A strength of the Japanese system is that it leads to a very long time horizon. Companies don't worry about shareholders, takeovers, or being acquired. But a long time horizon is problematic unless companies also must worry about profitability. Without profit pressures, companies pursue 20-year investment strategies to enter businesses in which they have no chance of succeeding.
Which Japanese companies have strategies, and why?
Some examples are Sony, Honda, Nidec, and Shimano. The Sonys and the Hondas are mavericks. They have strong CEOs. They don't care about fitting in, and they don't see themselves as part of the Japanese corporate structure. Such companies tend to be the ones that have a strategy.
The other class of companies that are more likely to have strategies are those not based in Tokyo or Osaka. Companies in the big establishment business centers got dragged into the system. But if companies were based in Kyoto, Nagoya, or someplace off the beaten track, they often were far more focused. They had a distinctive positioning.
There is still a lot to learn from Japanese companies. All the efforts to study the Japanese quality system, and just-in-time, were valid. But that's not the whole job of management. Indeed, competing on operational effectiveness can become a very destructive kind of competition--a zero-sum game, where everybody is trying to do the same thing and profitability is eroded. The big message of our book for Japan, and also a big message in general, is that ultimately you have to have a true strategy if you are going to be successful.
How do you change the Japanese management model? It won't be easy, especially given the interlocking share ownership of the keiretsu.
Change is already occurring. It's being driven by a number of things--by economic pressures, by foreign investors, and by a new generation of CEOs. The keiretsu system will decline as cross-holdings among companies are sold off. The problem is that, in most Japanese companies, change is still very slow, timid, and measured. The big barrier is that Japanese companies really avoid laying off people.
The tradition of lifetime employment won't change easily.
Lifetime employment is a problem. But companies are finding ways around it; they are offering severance packages, for instance. So it is starting to happen.
If government would demonstrate a sense of leadership, that would speed up the corporate restructuring. I think companies are nervous that there is nobody driving the bus, and they are risk averse as a result.
What steps should the government take to revive Japan's economy?
First, the government needs to stand up and legitimize the need for substantial changes. Almost more important than what government does is to have a true reform plan.
A major step needs to be the restructuring of bank loan portfolios. A lot of emotional and psychological energy, as well as real economic difficulties, is being caused by the debt problems in the banks. The focus is on the past and preserving the fragile status quo, rather than on the future.
The contrast between the United States and Japan is striking. We faced a series of issues at the turn of the 1990s. A huge budget deficit, the savings-and-loan crisis, a meltdown in real estate. But the wonderful thing about the United States is that we adjust. The system adjusts. People go bankrupt, there are workouts, loans get renegotiated, and we move on. But Japan hasn't been able to move on.
Beyond bank debt, there is a whole series of reforms that need to be carried out. Japan needs to rewrite its competition laws, enact stricter antitrust enforcement, end cartels, start rooting out the protectionism that remains. There also needs to be substantial deregulation in parts of the economy.
This is not to say that Japan should look exactly like the U.S. There are enormous strengths in Japan.
For example?
Their public education system. Despite the fact that Japanese wring their hands about public education, their system is much better than ours. They need to build on that.
Japan has real strengths in terms of technology. They are a very technologically sophisticated nation, but innovation has been blunted by some of the same consensus decision-making and incentive issues that have blunted competitiveness in general. Also, Japan has the opportunity to prosper by confronting some of its demographic changes earlier than other countries.
It has an aging, and shrinking, population.
Yes, but Japan has successfully handled such challenges before. Think of its ability to make compact, multifunctional, energy-efficient products. Americans were used to having lots of space, and cheap energy; Japan didn't have those. It confronted that challenge earlier than other countries did, and it paid off in competitiveness. Japan has similar opportunities today in the area of demographics and aging. It also has a secret weapon: women. Women in Japan have not yet entered the workforce in any substantial way.
How long will it take Japan to get out of what looks like a deflationary spiral?
Be careful about using the word "deflation." In Japan, housing prices are going down. Food prices are going down. The prices of goods are going down. Is that bad? No.
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