Fostering Corporate Self-reliance
Senior Fellow, RIETI
The problems posed by nonperforming loans (NPLs) in Japan today have prompted many reactions, but most of them go like this: "Of course, we can endure any 'pain' that the acceleration of bad loan disposal and other structural reforms may bring, but what if the pain is for nothing? The economic outlook isn't so bright, after all, and no one can guarantee that all those painful measures will really revive the Japanese economy..." Some of these people argue that the disposal of NPLs will not necessarily improve economy. And others say that Japanese banks - even if they manage to clean up NPLs - have no future unless they quickly find a new business model to rid them of their current low profitability. We could use a medical metaphor to elucidate the sort of logic that underlies these rampant ideas about the economy: if a patient (i.e., the economy or banks) is forced to undergo major surgery (i.e., structural adjustments) while too weak, he likely won't be able to survive the surgery and ends up falling prey to vultures (foreign capital).
Future Uncertainty is No Excuse for Postponing Current Problems
Indeed, it might very well be easier to endure pains if recovery is assured - this goes for the economy as well as for patients. And in theory (real option theory), the "wait-and-see" option, in which one waits till all uncertainty has been wiped out, has a certain advantage when there is a great deal of uncertainty and contingency. Therefore, in way, it does make economic sense to postpone irreversible actions that may create more pain.
However, we must stop using the uncertainty and contingency of future events as excuse to avoid pains. While postponement is undoubtedly a rational decision for a microeconomic entity, if all economic entities chose to wait-and-see what the future brings, we will be faced with negative externality effects (based on coordination failure) on a macroeconomic scale. The economy would continue to stagnate. Every economic entity would decide to wait further in a holding pattern, creating a vicious cycle. While economic entities continue to wait, hoping that others will initiate changes for the better, their existing capital may seriously deteriorate. Human capital is not immune to this deterioration - the wait-and-see approach may cripple this valuable resource, which can only be fostered through learning by doing.
What Actions Should be Taken Now, When the Future is So Hard to Tell? Why is there so much emphasis on future economic prospects? From the postwar period through the 1980s, the Japanese economy had grown at a relatively steady and often rapid pace despite undergoing a series of external shocks. Throughout those years, the "pie" of demand had steadily become more nourishing, enabling Japanese companies to enjoy continuous growth so long as they stuck to strategies deemed safe-and-sound within their respective industries. The tendency was especially conspicuous in sectors heavily protected by the government, in which companies were assured that "a piece of the pie" would always be reserved for them. Under such circumstances, future economic prospects, or the future directions of each industry, made up a critical factor in corporate strategy - a company could stay on the safe side simply by doing what other members of their industry do. Future economic prospects were determined through subtle, implicit agreements between the government and industries, with relevant industrial associations serving as go-betweens.
While this was going on, though, Japan's economic bubble ballooned and then burst, sending the whole economy into a long period of stagnation. While structural adjustments were able to make some progress, however late, Japan's economy was dealt yet another blow when the IT bubble in the United States burst. Today, it is extremely difficult to tell what the future holds - this is as true for the macro economy as a whole as it is for the many industries that comprise it. Building a tacit consensus has become an impossible task. Faced with this situation, what can we do?
The following parable might help us understand the dire situation we are in. Led by a teacher (government), each class (industry) of students (companies) sets out on an excursion in the mountains. Up until the 1980s, all was well - everyone felt at ease because they could clearly see the summit (goal) and follow the beaten trails (strategy). Walking in tandem and following the flag held up by their teacher, the students found it quite easy to get to the summit. In some particular classes (regulated industries) even those who weren't so good at climbing managed to reach the summit because their classmates slowed down to keep pace with them (convoy system).
However, from the 1990s onward things changed completely. The problems now facing the Japanese economy can be likened to a class of students having lost their way at a critical juncture. Just as they were to enter the steepest and most dangerous part of the trail (end of the catch-up period), the weather changed drastically (economic slump). A dense fog (increased uncertainty) hung heavy in the air, obscuring their vision. They could neither see the summit nor tell which trails would lead them safely to the top. So, in the 1990s, they decided to stay still and wait out the bad weather, hoping for the fog to lift. But even after waiting for quite some time, the situation hasn't changed at all. Now, fear has crept in - they are afraid they will all perish together. Having come to this, what can possibly be done?
Self-serving Measures Save All
Unfortunately, the teacher is helpless. He might try to force some way out of this desperate situation, but he will surely take a wrong path. The whole class would then be lost. In this situation, what is important is that each student, regardless of their class, fend for themselves. They must embark on extremely egocentric actions (entrepreneurship), seeking ways to fend for themselves, refusing to die with the others. Only such dirty mind will pursue their own benefit with no consideration for others - but this is necessary if the students are to forge new trails and escape certain destruction. Some students may wander aimlessly, others may fall victim to falling rocks or precarious cliffs. But if enough enterprising students set out on their own paths, it is inevitable that some will find their way to the top of mountain. And once this happens, other students will follow the paths paved by the pioneers (new business models), getting through the current crisis, at least for the time being. Although it may seem selfish to leave others behind and finding one's own way to save oneself, this may actually help avert a crisis for all. Teachers used to tell their students to pay close attention to their fellow classmates while mountain climbing. Now, though, the teachers must completely change their mind-sets and tell their students to think of ways to save themselves. About all teachers can do now is proffer advice to students who get stuck and cheer them on. It will take a lot of courage for teachers to learn to turn their backs on their students. And teachers should be warned: it will be a grave mistake if, at this critical time, they resort to halfway measures, hoping to ease their students' worries.
The message I hope to convey with this parable is that an unquenchable entrepreneurial spirit and enterprising vision that doesn't shy away from trial-and-errors are crucial now that macroeconomic growth is so low and there is grave uncertainty about the future. We must break with the old behavioral pattern in which we only take steps in tandem with other industry members according to coordinated ideas about future economic prospects for the whole industry. A completely new mentality must be adopted, one that will allow a company to play a different tune than those played by other companies. The government's role should be to keep a certain distance from the private sector - at this distance, it should contemplate measures to aid the private sector in revising its ways of thinking.
To Foster Self-reliance Among Companies, Market Players Must Reform Their Way of Thinking
Stock markets play an important role as a mechanism that can objectively evaluate companies that adopt innovative strategies that differ from competitors. No one can tell for certain whether such companies have the potential to grow, and of course it is difficult to reach a consensus among market players. Nevertheless, one of the important roles of stock markets is to act as a mechanism to combine a wide variety of views into a unified index of stock prices. This has not been the case for the Japanese stock markets, however. In Japan, macroeconomic conditions are the largest factor in determining a company's stock price. The stock price of each company is then subjected to some adjustments depending on the industry it belongs to, while the specific status and conditions of the company itself serve only as the last and least important determinant factor. A price determination mechanism such as this might have made sense when the lock-step mentality that continued through the 1980s was the norm, but it goes against the intrinsic mechanism of stock markets. Certainly, quite a few spirited small- and medium-sized enterprises - including venture businesses - are pursuing a policy that can only be described as a "do-what-others-don't policy." But their existence has often been lost in the shadow of big companies that dominate the market even though they are heavily reliant on outside help, such as better macro economic conditions and the government. To transform these dependent companies into self-reliant companies driven by a strong entrepreneurial spirit that enables them to pursue unique, innovative ways, we need a change in overall mind-sets - this goes not only for companies themselves but also for the government and the stock markets.
November 19, 2002
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