Chapter Seven

Chapter Seven
Japan’s Lost Decade?

Capitalism without failure is like religion without sin. It doesn’t work.
Allan H. Meltzer (1928-2017).
Economist, Professor of Political Economy.

Chapter Highlights

In 1990, Harvard economist Professor Michael Porter had great publishing success in his global research project aimed at explaining those factors underpinning the competitive advantage of nations, not firms, his traditional inquisitive territory. His findings were summarised in the Introduction to Ten Years, in the section The Competitive Advantage of Nations: A Theory of Everything?

Like many authors reflecting on country economic performance during the 1980s, Porter eulogized Japan for, amongst other things, creating an intensely competitive environment among its domestic industries, leading to extraordinary success for its companies both at home and abroad. However, within months of the book’s publication, the Japanese economy spiralled into a deep crisis as, amongst other latent traumas, hyper-inflated asset prices collapsed, most notably equities and property.

Japan’s highly uncompetitive financial services sector was hit particularly hard, partly because banks could carry unrealised capital gains on their balance sheets as tangible assets. This accounting practice would have been anathema to large, global ‘western’ banks but reflected the fragmented nature of the industry structure in Japan.

Smaller banks, for example, were ‘propped up’ and allowed to survive rather than consolidate or go bankrupt, despite having substantial small company ‘toxic debts’ on their balance sheets. Furthermore, foreign bank entrants were barred or strongly deterred from competing in the Japanese market.

During the 2007/2008 global financial crisis, mega-banks and financial institutions such as American International Group (AIG) were deemed ‘too big to fail’ and were therefore bailed out by the federal government in the US and governments elsewhere. By contrast, in early 1990s Japan, it was mid-size community banks which, within Japanese society and culture, were felt to be ‘too small to fail’ and were therefore supported by government, both national and local, during the period.

The common economic/behavioural factors which existed between these contrasting failure scenarios – separated by two decades – was (and remains) moral hazard. This is the implicit or explicit assumption amongst bank executives that bad lending decisions will not be punished and, in parallel, the belief amongst the general public that their cash-in-the-bank deposits are secure.

A fundamental tenet of market economics is that banks must be allowed to go bankrupt or, at the very least, restructure in one form or another in times of financial crisis. In Japan during the 1990s that didn’t happen and the Japanese economy endured a decade or more of stagnation interspersed with outbreaks of deflation, described by many commentators as ‘Japan’s lost decade’.

To add another dimension largely ignored in the Porter thesis, the unfathomable, byzantine nature of keiretsu organizations such as Fuji, Hitachi, Matsushita, Mitsubishi and Toshiba confused the competitive landscape.

These long-established mega-firms – so different from post-war newcomers Sony and Honda – were (and remain) diversified conglomerates which span multiple business and financial sectors and have intricate relationship matrices within and between themselves. These impenetrable industrial structures made participation in many Japanese market sectors extremely challenging for non-Japanese companies.

Porterian critique aside, the crucial point here relates to the uneasy categorisation of macro and microeconomic forces when attempting to explain the nature of competition in the context of globalization. As was concluded concerning competitiveness in general when I co-authored Inside Fortress Europe: Strategies for the Single Market with my colleague Professor Peter McKiernan in 1993:

We believe that the focus of the debate should be on the industrial level, that is, through strong firms recognizing the primacy of customer-based innovation over government-sponsored protectionist policies.

More than twenty-five years later, I remain convinced that this fundamental essence of competitiveness, when applied to free markets, is more valid than ever in international business and trade history. The principles are the same, just more: (i) intense; (ii) immediate; (iii) impactful.

 


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