Japanese Economy (Macro/Sector Level/Company)

Japan: Post-war to Economic Growth

I.Devastation during WWII:

Japan was badly devastated during World War II (1941-45).

 Human Loss:
Military personnel: 2.1 million people (approx. 5% of the entire population)
Civilian: 0.8 million people

 Missing and Injured:

680,000 people

 Material Loss:
Approx. 25% of the national wealth excluding military stock (1949 Economic
Stabilization Board Report)

 Industrial Production Drop:

Immediately after the war, industrial production was just one-tenth of the pre-war level.

II. Japanese Postwar Reforms:

The allied force (General Headquarters (GHQ)) initially aimed to democratize Japan on
both political and economic fronts. The GHQ assumed Japan's pre-war militarism had
been enhanced by a concentration of economic power in a limited number of
companies, financial institutions and landlords’ hands, coupled with the lack of
democratic forces such as labor unions. Thus, the so-called 'economic democratization'
reforms were carried out in the mid to late 1940s.

1. Zaibatsu Dissolution (1945):

Zaibatsu (large conglomerates of major companies and banks, often controlled by a
shareholding company) were dissolved and shareholding companies were prohibited.
The major Zaibatsu were Mitsui, Mitsubishi, Sumitomo, and Yasuda. To eliminate
concentration of economic power, the Zaibatsu Fair Trade Law and the Economic
Power Excessive Concentration Elimination Law was enacted in 1947.

2. Agricultural Reform (1945):

The government purchased land from absentee landlords and all tenant land in excess
of one hectare, and sold them to tenant farmers at nominal prices. The percentage of
tenant land dropped from 46% to 10%. The number of independent farmers increased.

3. Labor Market Reform (1945):

Through the enactment of the Labour Union Law (1945), Labour Relations Adjustment
Law, and Labour Standards Law (1947), the organization of labor unions was promoted
and their labor movements were legalized.

4. Fair Market Rules (1947):

American-style market rules were introduced. The Anti-trust Law and the Securities
Exchange Law were the core laws enacted in order to secure market competition and
transparency.
5. Education Reform (1947):
Compulsory education was extended from 6 to 9 years long.

III. Rapid-Growth Period and the "Dual Structure":

From 1955 to 1972, the Japanese real GDP grew by an annual average rate of 9.3%.
During this period there were virtuous cycles such as:

 Demand expansion → Production expansion → Increases in income →

Consumption expansion → Further income expansion → Increases in savings →
Investment growth and an expansion of production capacity.

During this period big businesses in heavy industries such as metal, chemicals, energy
and machinery received the most benefit. Scarce funds were preferentially allocated to
industries with a lower capital cost. On the other hand, small-medium enterprises and
consumer-goods/services sectors suffered from shortages of investment funds.

However, this strategy was generally accepted by most Japanese people since a
'trickle-down approach' to raise incomes and living standards in Japan was taken for
granted. The government's medium-term economic plans, particularly the National
Income Doubling Plan of 1960, helped form this consensus.

While this approach supported Japan's rapid economic growth, it also created a 'dual
structure' problem. While heavy industries and big businesses enjoyed high productivity,
international competitiveness, and high wages; the consumer-goods and service-related
sectors continued to have low productivity, low international competitiveness and low
wages.

Japan's Profitability Problem Question

In Japan net sales increased, yet operational profit and sales decreased. This is
contradictory to a standard scale economy. Why do you think this happened?

Instructor's Explanation

As you could observe in the graph, profitability decreases gradually overtime, but with
many peaks and falls. Sometimes lower profitability is generated by events such as the
 securities-depression (1964), Nixon shock (1971), Oil shock (1973 & 1979), Plaza
agreement (1985), bubble collapse (1991), collapse of the dot-com bubble (2001). If you
look at the graph, you can see that while profitability improved after each event, there is
still a general long-term trend of decreasing profitability. This decreasing profitability
trend has many complex reasons and a deep background. The lower risks at lower
returns is only one explanation for the decreasing profitability and is explained in a little
more detail in the video in the next unit. However, you need to understand this
phenomenon from various perspectives. The combined lectures in Sections 1 and 2 will
provide you with insight as to why prioritizing growth and less external pressure are also
valid reasons for this trend.

Useful Resources

 Paper: Yoshioka, S; Kawasaki, H. (2016). Japan's High-Growth Postwar Period:

The Role of Economic Plans. Economic and Social Research Institute, Cabinet Office.
ESRI Research Note No.27.

 Paper: Sadahiro, A. (1991). The Japanese Economy during the Era of High

Economic Growth Retrospect and Evaluation. Economic Planning Agency, Government
of Japan. Working Paper No.4

The Resource Based View / Approach:

The Resource Based View (RBV) is one of the major strategic theories to be able to
achieve competitive advantage through the unique resources of a firm. The RBV takes
an ‘inside-out’ view on why organizations succeed or fail in the market place. The RBV
insists that a firm should look at the resources and capabilities within its organization in
order to develop sustainable competitive advantages. However, not all the resources of
a firm can be sources of competitive advantage. Competitive advantage occurs only
when the resource is heterogeneous and immobility.

This theory was established in 1980~1990 through Wernerfelt, B. "The Resource-Based

View of the Firm"; Prahalad and Hamel "The Core Competence of The Corporation";
Barney, J. "Firm resources and sustained competitive advantage" and other scholars.

There are two types of resources: tangible and intangible. Tangible assets are physical
things such as land, buildings, machinery, equipment and capital. Intangible assets are
everything else that has no physical presence but can still be owned by a company,
such as brand reputation, trademarks, and intellectual property.

As mentioned, RBV assumes that resources must also be heterogeneous and

immobile. In order to identify resources that can be a source of competitive advantage,
Barney (1991) proposed the VRIO (originally VRIN) framework that examines if
resources are valuable, rare, costly to imitate and non-substitutable. The resources and
capabilities that answer yes to all of the following questions could sustain competitive
advantage:

1. Question of Value
Resources are valuable if they help organizations to increase the value offered to the
customers.

2. Question of Rarity
Resources that can only be acquired by one or few companies are considered rare.

3. Question of Imitability
The resource must be costly to imitate or to substitute for a rival.
4. Question of Organization
The resources should be utilized by an organization to capture the value from them.

Mochai: "Cross-shareholding"
Mochiai is owning stock in companies that are doing business together. The objectives
of mochiai is to reinforce the business relationship and maintain the stability of the share
structure of involved companies (defend a company from a hostile takeover).
Mochiai is often observed in Japan and Germany. Sometimes mochiai is executed
between several companies. For example, company A owns shares in company B;
company B owns shares in company C; and company C owns shares in company A.
This kind of mochiai relationship is called a "triangle mochiai" or "circular cross-
holdings".

While mochiai enhances the relationship between companies and gives support by
allowing companies to focus on internal issues, it also criticized because it may:
1 .Waste capital that could be used for other objectives
2.Decrease external pressure which enhances the re-allocation of corporate resources

Outsider Model
A system in which the main corporate governance functions are undertaken by external
owners is defined here as an 'outsider' system of corporate governance. An 'outsider'
capital model is typified by the US and UK corporate governance systems. In such
systems, firms' ownership is normally dominated by portfolio-oriented institutional
investors, with ownership stakes of typically less than 3% per investor. Such owners
undertake their governance functions 'outside' the firm, and do not generally involve
themselves actively with the management of their companies. Influence is exerted over
company management through 'exit' rather than 'voice', i.e. by selling their equity stakes
rather than through hierarchical control.

Insider Model
An 'insider' model of corporate governance arises where owners monitor, oversee and
control companies from within. This is achieved by owners taking large ownership
stakes in individual companies, and cooperating actively with management. This allows
investors to retain direct hierarchical control over management, and thereby reduce
agency costs. The insider model has been the predominant pattern of corporate
governance observed in continental Europe (and in most other countries apart from the
UK and US) during the postwar period (see table 1 below). Individual investors often
have large ownership stakes (typically greater than 10-20%, which normally provides
effective control). Furthermore, there tends to be a greater preponderance of privately-
 held companies, even amongst the largest firms. 'Insider' systems tend to have poor
legal protections for minority shareholders.

Architectural Models
Fujimoto (2008) insisted that Japanese manufacturing firms in the early postwar era needed to
utilize scarce resources (work forces, material and money) in order to catch up with the rapidly
growing demands. As a result, they built an organizational capability that emphasized teamwork
among a multi-skilled workforce, or "integrative organizational capability of manufacturing,"
which raised productivity and quality simultaneously.

Ulrich (1995) has defined product architecture as the strategy by which function is mapped to
form. For any given product, there are two main categories of product architecture, integral and
modular:

1. "Integral architecture," with complex interdependence between product functions and

product structures (such as automobiles), and

2. "Modular architecture," in which the relationship between a product's functional and

structural elements has a simple and clear one-to-one correspondence (such as personal
computers).

This architecture concept is important not only to understand Japanese management but also to
develop product and business strategy. Fine (2005) insisted that one of the reasons of failure of
cross-border M&A between Daimler and Chrysler was the gap in their architectures. While the
auto business in general is categorized as an integral architecture, among the auto makers, there
are those that are more integral and those that are more modular. Chrysler is a more modular
architecture whereby the supplier has autonomy for technological innovation, so that Chrysler
can focus on design. On the other hand Daimler Benz is an integral architecture. The engineers
of Daimler and its supplier get together to explore perfection through craftsmanship from the
early stages of design. The cultural differences between Daimler and Chrysler is often pointed
out as a reason of the failure of their M&A. Fine (2005) pointed out that the difference of
architecture between Daimler and Chrysler was a key reason for the failure of the post-merger
integration.