Japan

Fast factsArea: 377,835 sq km, slightly smaller than CaliforniaNatural resources – negligible mineral resources, fish Currency yen: $1CAN = 101.10JPY

Population - 127,417,244 (est. 2005) Population growth rate – 0.05%Life expectancy – 81.15 yearsJapan’s population fell for the first time in October, 2005

Only by 19,000 but its an indication of what is to come

Lack of natural resources

Japan suffers from having very few resources for manufacturing

A contributing factor for the start of WW IIJapan still very interested in securing raw materialsEnergy is of particular concern

Japan wants access to Russian energy

Japan’s biggest problemAn aging society is a major problem

Climbing dependency ratio

It will be serious by 2050

Gov’t credit ratings may suffer

Population is expected to peak in 2007It will fall by half by the end of 21st centuryThere will be 1 million 100 year olds by 2050Average age of marriage is 26.3 for women and 28.5 for menImmigration is not a serious option

Fewer Children

Hire older workers

Retirement age to be raised to 65 from 60 by 2013

Will keep 2 million more in the workforceTypically rehired retirees are paid lessAge discrimination in hiring may need removed: many job advertisements are closed to anyone over 45.

GDP growth rate – 2.1% (est. 2005)Canada’s is 2.9%

Per capita GDP - $30,400US (ppp)GDP composition by sector

Agriculture 1.3%Industry 25.3%Services 73.5%

Japan’s Two economiesThere is the domestic economy

Relatively inefficient and resistant to change

There is the export economy

Very efficient and competitive

Japanese agriculture

Farmland ownership is extremely fragmented average farm land size of between 3 and 5 acres

Most are highly inefficient and survive because of protectionHighly protected

Rice has over 700% tariff55% of cultivated land is in rice

High food prices by world standards

Declining farm populationhttp://www.pbs.org/frontlineworld/rough/2005/11/japan_the_slow.html#

Trade flows

Japan does have a comparative advantage in its more efficient energy use

Traditionally Japan has Discouraged Inward FDI

Restless JapanThe Pacific and Philippine Plates push against the Eurasian Plate. This geological movement makes Japan one of the most unstable places on year.

Closed Doors

Japan was essentially closed to outside contact from 1603 to 1854Limited contact was permitted through port of Nagasaki1854, Commodore Perry landed at Yokohama and engineered an unequal trade treaty at gun point

Japanese realized they needed to modernize, militarize and industrializeZaibatsu appeared to achieve this

Mitsubishi, Mitsui and SumitomoJapan became militarily aggressive and acquired Taiwan (1895) and Korea (1910)Invaded Manchuria in 1931Bombed Pearl Harbor in 1941

Post WW II

Relying on Confucian values of hard work, loyalty, and cooperative efforts coupled with US assistance the Japanese infrastructures were rebuiltDemocracy was establishedGovernment, financial institutions and industry banded together to build a new Japan

Japanese business relations have been governed by wa

Wa - the notion of harmony within a group, requires an attitude of cooperation and a recognition of social roles. If each individual in the group understands personal obligations and empathizes with the situations of others, then the group as a whole benefits. Success can come only if all put forth their best individual efforts. Decisions are often made only after consulting with everyone in the group.

Consensus does not imply that there has been universal agreement, but this style of consultative decision making involves each member of the group in an information exchange, reinforces feelings of group identity, and makes implementation of the decision smoother Participation in group activities, whether official or unofficial, is a symbolic statement that an individual wishes to be considered part of the group

Japan's sogo shosha, or large general trading firms

Itochu Corp.Kanematsu Corp.Marubeni Corp.Mitsubishi Corp.Mitsui & Co., Ltd.Nichimen Corp.Nissho Iwai Corp.Sumitomo Corp.Tomen Corp.

←9 largest

The 9 largest Japanese general trading companies, or sogo shosha, have 1,300offices in over 100 countries and over 5,000affiliated companies worldwide Sogo shoshas deal with 20,000 to 30,000products per company The largest 18 sogo shosha companies handle 62% of Japan’s imports and 37% of its exports

The Japanese keiretsu

The precise composition and structure of such business groupings are immensely varied. Here we focus on the industrial groupings generally known as keiretsu.

The Japanese keiretsu

expressed through cross shareholdings and personal relationships as well as through financial and commercial transactions Bilateral relationships between firms are embedded within a broader ‘family’ of related companies.

Keiretsu

Another form of industrial conglomerate appeared to replace the zaibatsuKeiretsu means something close to ‘link’ or ‘affiliated with’Two types

HorizontalVertical

The Japanese keiretsuHorizontal keiretsu are highly diversified industrial groups organized around two key institutions: a core bank and a general trading company (sogoshosha).

The Japanese keiretsuVertical keiretsu are organized around a large parent company in a specific industry (for example, Toshiba, Toyota, Sony).

The Japanese keiretsu

Intercorporate relationships are imbued with symbolic significance which helps to sustain links even where there are no formal contracts.

The Japanese keiretsu

Transactions are conducted through alliances of affiliated companiesInterfirm relationships tend to be long term and stable, based upon mutual obligations

The Japanese keiretsu

Intercorporate alliances in Japanese economy are marked by an elaborate structure of institutional arrangements that enmesh its primary decision-making units in complex networks of cooperation and competition.

The Japanese keiretsu

Diversity Problem41% of work force is female but few hold top management positions

Lack of confidence by women is cited as a contributing cause, but Japan has deep seated attitudes about division of labourOvert sexismIn 2004 only 2.7% of division chiefs of firms over 100 employees were women

5.2% of Fortune 500 executives are women

Financial Crisis of the 1990s

Christmas Day, 1989

Nikkei 225 sits at 39,000Japanese shares account for more than half of total global stock capitalizationTo cool stock/land price increases, Japan announces sharp interest rate riseNikkei 225 tumbles to 34,000, reaches 20,000 by mid-1991

The Road to Undiversified Risk

$5.2 trillion in total loans issued by 1990Doubled in 10 years

Top 25 banks by assets, 17 are Japanese, including top 725% of aggregate loan portfolio in property and construction ($1.16 trillion)Additional 55% indirectly linked to land

Collapse of the Bubble

Economic growth slowdownStock and real estate prices decline:

50% decline in property prices, quality of loans sufferValue of collateral erodedBank equity holdings shrinkReduced ability to raise equity capitalReduced ability of debtors to service loans

Banks took on more risk to protect margins

Inadequate Bad Debt Management

Banks had only $30 billion in reserves to protect against fall in property pricesMostly held in equities, which were erodingEstimated Bad Debts at Major Banks $120 billion

Bad Debt Provision = $34 billionUsed fixed level instead of historical average

Inadequate Bad Debt Management

1997199619951994199319921991

6.876.757.18.928.758.647.5Dividend Paid

258.1115.3233.4125.491.6338.9716.5Bad Debt Provision

-103.02.36-49.0516.1931.3146.1654.1Before Tax Profits

Aggregated Bank-Income Statement

$US Billions

Kanaya and Woo, ‘Japanese Banking Crisis of the 1990’s.’ Princeton, Essay in International Economics, 222, June 2001

Corporate Governance

Shareholder structure provided little controlCross-shareholding

Borrower shareholders depended on bank creditKeiretsu

Poor directorship systemDirectors ‘promoted’ from within or retirementsExpected to resign when the term is up

External auditors lacked legal liability

Corporate Governance

Major Effects:Management under limited pressure to maximize profitability for shareholdersLack of accountability created an environment that promoted delaying restructuring and eliminated long-term focus

Regulatory Forbearance

False hope of economic recoveryFear of public panic in financial systemIntervention only after insolvency

Anzen and Tokyo Kyowa were insolvent in 1993, not suspended until 1994Lending at these two institutions doubled between 1992-94

Regulatory ForbearanceConstant dividend payment a common corporate practiceStock Exchange rules ordered de-listing after 3 years of losses

lack of enforcement allowed banks to manipulate bad debt provisions

Lax loan-classification rulesNon-performing loans were not recognized

Other Contributing Factors

Tightening of monetary policies after shock interest rate riseUncoordinated deregulation and overcapacity

Mitigation and Efforts at Recovery

Internal Reforms

Transfer of credit-approval back to credit-investigation bureausFocus on borrower’s cash-flow analysisTankan survey showed decrease in willingness to lend by the banks

Credit Ratings of City Banks TokaiSumitomoSanwaSakuraFujiDai-Ichi

KangyoTokyo-

Mitsubishi

DC/DDDDDC/D1999

DC/DC/DDDDC1998

C/DCCDC/DCB/C1997

C/DCCDCCB/C1996

Kanaya and Woo, ‘Japanese Banking Crisis of the 1990’s.’ Princeton, Essay in International Economics, 222, June 2001

Government Intervention

Prompt Corrective Action Framework (1997)Well defined guidelines for asset valuationExternal audit and inspectionSpecified financial thresholds were regulators could intervene

1998 - $300 billion bail-outFundamental change in government policy

Any institution would be allowed to fail

Government Intervention

Financial Supervisory Agency 1998Consolidated and assumed supervision of banks

New laws to insert special managementDoubled bail-out to $600 billion (12% GDP)Second round of applications for relief (1999) was 4x as much as the first roundFirst bail-out ineffective, Long Term Credit Bank and Nippon Credit were nationalized

Recent Developments

Banks merged into four groups:Mizuho HoldingsMitsui-Sumitomo BankMitsubishi Tokyo Financial GroupUnited Financial of Japan

Crisis has changed the entire industrial system as groups (keiretsu) are merging

Recent Developments

Foreign competition in the sectorLTCB bought by American investment firm

New rules for bad debt write-offs

Future Directions

Future Directions

Increased foreign ownershipStrict loaning practicesLeaner business practices

Fire un-needed workforceAllow businesses to become competitive

Relaxation of governmental control

Present and Future Problems

“Golden Recession”Past success and current wealth is allowing Japanese to feel somewhat satisfied and is acting as a barrier to change

Past Bail-outsPeople feel that the government will bail them out as they have in the past

Present and Future Problems

Workforce numbers decliningReduction in productivity

Work ethic of those working declining More time on family and funReduction in Productivity

Post office is a problemthe money that Japan Post has funneled to state-backed and politically connected businesses—such as construction—has helped to keep rural voters sweet on the LDP

Tension between Japan and China

The Japanese grumble about Chinese criticism of their wartime record which they regard as politically motivated

Unwilling to be seen as capitulating to China, Japan's prime minister, Koizumi, continues his controversial visits to the Yasukuni Shrine where Japan's wartime history is celebrated.

Territorial Dispute with China

Tech leakage

Japanese firms are losing their technical secrets to other Southeast Asian countries

Notably South KoreaSome firms use human labour instead of machines or software to protect their processes

Sharp, for instance, explicitly designs gaps into the automated processes at its advanced LCD factory in Kameyama, Japan. The right moment to twist a knob or push a button is thus kept safely inside the heads of a few Sharp employees.

R and Dinvests 3.2% of its GDP in R&D, compared with 2.6% in America and 2% in the European Union

Business networks in East Asia

East Asian business organizations have long been embedded in complex structures of interorganizational networks.

Characteristic Large Japanese enterprise Chinese family business

Size Large Small/Medium

Capital intensity Varied Low

Managerial discretion from owners

High Low

Business specialization andmanagerial homogeneity

High High in firms, medium in families

Strategic change Incremental Opportunistic

Growth focus Sector share Volume expansion and opportunistic diversification

Integration of different activities

Minority shareholding Personal ties and ownership

Risk management Extensive mutual dependence

Limiting commitment andmaximizing flexibility

Korea at Night

North Korea

South Korea

South Korea

Fast facts

Area - total: 98,480 sq km (about the size of Indiana)Natural resources - coal, tungsten, graphite, molybdenum, lead, hydropower potential Population - 48,422,644 (2005 est) Population growth rate - 0.38% (2005 est)Life expectancy – 76.85 years

GDP growth rate – 3.7% (2005 est.) Per capita GDP (PPP) - $20,300 (2005 est.) GDP composition by sector

agriculture: 3.8% industry: 41.4% services: 54.8% (2005 est.)

Currency: won - $1CAN = 838.48KRW

KoreaChaebol

Modeled after Japanese zaibatsuA single person in a single position exercise authority through all the firms in the groupThey are built around a holding companyTop 4 account for at least 40-45% of Korea’s GNPUnlike keiretsu they do not have their own financial institutionsThey spread across many industries

More centralized than keiretsu with large centralized staffsMore family based than keiretsuBased in part on Confucian ideals and loyaltiesExamples are Samsung, LG (Goldstar), Hyundai and Daewoo

Chaebols are roughly equivalent to keiretsu

Major differences

The government prevented the chaebol from owning private banks, partly in order to increase its own leverage over the banks in areas such as credit allocation The chaebol are still largely controlled by their founding families, unlike the keiretsu, which are run by professional corporate managers.

Biggest chaebol

Still small

Notwithstanding their overwhelming presence in the domestic market, the largest chaebolare small by world standards. In terms of sales, for example, Samsung Electronics is only about 14% of the size of the Japanese electronics firm Matsushita, whereas Hyundai Motors is less than 10% of the size of the US car maker, General Motors.

Major problemsThe overly rigid education system stresses rote learning over a more creative approachThe labour market and the trade unions remain inflexible Many well-educated workers are either underemployed or insecure in their jobs The chaebol remain unaccountable to outside shareholders, whom they often swindle by manipulating their subsidiaries' finances

Dispute with JapanSouth Korea has some economic reasons for maintaining its claim.

The waters around the islands contain lots of fish, and reserves of natural gas and minerals may lie beneath them.South Korea has stationed a number of policemen on the rocks. It rejects any attempts by the Japanese side to represent the issue as a territorial dispute which requires international mediation.

Called Tokdo by KoreaTakeshima by Japan

North Korea

Kim Jong-II

Fast facts

Area - total: 120,540 sq km Natural resources - coal, lead, tungsten, zinc, graphite, magnesite, iron ore, copper, gold, pyrites, salt, fluorspar, hydropower Population – 22,912,177 (2005 est) Population growth rate - 0.9% (2005 est)Life expectancy – 71.37 years

GDP growth rate – 1% (2005 est.) Per capita GDP (PPP) - $1,800 (2005 est.) GDP composition by sector

agriculture: 30% industry: 34% services: 36% (2005 est.)

Currency: won not convertible

Interesting videosNew York Times: http://www.nytimes.com/video/html/2005/07/12/opinion/highbandwidth/realmedia/20050712_KRISNK_VIDEO.html#CBS News (60 minutes) http://www.cbsnews.com/stories/2005/09/26/search/main886284.shtml?source=cbsvideos&searchString=north+korea&x=0&y=0&sort=1&type=all&num=10&offset=0