or industrial corporations-has ,steadily risen in Japan; today it approaches nearly 80 percent of all outstanding shares. The so-called interlocking shareholding arrangements among the industrial groups are known as keiretsu–loosely affiliated companies often centered on a core bank and trading company. Each company in the group owns chunks in other group companies-and in some cases the shares of key suppliers. Historically, as Mikuni points out, “the arrangements had less to do with earning a return on your investment than it did with cementing relationships.”
One result was that Japanese managers were spared the pressure to earn the high returns on invested equity required of their American counterparts. There was little risk that their biggest investors would sell, and that allowed managers to make risky long-term investments. The strategic advantage of “patient” capital was only enhanced by Tokyo’s economic climate in the 1980s: low interest rates, steady growth and increased consumption. The stock market soared. Suddenly, Japanese companies could raise funds at almost no cost. The response in nearly every key industry was the same: expansion. " Being big just for the sake of being big became almost an obsession," says Richard Koo, an economist at the Nomura Research Institute in Tokyo. With so much cheap capital at hand, Japanese companies could set prices at murderously competitive levels that few Western companies could match. The result: razor-thin profit margins for industries like electronics, but expanding market share.
The crumbling of the Nikkei has changed the equation. Slowly, Japanese institutions like Nippon Life are wondering whether the money they tie up in Japan Inc. might be better deployed elsewhere. And in a declining market, they are particularly irritated by management’s notoriously small dividend payouts. " Suddenly, stockholders are telling firms they need more," says Koo. For the United States, that’s the irony. Several American companies have recently been moving toward more Japanese-style long-term links. The recent alliance between Apple Computer, IBM and chip maker Motorola is nothing if not an informal keiretsu.
Japan’s markets have a long way to go before they resemble American ones. But the idea that a desire for short-term gains could drive a wedge between companies, even those with longstanding ties, isn’t outlandish. “There is some pressure in that direction,” says Ministry of International Trade and Industry Vice Minister Noboru Hatakeyama. Last summer, in fact, Dai-ichi Mutual Life Insurance reduced its long-term investments in several companies, reportedly out of irritation at meager dividends. Some members of the Sumitomo Group reportedly have also sold shares in fellow keiretsu firms for the same reason: “A shot across their bow,” says one senior foreign banker in Tokyo.
If such pressure continues, the significance for U.S. firms that compete with Japan is plain. It would force Japanese companies to boost profits in order to pay out dividends and enhance their stock prices. That could lead to less aggressive pricing and, at least in the short term, less capital investment-a key edge for Japan in the late 1980s. In the long run, that strategic shift could finally force large and powerful companies like Toyota and Nissan to bury smaller competitors like Daihatsu and Isuzu in order to gain greater market share and more pricing flexibility.
The ripple effects wouldn’t necessarily stop there. The new conditions would, in the minds of many critics of Japan’s trade practices, require an end to the collusive nature of many Japanese industries. While firms compete fiercely, it is a managed competition with few major casualties. “They wield bamboo swords in the domestic market,” says Mikuni, “but soon they are going to have to use the real things.”
But change comes slowly in Japan. While one Sumitomo executive contends that shareholders are, in time, going to become a more important constituency for Japanese CEOs, they may never develop the influence they enjoy in the United States. “We’ll never have the quarterly pressures from the financial community that you do,” he says. “Japanese financial institutions know better than that.”
That coolheaded view is hard to resist in a nation as tradition-bound as Japan. But it is rooted in two assumptions: that the Nikkei stabilizes, calming the clamor from investors, and that the Japanese economy picks up steam again soon. Those are not unreasonable assumptions. But even with Friday’s Nikkei rally, it still seems too early to bet the keiretsu on them.
Unhappy Returns In an about-face, some Japanese investors want higher dividends. 1991 Not Dividend Payouts From Publicly Held Companies AS A PERCENT OF AFTER-TAX INCOME Japan United States United Kingdom 28.2% 65.1% 80.6%
