Focus: Economic Revitalization

JETRO, 1221 Avenue of the Americas, NYC, NY 10020March 19, 2003

Corporations and Investors Position Themselves to Compete in the New Japan

The last decade has been unkind to the world's second largest economy and since 1997 the Japanese Government has been initiating a far reaching reform agenda designed to restore the economic growth and dynamism it has exhibited for most of the last 50 years. While much remains to be done, many positive signs can be seen in the actions of corporations and investors -- both Japanese and foreign -- who are beginning to recognize the dramatic changes that are taking place and positioning themselves accordingly.

Deregulation and globalization, as well as a range of social and economic trends are increasingly impacting the way that business is conducted in Japan. Corporate and financial practices are rapidly changing as a result. To meet this challenge, Japanese companies are moving as never before to adapt and restructure themselves to remain competitive and to attract the attention of institutional investors.

Japan is admittedly advancing from the lower base line created from a long period of economic stagnation and one cannot really forecast with any real assurance what the future will bring. In the interim, however, astute corporations and investors are beginning to recognize the many possibilities that are emerging. This is true not only in the well known export-oriented industries that have continued to maintain or expand their competitiveness over the past decade, but also in service sectors such as banking, retailing, real estate, tourism and technology, which have suffered in recent years.

The Japan External Trade Organization (JETRO) provides the following information examining these issues in greater detail.


Japanese Corporate and Financial Practices in the Midst of Fundamental Change

While many observers continue to view Japanese business culture as suffering from the effects of an overly-rigid, consensus-driven structure, which overemphasizes stability and seniority over efficiency and profitability, few are aware of the many changes that have begun to take shape in recent years.

While the worldwide environment for M&A transactions suffered a severe 20% decline last year, Nomura Securities has reported that M& A transactions involving Japanese firms rose 25% to 2,244 in 2002. This marked the fifth consecutive annual high and the first time the number of transactions topped 2,000.

As Japanese financial institutions unwind cross-shareholdings with their borrowers, Japanese companies are seeing major changes in their investor base. According to Japan’s Nikkei newspaper, of the 1,842 listed companies that closed their books on March 31, 2002, 51% saw share ownership by financial institutions decline at the end of September compared with six months ago. This is causing many changes in their financial practices and is requiring that they pay more attention to the needs of outside investors.

Similarly, one recent media account stated that temporary workers in Japan are expected to soon number more than 15 million -- nearly 30% of the nation’s workforce.

While many people point to the existence of terminal zombie companies in Japan, private credit research agency Teikoku Databank notes that the number of corporate bankruptcies in Japan rose to 19,500 in 2002. This is the second highest figure on record. Most of these firms were liquidated, with only 5% seeking reconstruction under the government-sponsored rehabilitation measures.

Japan's newly revised Commercial Code will take effect this April. It will allow corporations a wider choice of governance options. Major firms including Sony, Hitachi and Toshiba have announced their intention to adopt U.S.-style corporate governance systems and others such as Orix, Aeon, Minolta and Konica are reported to be considering similar measures.

In fact, Sony is said to be adopting even more aggressive corporate governance system than those required in the U.S., in that its policies would prohibit the CEO from concurrently holding the position of the Chairman of the Board.

Japanese business executives tend to be older than their U.S. and European counterparts with Teikoku Databank noting that in 2001 more than half of the presidents of listed Japanese firms were over 60 years old. Business leaders such as 70-year-old honorary Kyocera Corp. Chairman Kazuo Inamori recommend the need for change, however, citing the need to "entrust the future of Japan to people under 50 years old". Others such as 67-year-old Fuji Heavy Industries Chairman Takeshi Tanaka appointed a 54-year-old successor a 54-year-old last year – who was promoted ahead of 25 more senior contenders. Additional notable younger Japanese CEO's include the 43-year-old president of Lawson, Inc. a national convenience store chain and a 45 year-old president of Takara, a major toy manufacturer.

Japanese Companies Position Themselves To Adjust to Changing Environment
Regulatory change, the pressures of globalization, Japan’s non-performing loan problem and the positive effects of foreign investment are all helping to rapidly move the nation from a main-bank system that promoted relationship-based lending to a market-oriented approach that provides financing according to credit-based principles. As a result, Japanese companies are by necessity moving to restructure and reorganize themselves in an effort that meets the requirements of demanding investors and a more competitive operating environment. A new breed of innovative, entrepreneurial companies are also beginning to identify profitable market niches that are arising as these and other changes continue to transform the Japanese economy.

Japanese Firms Restructure and Reorganize to Enhance Their Competitiveness

Seibu Department Stores recently announced a ¥1.9 billion reorganization plan.

NKK Corp and Kawasaki Steel merged to create JFE holdings in a move that allowed this new firm to achieve the top position in a recent Nikkei Financial Daily survey listing JFE as the top choice of 43 major institutional investors.

Japanese consumer giant, Matsushita, which operates in the U.S. under the Panasonic name, initiated a complete reorganization on January 1, 2003. This created full autonomy among its business units, along with an expectation that all 14 operations will earn a profit within the next fiscal year.

Major trading houses Nissho Iwai and Nichimen plan to integrate their operations into a single holding company in April 2003. This plan includes an initiative to carry out massive work force reductions and the elimination of many group subsidiaries.

Shinsei Bank and Seiyu are adopting many new practices as a result of major investments they have received from foreign shareholders and management groups. Many analysts believe this is having a major positive impact on their overall competitiveness and profitability.

Marubeni, another major Japanese trading company, recently appointed a restructuring veteran to lead firm back to profitability.

Minolta and Konica are slated to consolidate and streamline their operations in October 2003.

Hitachi announced its midterm management plan on Jan.30,2003, announcing its intention to dispose of operations that account for about 20% of its net sales in an effort to improve its prospects and profitability.

Entrepreneurial Firms Introduce New Business Models in Japan

In addition to the restructuring and reorganization now taking place in Japan as well as the new business practices that are being adopted as a result of the growing participation of foreign investors, there has also been a new breed of entrepreneurial firm emerging. These firms are focusing on changing social dynamics and economic trends to identify market niches where they can define, and organize themselves to command, a competitive advantage.

Through organizations including the 450 member Tokyo-based Nippon Angels Forum and a similar-sized Venture Community in Osaka, entrepreneurs and angel investors can meet to exchange ideas, and to allow start-up firms to engage in the matchmaking and networking needed to obtain the funding and knowledge necessary to allow their success.

Several examples of firms that have begun to achieve success in this regard are Business On Line, which provides OEM services in Japan to Intuit, the makers of Quicken software, Apparel Web, a firm that is helping Japanese apparel firm and Chinese manufacturers to exchange information and achieve efficiencies through the Internet, and Oregadale, which has created a secure Internet messaging technology and has an alliance with Oracle Japan.

Japanese retailers have also begun to take advantage of the new consumer purchasing habits that have been emerging. The Japan Entrepreneur Report recently highlighted two notable examples. One includes Mikio Kurihara’s ten-year-old 140 restaurant Freshness Burger chain. Their innovative and efficient management practices has allowed the firm to achieve success through the introduction of a “brand new ‘fast food’ concept in a mature market dominated by entrenched, multibillion dollar global players … build(ing) … restaurants at locations less convenient to consumers compared to rivals … (while) charg(ing) higher prices than competitors”. Another example is the 629 store Book Off! chain, founded in 1991 by Takashi Sakamoto, which has “revolutionized the used book market (through a) … clear, easy-to-understand policy (that) provides the company with millions of eager suppliers and a healthy margin ...”

Despite a low birth rate and troubling demographic trends that indicate a rapid aging of Japanese society, several firms have been moving to achieve success in the areas of childcare and education. According to one media account, Pigeon Corp., a leading maker of baby-care goods is taking advantage of the increased entry of women into the workforce. It opened 10 day-care centers last year. The firm now has over 50 facilities under direct or contract management and expects to earn about $10 million in sales from child-care services -- a 30% year-on-year gain from the last fiscal year. The Nikkei also notes the plans of Meiko Network Japan Co., to open 85 new private classrooms in an effort to enhance their ability to provide small group instruction during their current fiscal year and Tokyo Individualized Educational, Inc., which plans to open 35 classrooms over a similar period.

Foreign Corporate and Portfolio Investors Begin to Expand their Japanese Exposure

Even before the first announcement of the “Action Plan for Economic and Structural Reform” in 1997, Japanese policy-makers began to recognize the potential beneficiary effects that foreign investment -- both portfolio and direct -- could provide in helping to introduce additional efficiencies, competitiveness and “bottom-up” reform into the Japanese economy.

Newly-elected American Chamber of Commerce in Japan (ACCJ) president Lance Lee, a 50 year old entrepreneur has spent almost three decades in Japan building firms such as IGC, which helps children to gain confidence through gymnastics training and The Resource Group, which provides refurbished equipment to medical institutions throughout the world. In a recent interview with Japan’s Nikkei Weekly newspaper he expressed his bullishness on the Japanese economy noting “…I think it’s become a lot easier for businesspeople from other countries to do business in Japan because people’s attitudes have changed. … We come in with new ideas and innovations.” In the same interview, Lee noted “…personally, I’m very optimistic about the future of Japan. With a society of people with high literacy, a strong work ethic and a good habit of saving, no businessperson can help but be optimistic.”

Recent transactions from investors and corporations who share Lee’s enthusiasm include:

Premier U.S. investment bank Goldman Sachs recently announced its purchase of approximately $1.26 billion in preferred shares of the Sumitomo Mitsui Financial Group.

Goldman Sachs also announced its purchase of four hotels from the ailing Daei supermarket chain in a private equity transaction totaling over $360 million.

Walmart has become the major shareholder of the Seiyu supermarket chain, increasing its participation from 6.1 to 34% of total equity, in a move that allows it the option to take control of the entire enterprise.

Foreign luxury retailers Prada, Ferragamo, Christian Dior and Coach have all announced their intention to open major new stores in Japan over the coming year.

It was recently reported that U.S. real estate giant CB Richard Ellis plans to invest ¥300 million in Japan over next two years and to offer comprehensive residential and commercial real estate services in the Japanese market.

Another media account noted that Lockheed Martin plans to invest in a Japanese joint venture to develop rockets and small satellites.

In response to growing interest among institutional investors, U.S. watchdog service Institutional Shareholder Services, Inc. has announced its intention to begin rating Japanese companies on their corporate governance practices next year.

Foreign direct investment in Japan will bring new technology and innovative management methods, and will also lead to greater employment opportunities. Rather than seeing foreign investment as a threat, we will take measures to present Japan as an attractive destination for foreign firms in the aim of doubling the cumulative amount of investment in five years.

Japanese Prime Minister Junichiro Koizumi in General Speech to the Diet on Jan.31,2003

Data and statistics presented within this newsletter have been compiled by JETRO from the Nikkei Weekly newspaper and other publicly-released media accounts. Although these statements are believed to be reliable, JETRO does not guarantee their accuracy, and any such information should be checked independently by the reader before they are used to make any business or investment decision.

For additional information, please contact Satoshi Miyamoto, Executive Director of JETRO NY at Tel: 212-997-0416, Fax: 212-997-0464, E-mail:

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