In general, Prime Minister Shinzo Abe has proposed a good package of structural reforms for Japan’s economy. It remains to be seen how many he will be able to ram through the Diet in the face of determined opposition from vested interests. But there is one idea that he and his team may be overlooking: lifting legal restrictions on corporate takeovers.
Leveraged buyouts, which transformed American industry in the 1980s, have yet to make a mark in Japan. The private-equity industry is a stunted, vestigial appendage. The reason is partly due to the influence of big banks and big conglomerates, which throw lifelines to failing firms, and to Japan’s entrenched system of cross-shareholding. But by far the biggest culprit is the government itself.
The court system is heavily biased against private-equity firms. Laws still allow cross-shareholding, which helps big firms keep smaller, unproductive ones on life support. And most importantly, the government extends loans to failing companies on a vast scale, instead of letting them be acquired and restructured. In essence, the government has crowded out the private-equity industry, but has done so in a way that focuses on keeping people in their current jobs instead of on improving productivity.
Productivity should be Job No. 1 for Japan’s economy. With the population shrinking and working-age women’s labor force participation already higher than the U.S.’s, productivity growth is essential to keep Japan out of secular stagnation. And there is a lot of room to grow. In the late 1980s, Japan’s total factor productivity was close to that of the U.S., but in the 1990s it flatlined, and has grown only sluggishly ever since. The U.S., meanwhile, surged ahead, and is now more than 17 percent more productive than Japan.
Productivity in Japanese factories is still high, but white-collar productivity is horrendous. Anyone who has ever visited a Japanese office, of course, can't have failed to notice this. People spend hours copying electronic documents onto paper, sending faxes, or just sitting around acting busy to keep up appearances. Organization charts are more byzantine than circuit diagrams. And the official figures probably overstate true productivity, since Japanese workers put in huge amounts of unpaid overtime -- much of it consisting of sitting around waiting for the boss to go home. Many Japanese men don’t get home until midnight, and only see their families on weekends (which can't be helping the fertility rate), and yet less actual work gets done in Japanese offices than in American ones.
Leveraged buyouts have the capacity to change this bleak corporate landscape. Research shows that private equity, on average, increases the productivity of the companies it buys, in both the short run and the long run. If there is one force powerful enough to shake up the fossilized business practices of corporate Japan, it’s private equity.
Buyout firms have a bad reputation, because they achieve most of those productivity improvements by firing people. Even in the U.S., we have a strong cultural bias toward keeping people in the same jobs forever. If you’ve seen the movie ``Wall Street,'' you probably remember the heartbreaking scene where Martin Sheen is fired from a job he’s done his whole life, because corporate raider Gordon Gekko decides to acquire and break up Sheen’s unproductive employer.
But the fact is, real-life Gordon Gekkos, such as Carl Icahn, were probably responsible for a big chunk of the productivity gains that allowed the U.S. to pull ahead of Europe and Japan in the 1990s and 2000s. The U.S. made a momentous choice to switch from stakeholder capitalism to shareholder capitalism, and although we paid a price in terms of inequality and job insecurity, we reaped big rewards in terms of productivity.
Japan chose a different path, freezing its business practices in amber in order to avoid the social pain of ending the lifetime-employment system that gave many of its workers a (real or illusory) sense of security. But the pressures of globalization are putting an end to that cozy system anyway -- more than half of entry-level workers in Japan now have insecure, low-paying jobs with little opportunity for advancement. Meanwhile, Japanese businesses are being outcompeted by South Korean, American and now Chinese rivals, with even giants such as Sony on the ropes. And secular stagnation continues to threaten the macroeconomy, with productivity gains being the only real hope of escape.
In other words, Japan no longer has the luxury of choosing to have its workers build roads with spoons. If Japan doesn't release the energies of creative destruction on its hidebound companies, it risks drifting down out of the ranks of the rich countries.
Fortunately, the Abe administration seems to realize this, and is trying to implement initiatives to improve corporate governance and increase the focus on profitability. Abe is trying to reduce cross-shareholding and force companies to have outside directors. But he has yet to contemplate bringing in the big guns of private equity and leveraged buyouts. Japan needs to give the Gordon Gekkos a chance.
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